By: Kevin J. VanPelt, Walz Group

As trusted advisors for many construction companies, we receive questions about what financial metrics are most important to monitor. Some expect to hear working capital for bonding capacity, how much work the company has in backlog, or any other complicated financial ratio; however, the answer is fairly simple. One of the early indicators that a company is not operating effectively is how they manage their cash flow. Below are a few tips of how to improve processes related to accounts receivable to improve your cash flow.

Timeliness and Accuracy of Invoicing

As basic as it sounds, the sooner invoices are created and sent to customers, the sooner you will receive payment on that invoice. Under the Contractor and Subcontractor Payment Act (CASPA) that was amended in 2018, there are required periods of time that must be given for notices if a customer is not paying an invoice. If invoices are not being prepared in a timely fashion, action under CASPA will be delayed as well. Also, if there is any incorrect information on the invoice, there will be delays in payment of the invoices as both parties resolve the situation and a corrected invoice is issued. The invoicing process should be automated to the extent that it can. The more manual processes that are in place, the greater the chance of an error arising.

Granting Credit Without Performing Due Diligence on Customer

It is easy for the sales team and management to get excited about the possibility of landing a large contract, but was research done on the customer to determine if they will pay promptly? A very simple check that can be done on new customers is to look through public records (court hearings, identify any liens, etc.) that may indicate difficulty receiving payment for the work performed. If concerns do arise about a customer’s ability to pay, it could also be beneficial to ask the customer to provide references from their suppliers to determine the customer’s history of paying.

Monitoring Outstanding Receivables, Including Retainage

It is imperative that an accounts receivable aging report is reviewed frequently. We see companies review the aging report every week or bi-weekly, but at the very least, it should be reviewed on a monthly basis. Your customers are trying to manage their cash flow as well by figuring out how long they have to actually pay an invoice. If there is no follow up with customers that have invoices past their due date, there is no accountability for the customer to promptly pay. On the contrary, if a customer knows a member of the accounts receivable team will be following up on the status of payment the day after it was due, payment will most likely be received in a timely manner. This applies to retainage as well, especially for subcontractors that perform work at the beginning of a project. Constant communication with customers about open amounts due will lead to better collections.

Processes for invoicing and collections can vary from company to company. While the above procedures are not overly complex to implement, we would be happy to further the conversation of what implementation of any of these procedures could specifically look like for your company.

Kevin is a Manager in the Assurance Division at Walz Group. Kevin heads the firm’s Construction practice area and is a member of ABC Keystone’s Education and Young Professionals committees. He has been in public accounting for nearly 10 years, and as a manager of audits, has worked with many complicated accounting topics.

If you are interested in writing for the “Ask an Attorney” or the “Ask an Accountant” feature, please contact: Kelly Moore, Asst. Director of Marketing & Communications:

July 29, 2019