Construction is used to facing high competition and pressure on prices and margins. At the same time it is a capital-intensive industry, so every construction company needs strong cashflow to operate smoothly.
Yet research of 250,000 UK businesses from trade insurance company Euler Hermes highlighted that construction is the worst sector when it comes to payment delays, accounting for more than 30 per cent of all payment incidents. It’s time the industry takes charge of its cashflow.
To do this, you can’t just look at top-line growth or increasing sales. You also need to increase the speed of receivables – monetary and other obligations owed to you by customers or debtors.
Accounts receivable is one of the largest and most liquid of corporate assets. Many construction organisations are struggling with effective management of the process.
However, with the right credit and collections strategy and smart software, you can reduce accounts receivable balances and generate a substantial cashflow.
Here are eight ways to plan and execute credit management and increase the cashflow to keep your organisation healthy and competitive.
Credit management = relationship management
Some customers will delay payment for as long as they possibly can. In other cases, invoices are not paid on time because of issues that must be addressed before payment will be made. Your task is to apply payment pressure without creating undue friction that can negatively impact customer relations.
Divide your customer profiles
Are all your customers the same? Probably not. Some have been doing business with you for years while others are new and unknown. It is likely that you have customers that purchase large volumes while others only place small orders. Divide your customers up in (similar) groups to get more insight.
Provide a feasible plan
If your plans are too ambitious, you can confront your employees with an excessive number of actions. If there is no overview, you run the risk of demotivating your team. By segmenting your customers well and monitoring which approach yields the desired result, you can make the most of your credit managers.
Bang on time
Do not pay your dues early or late. If you pay them early, you’re reducing cashflow. If you pay them late, you could be hit with fees. There is one exception: if you’re offered a steep discount by paying upfront, consider it. This will hit current cashflow, but it will benefit future cashflow.
Pull receivables in before accounts payable
If receivables are coming in faster than payables are going out, you’re in a good spot. If this isn’t a possibility, at least reduce the average accounts receivable by several days. Start by focusing on reducing your day’s sales outstanding, even just by a few days, and put major amounts of cash back into your business.
Get your organisation on board
From management to sales, get everyone together to announce that cashflow is now the top priority and that your focus will be on increasing the speed of receivables. Make sure you’re armed with answers to likely questions so the meeting moves fast and little time is lost. When everyone has the same goal, it becomes more attainable.
Keep in touch with your customers
Communication is critical. Reserve time for personal contact with your customer. Only by actually speaking to each other can you figure out what the motivation is behind a failure to settle. Discuss what you can do to speed up the payment and jointly determine a feasible payment agreement.
Use reports for insight
Regularly assess the effectiveness of your credit management department. Is the workload realistic? Do your employees manage to follow the planned policy and planning? Are you achieving the desired results with your current policy? Flexibility in your approach keeps the focus on results.
The bottom line of these recommendations is that making credit management run more efficiently will help improve cashflow for any construction company.
Michael Facey is head of product management at software provider OnGuard