The construction industry presents unique challenges to finance and credit professionals. There is much more to minimizing risk and securing payment in construction than simply traditional credit risk assessment.
This lesson will broadly review the 4 key areas to manage receivables in the construction industry, with a specific focus on how it all ties together for the construction finance and credit professional. Avoid accounts receivable problems by implementing the policies discussed below.
Key Area 1: Credit Policies
Let’s start here: good accounts receivable management boils down to your credit policy.
Everyone in the construction and building materials supply industries should have a clear and well-thought-out credit policy. While this term may seem fancy at first, it’s a simple concept.
A credit policy is just a set of written guidelines to set:
- Customer qualification criteria
- The terms and conditions for supplying goods [or services] on credit
- Procedure for making collections
- Steps to be taken in the case of customer delinquency
(These steps are borrowed from a definition available at BusinessDictionary.com.)
As you can see, the “credit policy” actually incorporates all 4 key areas of managing receivables. Nevertheless, for the purposes of this course, we are separating credit applications, lien policies, and collection policies from the overall credit policy to give each a more comprehensive discussion.
The next lesson will discuss creating (or improving) your company’s credit policy.
Key Area 2: Credit Applications
The first thing a credit policy must accomplish is to establish the “customer qualification criteria” and the “terms and conditions for supplying goods (or services) on credit.”
While the credit policy sets forth these criteria and terms, it is the credit application that collects the customer data, enabling the organization to figure out how the customer fits into the policy.
The cornerstones of a credit application include:
- Getting the information you need from the potential customer
- Getting legal permission to check the customer’s credit
- Having the right people sign the document (clearly)
- Incorporating important terms
- Acquiring a personal guarantee, as per your credit policy
As you can see, the credit application is a pretty dense endeavor. The lesson on credit applications will dig into each of these issues.
Key Area 3: Lien Policies
While the construction credit professional must put a construction “twist” on the credit policy, the credit application, and the collection policy, the lien policy is truly unique to the industry.
The lien policy is probably the most overlooked of the bunch, but also probably the one that could make the biggest bottom line impact to organizations.
Lien and bond claim rights are a huge asset for the construction and building material supply industries. These remedies are effective even when they go unused, as it’s proven that simply sending preliminary notice to protect claim rights has a powerful impact on a company’s DSOs and underlying collection rates.
The lesson on the lien policy is important. It will guide you through creating or improving your organization’s critical lien policy.
Key Area 4: Collection Policies
The “collection policy” is not simply getting an unpaid and default account into the hands of a competent collector. The collections policy is the entire life-cycle of your invoice. Your collections policy, in other words, will touch 100% of your company’s revenue.
The collection policy will address all of these issues:
- How are invoices or payment applications transmitted to the customer?
- What actions are taken when an invoice isn’t paid on or before the due date?
- What actions are taken after an invoice goes into default status?
- When are accounts escalated into a collector’s or attorney’s control?
This is a huge part of successful accounts receivable management.
The work you do at the front end of a customer relationship reduces the percentage of accounts that will age or default…but if you don’t clean up the aging and default receivables, you’ll get suffocated by negative cash flows and write-offs.
The lesson on collection policies will help you leverage technology, terms, behaviors, and industry intelligence to optimize your collections funnel and get paid on every account.
Are you excited?
Are you excited and ready to move forward? This is fun stuff. This is the lifeblood of every organization. And, if you master these 4 key areas of managing receivables, you can make an impact on your organization that can mean millions or billions of dollars.
The Levelset Platform makes it easy to manage credit and payment paperwork. Get in touch with us to talk to an expert and learn more about how you can jumpstart the process of streamlining your accounts receivable.