One of the keys to running a successful construction business is effective accounts receivable management. If you have a smooth-sailing process for reviewing, processing and collecting your payments, you have a better chance of improving your cash flow and growing your company.
Construction businesses have different ways of managing their accounts receivable or AR. Smaller companies tend to have one or two people in charge of AR, while mid to large-sized companies can hire an entire team to manage their accounts receivable. Some companies also have highly detailed credit policies to guide their accounts receivable team, while others have more flexible rules.
No matter your company size, you must still hire, train, and retain highly qualified accounts receivable specialists in order to grow your business.
- What does an accounts receivable (AR) team do?
- Four main functions of an accounts receivable team in construction
- Accounts receivable in construction
- How to build a construction AR staff
- Tips for hiring an AR team
- How to interview accounts receivable candidates
- Construction accounts receivable team onboarding
- How to train your construction accounts receivable team
- How to improve construction accounts receivable team performance
What does an accounts receivable (AR) team do?
An accounts receivable team is in charge of making sure that your company receives payment for the services and materials that you sold to your clients. Some of their main tasks include the following:
The accounts receivable specialists are responsible for billing the clients. Since you sell your products on trade credit, the AR specialists need to let your clients know how much exactly the clients need to pay. The AR team also lets the clients know the specific items of goods and services to be billed, as well as the deadline for paying.
After the clients have received the invoices and have sent their payments, the accounts receivable specialists must process those payments. Cheques need to be deposited, and credit card transactions need to be verified. The AR team should also follow up on late payments and recover the money from delinquent clients.
Managing billing and payment systems
Billing, processing, and collecting payments are complex processes that need to be optimized. One of the accounts receivable specialist’s main tasks is to maintain the efficiency of these processes. The AR specialists should also aim to improve them by identifying pain points and weaknesses.
Four main functions of an accounts receivable team in construction
Approving or rejecting new clients
Material suppliers that sell their products on trade credit need to vet their clients. Part of the accounts receivable team’s job is to do the vetting and to ensure that the potential client will not be a liability to the company in the future.
The accounts receivable team should therefore make sure that the company only takes on clients that will be beneficial for their business. The decision to approve or reject a client should be driven by your company’s trade credit policy. Some companies prefer to approve all clients regardless of risk, while others choose to be pickier.
Managing client data
Another function of the accounts receivable team is to manage all client data, especially when it comes to invoices and payments. Managing client information does not only mean tracking and documenting all invoice and payment data; it also requires understanding trends, identifying risks, and mitigating potential payment issues.
For instance, if a loyal client with a good payment track record has all of a sudden missed a payment, an accounts receivable specialist should be able to flag this and investigate accordingly.
Billing existing clients
The accounts receivable team needs to prepare and send invoices 1to your company’s clients. The AR team must ensure that the items and amounts specified in the invoices are accurate. Otherwise, the inconsistencies may cause payment disputes, which will further delay the payments and hurt the company’s cash flow.
The invoices must also be sent to the clients on time. Timing is very important in construction, especially for cash flow management 2 . If the AR team constantly sends out the invoices late, payments will also come late. Your cash flow will suffer if your AR team does not implement an efficient billing process.
Sending out invoices is one thing, but collecting payments is another. In construction, payments do not always come on time, and it is up to the AR team to track and manage those late payments. Keep in mind that late payments can have adverse effects on your cash flow, and they can be fatal to your entire business.
Note that payment collection in construction should also be optimized. The AR team must implement a process to send payment reminders, serve preliminary notices, and recover payments through mechanics liens if needed.
Accounts receivable in construction
Material suppliers in construction need to have a solid accounts receivable system to protect their cash flow. Without proper accounts receivable management, a construction company can easily go into a major financial disaster.
To make sure that this does not happen, you must find the right people to manage and maintain your accounts receivable. The following table highlights the responsibilities of a qualified accounts receivable specialist in construction, as well as the corresponding skills that will make them successful in the position.
