A young businessman I know called the other day. He was in a state of shock. He said he checked his books over the weekend and found he had over $11,000 in receivables, much of it over 30 days past due. He said, “I don’t know how it happened, it just creeped up on me.” His average job size is less than $600.
If you are in construction, you should not have accounts receivable. Yes, there are the exceptions, stuff happens that can delay payments from lenders, insurance companies, etc, but as a rule, AR should not exist.
Put your payment schedule in your contract, including a down payment, multiple progress payments (if the job runs more than two weeks), and a final payment of not more than 2%. Then, before your customer signs the contract, read the payment schedule to them and make sure they understand and agree to the terms. Also have a penalty clause in the contract should the customer decide they are going to change the terms on their own.
You are in business for one reason and one reason only — to provide a service to your customer and make a profit doing it. You can’t make a profit if your money is sitting in accounts receivable.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
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