536: How To Handle Construction Client Debt So You Get Paid On Time

This Podcast Is Episode Number 536, And It's About How To Handle Construction Client Debt So You Get Paid On Time

If your customers owe you money, the faster you can obtain it using effective collection tactics, the better. Ideally, you want to reduce the chance of bad debts and pressure on your construction company's cash flow.

It can be easy to neglect to manage your debtors when you're busy growing your business, but intelligent credit control is important. So it's crucial to have the skills to handle the people who owe you money well, especially if you want to avoid taking them to court.

When negotiating contracts with clients, try to set payment terms that help your cash flow, such as deposits or progress payments. Dealing regular payments for contracts that take months to complete has two purposes: it gives you cash flow to match your expenses and protects you from total loss on a project if the customer goes into liquidation.

Please include a timetable for the customer to pay invoices as part of any agreement. Agree on clear milestones for the work to be completed to minimize the chance of the customer disputing any invoices.

Successful debt collection is about good processes.

As with most things, prevention's better than a cure. If you have good processes in place for collecting debt, the less likely it is that you'll have to chase debtors. And if you do, having the proper procedures to follow up on late payers makes it much more manageable.

1. Tighten your credit control

Having stricter control over new debtors is the best way to limit your exposure to future bad debts. So make sure that you:

- Ensure your business completes comprehensive reference checks before offering credit to new customers.

- Set fair credit limits – and ask your staff members to notify you if a customer wants to exceed their agreed limit.

- Approve any additional credit extensions in advance.

Make sure you state clear payment conditions in your terms of trade agreement.

Make use of credit checks – this can be especially important for new businesses that feel pressure to gain customers. Try to avoid being careless with credit checks. It might come back to haunt your business in the form of cash flow problems up the road.

Terms of trade – implement a system whereby new customers must sign their acceptance of your terms of trade before you offer them credit. Follow up by emailing (and any changes) annually to refresh their memories.

2. Structure payment terms

It's essential to put together your payment terms to encourage prompt Payment. You could, for example, offer a 2% discount for customers who pay within 21 days.

Ensure that your terms of trade state exactly when you'll start charging interest on any overdue amounts and the rate you'll be charging. Don't yield to customers even if Payment is only a day late.

Whether you decide to make any exceptions for those customers that usually pay promptly is up to you – but be clear that it's a once-only exception because you value that customer's business relationship.

3. Good organization is vital

You'll come across as an astute businessperson who takes Payment collections seriously if you systematically show your clients that invoices are a top priority. By being organized and able to quickly reference a customer's account when they make contact, you'll be more likely to get paid faster.

Some ways you can project a higher level of organization include:

- Being professional – all written communication with your customers should be consistent, look professional, and clearly show contact details, the amount owed, expectations, and payment terms.

- Having a consistent schedule – sending invoices at the same time of the month and following up after a set number of days.

- Don't show a layered approach – a customer's first invoice will show the amount due and by when, but next month should state that they're late in paying. Don't have 'late Month 1, Month 2, Month 3'. They are all late and should accumulate.

- Flexibility for significant clients – a degree of understanding may be necessary for your critical clients with larger bills to pay that help keep you in business. Phone calls or more personal letters to key staff may be warranted to entice earlier payments.

4. Address problems quickly

Identify and deal with problem payers as soon as you can. The sooner you start chasing the debt, the sooner you'll get paid.

If you've got good accounting software, it'll notify you of any unpaid credit sales as they become overdue. Many accounting programs will automatically flag due bills and generate reports of unpaid bills showing how long they've been late.

You're looking to speed up the collection of late payers. You can do this by:

- Calling them directly – to discuss how a resolution can be made quickly.

- Visit in person – a face-to-face meeting is generally more effective.

- Sending a legal letter – if all other options have been exhausted and you're close to writing off the debt.

So when is a good time to ask for Payment?

• When the contract is signed, ask for a deposit.
• Progress Payments - Every week, perhaps on Monday, you could review the work completed the week before, issue a simple invoice or give your customer a comprehensive payment application and get paid.
• Change Orders - Every change order has a clear scope of work and pre-determined price, which needs to be documented before the work is done and paid in advance. Sounds strong? Well, change orders have a short shelf life; the value of the work and the motivation to pay for the work on all Change Orders rapidly diminish after the work has been performed.
• Final Payment - when the work is done. When you prepare the final invoice, you will credit back the deposit and either issue a small refund check or collect a small check.

Final thoughts

Stop doing the work and yet feel embarrassed about asking for money. Construction business owners often find chasing money owed to them like pulling teeth. It's not pleasant, and it's not the reason you went into business. But when people owe you money, and it's the lifeblood of your business, then you cannot afford not to take action. Clients will respect you for being firm but fair.

About The Author:

Sharie DeHart, QPA, co-founded Business Consulting And Accounting (Fast Easy Accounting) in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com