- Prepare and issue invoices to clients
When preparing and issuing invoices to clients, an accounts receivable specialist should apply their proficiency in accounting and finance. Billing is an important part of the accounts receivable process, and a qualified accounts receivable specialist should ensure the accuracy of the invoices and reconcile them against the payments received.
- Process payments from clients
An accounts receivable specialist must know how to process payments and track them using standard accounts receivable software. Proficiency in Excel is a highly valuable skill for an accounts receivable team member. Even better, if they are technically proficient that they can easily learn how to use new accounting software.
- Reach out to clients to ensure outstanding invoices are paid
Being in accounts receivable is a client-facing job, especially when it comes to payment collection. In the construction sector, late payments are a common problem, and so an accounts receivable specialist must have the necessary knowledge and expertise to pursue delayed payments.
- Audit all payments and reconcile any irregularities
The accounts receivable team plays a huge role in completing the company’s financial statements. They must know how to balance all invoices and payments, and they must have the ability to identify any irregularities and discrepancies. Furthermore, they must know how to investigate and reconcile all the identified irregularities.
- Maintain accurate records of all invoices and payments
Tracking and recording all invoices and payments are key parts of the job for accounts receivable specialists. Without a proper documentation and monitoring process, it would be difficult to identify and fix discrepancies in the clients’ accounts. Proper documentation is also important in recognizing points for improvement in your current accounts receivable processes.
How to build a construction AR staff
Assess your current credit team
One of the initial steps to build a robust accounts receivable team is to look into your current processes and determine who has been doing the AR work. Do you have one person doing all the jobs? Are the responsibilities shared among multiple people?
Assessing your current capabilities is important because it gives you an idea of who in your team is capable of handling accounts receivable.
Evaluate your client base
How big your accounts receivable team depends on many factors, most importantly the size and quality of your client base. If your company is growing and is projected to acquire more clients, then a one-man AR team will no longer cut it.
The complexities of the invoices are also a factor in building an accounts receivable team. If your clients’ invoices are not as straightforward and if they require meticulous attention to detail to prepare, consider hiring AR specialists who have extensive experience in accounts receivable in construction.
Identify possible tasks to automate
When building an accounts receivable team for your construction company, you also need to consider which steps in the AR process you can afford to automate. These days, there is an abundance of available technologies that you can use to optimize and optimize AR management.
There are available invoice management tools to help you bill your clients efficiently. There are also software tools for project management, payment collection, and even mechanics lien filing. While you do not need to use all available construction AR technologies in the market, it is worth doing a study to identify which of them are worth investing in.
Tips for hiring an AR team
- Be specific when advertising the job description.
When posting an opening for any construction job, you need to specify the tasks and responsibilities 3 that you are looking for in an accounts receivable specialist. You want to filter out applicants who are not interested in doing AR work, and you also want to communicate what exactly you are looking for in ideal candidates.
- Look for candidates with direct or related experience in construction.
A candidate who has already worked in the construction sector is preferable over a candidate who has not. The construction industry is notorious for late payments, which is a big challenge for an accounts receivable specialist. An ideal AR specialist already knows the ropes of construction’s hierarchical payment system.
- Hire candidates who are enthusiastic about the job.
You need to weed out candidates who do not seem enthusiastic about accounts receivable management. The work that AR specialists do in construction can be high-pressure and high-stress, so you want to hire people who thrive in this type of job.
- Do not rush the hiring process.
Do not rush the hiring process for the sake of filling in a position. Take your time interviewing all qualified candidates. If you get a weak pool of applicants, do not hesitate to put the posting up again until you get the right people for the job.
How to interview accounts receivable candidates
- Ask for relevant experience in construction.
The ideal candidate must have relevant experience in the construction industry, so be sure to probe into their employment history. If they have extensive accounts receivable experience but no experience in construction, ask them basic construction questions to make sure that they have done their research and are truly enthusiastic about the job.
- Classify the candidate’s proficiency level in using spreadsheets, invoicing, and other related software.
