9 Tips for Contractors to Optimize Accounts Receivable

2024-10-15

Reading time: 3 minutes

Accounts Receivable (AR) refers to the money a business is owed for completed work that has not yet been paid. In construction, the AR function is especially critical due to complex payment structures and the extended time between project milestones and payments. Effective AR management ensures contractors maintain steady cash flow, pay suppliers, cover labor costs, keep projects on track, and protect profitability.

However, recent data from Dun & Bradstreet shows a concerning trend of delayed payments in the construction industry. In 2024, only 58.2% of general contractors reported receiving payments on time, a significant drop from 66.8% in 2023. Moreover, the percentage of payments delayed by 30 to 60 days has more than doubled, rising from 6.3% to 16.1%. These delays can cause severe cash flow disruptions, leaving companies struggling to cover operational costs, threatening their ability to complete projects.

Compounding the problem is the ongoing rise in construction input costs. Although there has been a slight decrease over the past year, costs remain nearly 40% higher than in 2020, putting further pressure on profit margins. In this challenging environment, proactive AR management has never been more important. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

Key Tips to Optimize Accounts Receivable

1. Set Clear Payment Terms – Establishing clear payment terms from the outset of a project helps to ensure timely collections. Contracts should outline the payment schedule, due dates, and consequences for late payments. Including incentives for early payments or penalties for delays can motivate clients to adhere to payment timelines, helping maintain steady cash flow.
2. Leverage Technology for Invoicing – Using construction-specific accounting software can streamline the invoicing process and reduce errors. Automated invoicing, payment reminders, and digital payment options make it easier for clients to pay on time. In addition, accounting software provides real-time visibility into outstanding receivables, allowing for timely follow-up and reducing the chances of invoices being overlooked.
3. Maintain Strong Client Communication – Clear and regular communication with clients is key to preventing payment delays. Providing updates on project progress, sending reminders before payments are due, and following up promptly on overdue invoices can all help improve collections. Strong relationships with clients can also aid in resolving disputes quickly, preventing them from escalating into significant delays.
4. Perform Credit Checks on New Customers – Before taking on new projects, conduct credit checks on potential clients to assess their payment history and financial stability. Understanding a client’s creditworthiness helps mitigate the risk of extending credit to unreliable clients. This proactive measure can help construction companies avoid credit losses and maintain a predictable cash flow.
5. Offer Flexible Payment Options – Providing multiple payment options, such as credit cards, electronic transfers (ACH), or online payment portals, makes it easier for clients to pay. The more convenient the payment process, the more likely clients are to pay on time.
6. Establish a Collections Policy – A structured, well-written collections policy can help manage overdue accounts effectively. This includes defining when to send reminders, when to escalate to phone calls, and when to involve a collections agency. Having a clear policy in place ensures that your team takes timely action on overdue accounts, reducing the risk of credit losses.
7. Track Payment Trends – Analyzing clients’ payment behaviors can help identify patterns in late payments, allowing companies to take preemptive action. If certain clients consistently pay late, consider adjusting payment terms, requiring larger upfront deposits, or prioritizing follow-up efforts on these accounts to improve overall collections performance.
8. Provide Training on AR Best Practices – A well-trained team understands AR best practices. They know how to use accounting software, follow the collections policy, and communicate with clients. An effective AR team can make a significant difference in streamlining collections and accelerating cash flow.
9. Implement Progress Billing – If you haven’t done this already, be sure to start. Progress billing involves invoicing clients at various stages of a project instead of waiting until completion. This approach helps maintain a consistent flow of cash, reduces financial risk, and aligns payments with the actual progress of work. Progress billing is particularly effective in construction, where projects are long-term and payment delays can significantly impact financial stability.

Contact Us

In a market defined by fluctuating costs and economic uncertainty, optimizing AR processes can help construction companies improve cash flow, reduce financial risks, and maintain a competitive edge. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.