Accounts receivable is considered an asset on your balance sheet, but if your company is struggling to collect payments from clients, it can quickly turn into a headache.
“’Cash is king’ in any business,” says Andrew Trower, CPA and founder of Andrew Trower & Associates, P.S.C. “Delayed invoicing increases the time it takes to collect your money. Similarly, lack of follow-up through written AR collection procedures increases your average age of receivables. Don’t be afraid to enforce your contract and get paid.”
Trower says some of the common mistakes with AR management include offering Net 30 for small jobs and failing to require written contracts for every job. Without mutually defining the scope of the job, you cannot ensure both parties are aware of the job specifications and payment terms.
“Other common mistakes include waiting too long to follow up on AR, not requiring deposits (even for small jobs), and mixing business with personal relationships — you are in business to provide quality service and to receive compensation; you’re not in business to be your clients’ friend,” Trower says.
Monitoring Your Accounts Receivable
It’s easy to let payment due dates slip by if you’re not focused on them. Generating reports in QuickBooks such as AR Aging Summary, Customer Balance Detail and Open Invoices can give you easy insights to who has yet to pay.
Trower adds you can use your QuickBooks data to calculate two important ratios: Average Age of Accounts Receivable and Accounts Receivable Turnover. By tracking these numbers, you can see how efficient your collections are.
“Target 12+ turns per year, meaning you collect every 30 days,” Trower says.
Shortening Your Wait for Payment
The key to managing your accounts receivable effectively is to be proactive, not reactive. Send your invoices the same day or within 48 hours after the service. Trower recommends using industry-specific software to speed up your billing process.
“Invoice as fast as possible,” Trower says. “The faster a client has the invoice, the faster you get paid. Try to offer the shortest payment terms you contractually are able. Collect deposits (even on smaller jobs, if able).”
In your contract, set clear terms on when payment is due. Trower recommends using ‘Due Upon Receipt’ or Net 7–15 for payment terms to speed up how soon you are paid. Also, make sure to collect clients’ payment information up front.
“Include clear late fee clauses to reinforce expectations,” Trower says. “In the contract, you can specify preferred payment methods to increase the speed of billing.”
Encouraging clients to utilize ACH or credit card payments can also streamline your cash flow.
Trower recommends progress billing for any design/build job over $5,000 or lasting longer than two weeks.
“Use billing milestones: upon signing, midway, and at substantial completion,” Trower says. “A common billing schema is 1/3 up front, 1/3 midway, and 1/3 at substantial completion.”
Dealing with Delays and Nonpayment
If you want to decrease payment delays, enforce your policies consistently and monitor your AR aging weekly.
Trower recommends including a 1-2% monthly late fee. Late fees can be implemented 14 to 30 days if payment for a bill is due upon receipt, depending on the contract language and type of client.
“Be sure to contact a local attorney to ensure your invoices contain the proper contract language in order to legally charge late fees,” Trower says.
Also, train your staff on your collection guidelines.
Trower suggests office staff contact the client at the first 30 days past due. After 30 days, your account management and sales staff should assess finance charges. After 60 days, threaten to stop service on the job. At 90+ days past due, Trower says you can consider filing a lien or pursuing other legal remedies.
He says for jobs worth $500-$1,000+, it’s worth pursuing payment, especially with commercial clients. Trower recommends starting with collection letters and weighing the cost versus the likelihood of recovery.
“In many states, the mechanic or materialman’s lien is the best tool in the small contractor’s toolkit to facilitate collections,” Trower says. “Liens often require stringent notice periods, so consult a local attorney to ensure you fully understand the rules of engagement.”
If 90 to 120 days have passed with no response, all collection attempts fail, and you’re 90% sure you will not collect the payment, it has to be written off as a bad debt expense. Document your attempts and send a final demand first.
Balancing Client Relationships and Timely Payment
Collecting payments can be a touchy subject at times. You should be firm but professional and courteous.
“Use consistent language like ‘Per our policy…’ or ‘To keep your account in good standing…’” Trower says.
Trower notes that some of the red flags early on with problem clients include excessive haggling, a vague payment process, or a reluctance to sign contracts or provide billing information.
In cases where a client is occasionally late making a payment, but typically on time, reach out to see if they’re open to ACH payments for work billed in monthly installments.
“I think it’s important to remember that your collection policies and procedures are guidelines only,” Trower says. “Although it is important to remain firm, you should also be flexible and address each situation with a certain amount of nuance. If a client has paid on time repeatedly, it might not make sense to charge a late fee immediately when an invoice is past due.”
