A shortage of cash flow has taken more than a few good contractors out of the game. How many of them would still be in business today if they’d simply received payment on their invoices promptly? Not only do you need to learn the best ways to manage accounts receivable — to make sure you’re getting paid as you deserve — you also need to be organized and timely in paying your own accounts. Follow these tips to stay on top of accounts payable & receivable in your contracting business.
Organization is Golden
Heaven forbid you ever don’t get paid because you missed sending the invoice. Whether you’re a one-man show, writing all the checks and sending the invoices, or you have an accounting department, your accounting system should be organized. Use accounting software and take advantage of affordable contractor apps that make it easy to keep track of invoices.
Use Both Penalties and Incentives in Accounts Receivable
According to the 2020 National Construction Payment Report by LevelSet, only 52% of construction businesses say they always get paid in full. Only 26% say they always get paid on time. On the upside, now you know pretty much every other contractor is going through the same thing you are: trying to get paid in a reasonable amount of time. Utilizing penalties and incentives on your invoices might help you get paid quicker.
Penalties are obvious. Put a due date on the invoice and tack on a late fee of “X” amount if they pay after a certain date. However, incentives can be even more motivating for customers to pay on time. An incentive is a reward for paying by a certain date. So, on your invoice, you could include a discount if they pay within 10 or 15 days. In accounting terms, it looks something like this, “5% 10 NET 30.” That tells the customer they can deduct a 5% discount off the payment if they pay within 10 days or the net amount is due in 30 days.
Now, here’s the thing with penalties and incentives (it applies to accounts receivable in general, too). Just like doling out punishments and positive reinforcement to kids, you must be consistent. That means if a customer takes the incentive discount off their payment, but doesn’t send it to you for 2 months, you need to bill for the remainder. It means sending a new invoice with a penalty charge after 30 days. It means following up when they haven’t paid within the allotted time frame.
Automate Your Processes and Give Customers Choices
Email invoices can be more convenient for your customers to pay. That just might mean they’ll pay quicker. Also, if you use email or online billing, you can give customers the option to pay by card. As a bonus, if your accounting system sends email invoices, it will be easy for you to email payment reminders.
Would you like to go a step further and offer financing for your customers? Let HFS Financial work for you! We make it easy for your customers to finance their home improvement projects. Click here to get started.