Almost anyone running or managing a company, or working in a finance function within a company, knows the challenges with managing accounts receivables. When you pull a cash statement on your business and get to the receivables line, you're just staring at money owed to you, but not in your pocket.
The consequences of this are expensive. Namely, you have less working capital available to your company — and if you're like most companies, that means you have to get capital elsewhere. In some way, therefore, you are financing your receivables for your customer.
Organizations without a method or policy to manage their accounts receivables are exposed to poor A/R performance. This can be expensive, and if left alone too long, deadly for a company. Here are the three most common mistakes construction companies make when managing their A/R.
Mistake 1: You don't have a system
Printing out your aging receivables once per week and going down the list to call customers is not a "system." That is the opposite of a system.
While you or your staff may feel confident with this type of process, and you may do an average job with it, the truth is that it's impossible for this type of process to work well. It has hundreds of flaws, and it is subject to influence from a variety of areas, including bias and workloads.
Managing the task of following up on outstanding accounts receivables really requires a customer relationship management (CRM) system of some sort. Collecting from customers is part of the customer relationship. You need to manage that relationship, and you need software to help you do this. There are a lot of players in this space offering general CRM platforms, as well as specialized offerings.
Mistake 2: You don't protect your security and lien rights
The construction industry is vulnerable to contractor failures, defaults and payment problems. However, the flip side to this problem is that the law is layered with tons of protections against these risks. Primarily, subcontractors, suppliers and other construction participants can find protections against financial risk through their security rights.
Everyone in the construction industry has the right to file a mechanics lien or bond claim in the event they are unpaid. Using lien rights, however, is a discipline and not a knee jerk reaction to a single bad account. Companies must be disciplined to manage their lien rights across their A/R portfolio.
If companies do this, they will have a foolproof collections weapon when faced with a nonpaying account, and they will avoid accounts crossing into aged territory.
Mistake 3: Not being full-time
The third and final mistake that companies make in managing their accounts receivables is treating this as a detail of their business. If a company is only taking a reactive approach to A/R management, it means they will constantly be chasing money that is 90-plus days past due. This, unfortunately, is a dead-end game.
If a company has any sort of accounts receivable portfolio, it's essential to manage those receivables full-time, and to stay ahead of defaulting and aging accounts. Otherwise, business owners, accountants or other employees will never find the time required to chase older debts.
And likely, since only reactive measures are being taken, they will have little ammunition to go after the account.