Technical proficiency is best done through a test, but you can also glean an understanding of their skills through the interview. Ask them what types of software they have used before and how proficient they are in spreadsheets. You can even introduce hypothetical scenarios and see how they would respond to them.
- Look for relevant experience in customer service and settling client disputes.
Since late payments frequently happen in construction, make sure to ask the accounts receivable specialist candidate how they have previously dealt with late payments and client disputes. Ask for specific examples and note down how they addressed and resolved the situation.
- Ask for specific scenarios in which the candidate demonstrated a keen attention to detail and strong organizational skills.
During interviews, it is important that you ask the AR specialist candidate to be specific. Get them to share specific examples when they demonstrated their keen attention to detail and other skills. If they are giving generic answers, remind them to specify situations and examples. If they continue to give general examples, they probably lack in accounts receivable experience.
- Look for enthusiasm and a positive attitude.
Enthusiasm and a positive attitude can go a long way for people working in accounts receivable. During the interview, gauge how they answer the questions and how they respond when you challenge their answers.
Construction accounts receivable team onboarding
Make a positive first impression.
Once you have hired the right people, the next step is to make them feel welcome when they officially join the team. Introduce them to the people in the company, show them around the office, and make them feel that they made the right choice for deciding to work for your company.
Establish a clear process to ensure a smooth transition into the team.
Working in accounts receivable requires managing and handling a huge volume of information. There is a lot to know for a new employee, so make sure that you have a process in place to ensure that the new hires can easily integrate into the team. For example, you can have the new hires shadow more experienced AR specialists during the first week of onboarding.
Ensure training programs are set in place.
If there are any specialized processes or software tools that the accounts receivable team members should learn, be sure to get the new hires to learn them. Schedule the training before the new hires’ first day of work. It is also just as important to get the new hires to provide feedback on the training process so you can continuously improve it.
How to train your construction accounts receivable team
Have the new hires shadow the more experienced staff members
Shadowing experienced accounts receivable specialists is a good way to introduce new hires to the company. By letting them shadow an expert AR specialist, they will start understanding how your AR processes work.
Ensure that they are comfortable using the necessary software
The new hires must be trained on how to use the accounts receivable software that your company uses. Even if it takes time to train them, the investment will pay off once your new accounts receivable specialists start working on their own projects.
Assign simple projects supervised by a senior staff
To ease the new accounts receivable specialist into the team, let them begin with small projects first. Provide direct supervision and guidance, if needed. Once they are comfortable working on smaller projects, you can start assigning them more complex client portfolios.
Schedule a meeting to review their training and onboarding experience
As you evaluate your employees, you also need to keep in mind that your new employees should also be allowed to give feedback. Meet with the new accounts receivable specialists and ask them their thoughts on the training process. You can use their feedback to continuously improve the onboarding experience for your new hires, even in other departments.
How to improve construction accounts receivable team performance
One of the best ways to assess and improve the performance of your accounts receivable team is to use key performance indices or KPIs. There are a number of KPIs available, including the following:
Day Sales Outstanding
The day sales outstanding or DSO measures the average number of days it takes the accounts receivable team to collect payments from clients. Generally, a low DSO is preferred over a high DSO since low DSO means that your AR team can turn invoices into cash quicker.
Collection Effectiveness Index
The collection effectiveness index or CEI is specifically made to measure the effectiveness of your AR team in collecting payment. It is similar to DSO, although unlike with DSO, you should aim for a high CEI to show that you are highly effective in payment collection.
Average Days Delinquent
If you want to understand the status of your delinquent accounts, you can calculate the Average Days Delinquent or ADD. This KPI tells you how long the delinquent accounts have been overdue. If you have a high ADD, it means that there is something not working in your current accounts receivable processes.
- Construction Dive, The Dotted Line: 7 invoice mistakes that waste time, money (accessed September 8, 2021)
- The Contractor’s Compass, Why Effective Cash Flow Management is Crucial for Subcontractors (accessed September 7, 2021)
- Indeed.com, How to Hire an Accounts Receivable Specialist (accessed September 7, 2021)