Dispatch #45 - COVID-19 Has Infected Your Accounts Receivable
Maybe you’re seeing it already, or maybe it’s still invisible, but the coronavirus has infected your construction firm’s accounts receivable, for two reasons.
At the job level, virus-related cost increases and schedule changes are likely to give rise to more disputes and claims, which are obstacles to timely payment.
At the broader market level, the economic disruption from COVID-19 means that some of your customers—and some of their customers—are on shakier ground financially.
The result, on average, is customers are more likely to pay slowly, or not pay at all.
I encourage you, then, to re-examine your firm’s collection cycle from beginning to end with an eye toward securing timely and total payment for work performed.
There are close to 100 ways to speed up collections, and they fall into the following categories, which loosely follow the job cycle:
Target customers who pay quickly. Track DSO by customer. What factors differentiate the fast vs. slow payers?
Target jobs that pay quickly. For example, performing familiar work in a familiar location with proven crews and subs are less likely to go south and trigger payment delays.
Use project managers who know how to get paid. Track DSO for each of your project managers. What factors differentiate their collections performance?
Negotiate contract terms. Clear pay application specifications, change order procedures, and prepayment of materials are just a few of the many contract terms that can support timely payment and help cash flow.
Set up the job right. Set up and kick off the job correctly, ensuring that accounting knows who and where to send invoices. Has the information been entered correctly in the accounting system? Are field and office personnel aligned regarding what is required in order to get paid quickly?
Deliver on time, on budget, and per spec. Not foolproof, but it goes a long way to getting paid quickly.
Document job activity. Substantiate your work to defend against claims.
Become a billing ninja. Bill customers on time, frequently, accurately, and per the customer’s specifications.
Provide payment alternatives. Offer convenient payment options such as ACH, wire transfer or credit cards (service fees may apply), and even “we’ll be happy to come right over and pick up the check”.
Put the money in the bank. I know that sounds obvious, but in case your accounting team sits on checks for a few days…don’t.
Follow up on A/R collections. Confirm receipt of large invoices and those sent to new customers, then follow up immediately and regularly on past due invoices.
Wind down a job. Implement effective punch-list management and a large final progress payment (leave less money on the table subject to the customer’s final acceptance of deliverables).
Escalate at-risk customer payments. Progression: if accounting fails to collect payment, they notify the project manager. If the PM is unsuccessful, the company’s owners must step in and decide if it’s time to file a lien. As an expensive last resort, the owner may file a lawsuit or place the invoice with a collection agency.
Construction is a risky business even in the best of times and these are not, unfortunately, the best of times. Protect your profits by doubling your collections efforts and taking a full-cycle approach. Sell the work, do the work, and above all, get paid.
Need help with this or other financial matters faced by construction contractors? Let’s talk!
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.