The importance of accurate accounts payable and other accounting records in the construction business cannot be overstated. For most contractors, these costs drive their income. Managing accounts payables — ensuring accurate records and quick payments — is the key to all construction companies staying in business. Improving the management of these records will help ensure that everyone gets paid in a timely fashion and accurately.
What is accounts payable in construction?
Accounts payable is a term for the money you owe to vendors and subcontractors for business costs and expenses. It includes all types of costs, including overhead, direct, and indirect costs.
Bills that are unpaid, from the time the vendor bills you until you make a payment, are considered your company’s accounts payable. Obviously, the number of outstanding bills will fluctuate. It’s similar to accounts receivable in this way.
Especially in construction, the payment of accounts payable is often linked to payments received in accounts receivable. In other words, many companies don’t pay their bills until they receive payment from their customers. This is most often the case for direct costs for projects: Overhead and general business expenses are usually paid as they are received.
Having an accurate accounts payable total to base your customer billings on is crucial for maintaining positive cash flow and ensuring that you make money. You want to make sure you are bringing in enough money to cover your expenses, or you’ll have to look for alternative cash flow solutions, like short-term loans, lines of credit, or other financing.
8 tips to improve accounts payable management
Managing accounts payable means ensuring that all invoices have been accounted for and that they get paid in a timely fashion. Having a process for doing this is essential as your business grows. Here are some ways you can improve your accounts payable management.
1. Have one person or email address that all invoices are sent to.
This helps prevent confusion on the part of your vendors about who to send the invoices to and makes it easier for you to track if an invoice has been received.
You should encourage your vendors to email invoices instead of faxing or mailing them, as emailed invoices can easily be recalled and reprinted.
2. Enter all invoices that you receive in your accounting software.
Doing this before distributing the invoices for approval or coding ensures that you’ve got a record of all incoming accounts payable. If you send your invoices to management for approval before entering them into your software, there’s no way to know that the invoice was received. This can lead to lost invoices and unaccounted for expenses.
Entering invoices as they come in creates a record showing that the invoice exists, and you can then track it down if the hard copy gets misplaced.
3. Track retainage owing and paid.
Make sure you are accurately tracking the retainage that is owing to your subcontractors. Construction accounting software should track this for you. If you’re using another software program, or tracking your costs with a spreadsheet, you’ll need to keep track of these amounts by hand.
4. Go paperless.
Scan or save copies of accounts payable invoices to your server or cloud storage system. By doing this, you’ll ensure you always have a copy of every invoice, even if something happens to the paper copy.
You should also take advantage of digital routing and approval processes if your accounting software allows them. These processes reduce the chance of lost invoices and help ensure that all costs are recorded in the accounting system.
5. Run regular accounts payable reports to help you determine your cash flow needs.
Most software packages allow you to enter payment due dates for accounts payable invoices. Use these dates to filter your reports so you know how much is due at any one time.
By reviewing the amounts due on a certain date, you can put together an accurate cash flow projection, showing how much is due each week or month. These amounts should inform your job billings, so you make sure you’re billing enough to cover all your expenses.
6. Schedule payments at regular intervals.
Have a regular payment schedule that you stick to as much as possible. Set specific days of the month or a day of the week that you make payments on invoices that are due. For example, you could pay bills on the 1st and 15th of the month, or every Wednesday.
Since invoices have different due dates, you’ll need to review these to determine when’s the best time to make your payments. Once a week is usually a good place to start, as this allows you to address urgent payments as well as keep current with necessary services such as utilities.
7. Note any joint check payees and amounts on the invoice.
If a subcontractor or supplier needs to get a joint check, make a note on the invoice or in your software so the person creating the checks can see it. This is particularly important if the person creating the checks is different from the person who entered the invoice and knows about the joint check.
8. Create and track lien waivers on all projects.
Lien waivers are a great way to protect yourself and your client from mechanics liens. Using them on all projects, even those that don’t require them, offers an additional layer of protection for you and your client. You can choose to send conditional or unconditional lien waivers, depending on your preferences and the job requirements. However, you should know the difference between the two and what they mean for lien protection. Also, if you send lien waivers, you’ll need to track them to make sure they are signed and returned before the next payment is due.
Managing accounts payable for better cash flow
Tracking and paying accounts payable accurately and in a timely fashion is essential for any construction business to help manage their cash flow. Using tools like construction accounting software and electronic routing of invoices make this process easier and quicker. Running regular accounts payable reports and scheduling regular payments will help you predict your cash flow needs so you can plan your customer billings and know your cash standing.