Improving Cash Flow with Accounts Receivable
A. Why do companies have cash flow problems?
1. There is no defined billing cycle which is followed regularly.
• Many companies bill when they need the money, instead of at a set time such as the 25th of the month, every two weeks, or weekly.
2. Many companies over-bill on their projects.
• Over-billing is a good procedure if used correctly.
• But some companies use over-billing on one project to finance another - this leads to cash flow problems.
3. When companies have financial or cash flow problems they tend to focus on accounts payable. In most cases there is actually an accounts receivable problem.
• If the accounts receivable were collected there would not be an accounts payable problem..
4. The contract language may lead to cash flow problems.
• The contract may restrict the billing process—too few draws.
• There may be retention clauses.
• There may be penalty clauses.
• Change order language may be very restrictive.
• Change orders may occur in the field but might not be reported to the office.
• Many change orders are made but not billed.
• Many companies do not have collection policies, or if they do they may not be followed faithfully.
B. How to manage Accounts Receivable
1. Review the contract language on all projects.
• Negotiate the language if necessary. If the language cannot be negotiated, make the necessary changes in-house to ensure that the project does not cause cash flow problems.
• Make vendors aware of the contract language and request their cooperation to ensure that all monies are received when due.
2. Set up billing procedures and policies.
• Who is responsible for billing projects?
• Schedule definite billing dates and/or days. Try billing on the 10th and 25th of each month.
• Keep records on the billing contact for each project and where the invoice should be sent. Don’t have payments held up because the invoice was sent to the wrong person or place.
3. Use the right billing method.
• Percent complete
• AIA draw
• Time and material
• Cost plus
4. Set up a change order policy. Any changes to the budget should be made through a change order also.
5. Set up an accounts receivable collection policy.
• Include call dates, lien law policies, stoppage of work if needed, and finance charges for late payments. Assign a person responsible for calling clients for payment. Assign a person responsible for lien law requirements.
6. Use the appropriate receivable reports to be aware of any and all accounts receivable at any given point in time.
• Accounts receivable aging schedules (3-1-3 in MB)
• Accounts receivable statements (3-4 in MB)
• Accounts receivable call sheets (3-1-5 in MB)
• Work in progress report—showing the minimum amounts that should have been billed vs. what was actually billed (6-1-7 in MB)
Additional Thoughts
What happens on the job site directly affect Accounts Receivable. If the client (whether it's an owner or GC) thinks that a specific area of work has not been completed properly, the payment for that portion of the job is usually not collectable. This is simple, and it can be kept simple. One person should be responsible for documenting completion of work, including punchlists, in order to insure timely collection.
Master Builder makes all of the above easier. When there is a change to the budget, use the "Budget and Sub Change Details" tab in screen 6-4-1 Change Orders. When a punchlist exists, enter it into screen 6-11-7 and manage it regularly using the Options / Hide Completed Items feature.
If you follow the above procedure through one billing cycle, then review client feedback, employee feedback, and vendor feedback, then modify the procedure as needed, cash flow will improve.
Please contact me if you would like to learn more about instituting a comprehensive training process. Thank you.
Andy King
T: 805-771-8400
service@missiondevelopment.com
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