The lifeline of your construction business might just be hidden in your accounts receivable (AR). AR is the heartbeat of your cash flow—the outstanding invoices that clients owe you. Picture it as a line of credit—a trust extended, expecting a swift return.
For a deeper dive, there is a comprehensive article about construction accounts receivable designed to help you grasp the concept fully.
Here's the kicker: A streamlined, efficient AR process can accelerate your financial health and kick your cash flow into overdrive. Ready to simplify? We're here to break it down for you, guiding you through each step toward AR optimization. Let's turn the complex into a compelling one!
Accounts Receivable Process Steps
Step 1: Deciding on Credit Practices
Before you start a job, decide if you're going to let your clients pay after the work is done. This is called offering credit. If you do offer credit, make sure you set clear payment terms and conditions. You want to be certain that your clients understand when and how they need to pay you.
Indeed, let's put it this way: By extending credit, contractors can accelerate payments. They typically see the money 15 days sooner. This strategy does not just sit well with AR accounting. It also gives a healthy boost to your cash flow.
>> Learn more: 4 Strategies to Improve Construction Cash Flow
Step 2: Invoicing Customers
Invoices are documents that detail what work you've done and how much the client owes for it. It is important that every invoice you send out has a unique number. This way, you can easily track each one and make sure you're getting paid correctly and on time.
This phase involves:
Issuing detailed invoices to clients, outlining construction service costs and due dates
Ensuring each invoice, sales receipt, or statement has a unique number for efficient tracking
Electronic invoicing can speed up the payment process, which is a significant benefit for larger projects.
Step 3: Tracking Accounts Receivable
Once you have sent out your invoices, you will need to track your accounts receivable. You can do this manually or use specialized software. Either way, the goal is to ensure you know who owes you money and whether they have paid on time.
Adopting advanced software can streamline your accounts receivable process steps and boost efficiency. Check out our CCA accounts receivable process flow chart for more details.
Step 4: Accounting for Accounts Receivable - The Final Step in the AR Process
Just like tracking your AR, it is equally important to account for it in your financial records.
This step includes:
Setting due dates for construction project payments
Recording journal entries
Accounting for bad debts and early payment discounts
Using tools like the AR Aging Report
Why is this vital? It directly contributes to your business's financial health. Moreover, it is a key element in calculating your taxes at the end of the fiscal year.
Embracing Automation in Construction AR Management
Using an automated workflow can make managing your AR easier and more efficient. With automated workflows, managing your AR becomes a breeze. The right software can do wonders. It can generate invoices and track payments for you. This leaves you with extra time to steer your business.
How exactly does it help?
Automation can cut down on bad debt and boost cash flow. Both are critical for the financial health of your construction business. In AR accounting, automation helps with preparing key reports, such as the Accounts Receivable Aging report.
Let's zero in on a fact. AR automation minimizes recording mistakes. It also gives a real-time view of outstanding payments. The result? Superior cash flow management
Invaluable Resources to Further Enhance Your AR Management:
Boosting Your AR Collections: Check out our article on practical tips for contractors to improve accounts receivable collections for more insights.
Understanding Your AR Turnover Ratio: Our guide on what is a good accounts receivable turnover ratio and how to calculate it is an excellent resource.
Free AR Sample: You might find our free accounts receivable on balance sheet samples very useful.
Is Accounts Receivable an Asset? If you're wondering whether accounts receivable is an asset, our guide for construction business owners answers this question in detail.
Our construction accounting specialists are available to assist you with any aspect of construction bookkeeping, accounting, or tax. Please do not hesitate to contact us for a free quote.
In Conclusion
Successful accounts receivable management is like laying the foundation for your construction business. It paves the way to a steady cash flow. Set clear credit practices, invoice accurately, track AR relentlessly, and account for it carefully. With these steps, you'll cement the financial health of your business, freeing you up to do what you do best: construct top-notch projects.
Need a helping hand with construction bookkeeping, accounting, or tax matters? Our team of construction accounting specialists at CCA is on standby. We offer tailored accounts receivable services for contractors like you. Reach out to us for a free quote, and let's start building your financial success together.
