Those in the business of building don’t always pocket the money due them as speedily as they’d like. Too often, the accounts receivable column bleeds red, long after a contractor has billed the customer.
The good news is – employing certain tactics can go a long way toward stabilizing cash flow, ensuring that business owners have money on hand when they need it. Experts suggest the solution rests in organized accounting practices, efficient invoicing and attention to last-minute details.
Taking Matters into Account
Good record-keeping serves as the foundation for a robust accounts receivable column. The process begins with getting a clear read on overall revenue patterns – for both income and expenses. Unfortunately, harried business owners – especially those with small or medium-size construction firms – sometimes place accounting chores last on their to-do lists. This habit can contribute to stunted or erratic cash flow.
To avoid shortfalls at critical operational points, industry analysts offer these basic guidelines:
- Take control of fiscal issues. Construction business owners should feel confident they are generating reliable financial data, safeguarding assets and complying with regulations. And while no employer likes the thought of dishonest staff, accounting systems should be tamper-proof to prevent deliberate or inadvertent misappropriation of funds. Business management software packages and Internet subscription-type programs usually provide safeguards against prying eyes.
- Assure that records track every step of business functions in separate, detailed categories. These include, among others, contract information, billing history, revenue receipts and operating expenses.
- Abide by a single accounting system. The most straightforward are cash and accrual. In the accrual method, receivables are tallied when the contract is signed or services occur, no matter when the contractor actually receives payment.
The cash method, on the other hand, counts revenue only when money changes hands.
Percentage-of-completion and completed contract methods also are common in the building industry, and as their names suggest, involve receipt and posting of payments based on a project’s progress. Of course, each of these systems yields different outcomes at tax time.
Smart Billing Means Faster Collections
Research shows slow, erratic and incomplete payment for finished jobs is one of the most common – and distressing – issues plaguing today’s construction companies. In the case of the small-business owner, a couple late checks may be all it takes to shut down operations.
For this reason, an increasing number of industry analysts say preemptive measures are critical to a thriving accounts receivable columns. Procedures such as those listed here are simple, comprehensive and easy to put into place.
- Utilize a solid automated billing system. Software should have the ability to: consolidate all customer fees and transactions into one invoice; integrate with existing programs and files; provide billing formats that can be customized according to client; and allow the business owner to review and revise invoices before delivery.
- Request a deposit. Asking for a share of the money up front has become a standard practice in the construction industry, and with good reason. Besides covering start-up costs, the revenue can go directly into other company expenses, which contributes to a steady cash flow.
- Try the “pay-as-you-go” approach. Setting down a series of deadlines and payments over the course of the job, in the original contract, allows the business owner to stop work (thus extending the terms) when a client fails to meet his obligations. The consensus among industry insiders is that by a project’s completion, a very small balance of monies owed should be outstanding. Some contracts leave as little as five percent of the total cost.
- Allow for changes. An initial written agreement always should include a policy statement regarding subsequent modifications in design, labor force, cost and materials. By the same token, when a client requests a variance from the original contract , the savvy business owner will put these terms in writing, too. In some states, this already is the law. Include all new costs on the statement, and then bill immediately.
Collecting Every Cent
Proverbial wisdom dictates that collection of the final payment on a finished construction project begins when a potential client walks through the company’s door. A business owner’s open, cooperative attitude, meticulous verbal and written communications and consistent, understandable billing processes can assure happy customers who are more likely to settle their accounts.
Still the last few invoices can go unpaid, regardless of a contractor’s degree of professionalism. To remedy this, builders use punch lists when projects are in move-in condition, or when appliances are installed. The process involves checking off every item that meets customer specifications, as outlined in the original contract and in subsequent documents.
The idea is to address and resolve issues – such as missing hardware and uneven carpeting – that if left unattended, may prompt disgruntled customers to withhold final payment.
Once the client signs and dates the list, the contractor or his crew should return within the next few days to make necessary repairs. While the procedure does not guarantee that final check, it does increase the likelihood of this happening.