Attributed to Michael Facey, head of marketing and product management at OnGuard
Construction is used to facing high competition and pressure on prices and margins. At the same time, it is a capital intensive industry so every construction company needs strong cash flow to operate smoothly. Yet, research of 250,000 UK businesses from Euler Hermes highlighted that the construction industry is the worst sector when it comes to payment delays, accounting for over 30% of all payment incidents. It’s time the industry takes charge of its cash flow. To do this, you can’t just look at top-line growth or increasing sales. You also need to increase the speed of receivables — monetary and other obligations owed to you by customers or debtors.
Accounts receivable is one of the largest and most liquid of corporate assets. Many construction organisations are struggling with effective management of the process and consider it a cost center. However, with the right credit and collections strategy and smart software you can reduce accounts receivable balances and generate a substantial cash flow. Here are ten ways to plan and execute credit management and increase the cash flow to keep your organisation healthy and competitive.
1. Credit management equals customer relationship management
Credit and collections management is a fundamental part of customer relationship management. In this challenging economy some customers will delay payment for as long as they possibly can. In other cases, invoices are not paid on time because of issues that must be addressed before payment will be made. Your task is to apply payment pressure without creating undue friction that can negatively impact customer relations.
2. Divide your customer profiles
Are all your customers the same? Probably not! Some customers have been doing business with you for years while others are new and unknown. It is likely that you have customers that purchase large volumes while others only place small orders. Divide your customers up in (similar) groups to get more insight.
3. Provide a feasible plan
If your plans are too ambitious you can confront your employees with an excessive number of actions. If there is no overview, you run the risk of demotivating your team. By segmenting your customers well and monitoring which approach yields the desired result, you can make the most of your credit managers.
4. Determine appropriate monitoring
Verify how you currently deal with your customers. When do you contact them? And at what time? Do you do this by letter, mail, phone or otherwise? By approaching your different customers appropriately (according to their customer profiles) you spend your time efficiently and you achieve the greatest return.
5. Pay suppliers on time
Do not pay your dues early or late. If you pay them early, you’re reducing cash flow. If you pay them late, you could be hit with fees. There is one exception: if you’re offered a steep discount by paying upfront, consider it. This will hit current cash flow, but it will benefit future cash flow.
6. Pull receivables in before accounts payable
If receivables are coming in faster than payables are going out, you’re in a good spot. If this isn’t a possibility, at least reduce the average accounts receivable by several days. Start by focusing on reducing your days sales outstanding, even just by a few days, and put major amounts of cash back into your business.
7. Involve sales
Credit and collections should be an integral part of the sales process. This should help establish an initial framework for a long and mutually beneficial relationship between buyer and seller and completing the final step in the sale-to-cash cycle. If viewed from this perspective, credit and collections becomes a sales enhancement function and a profit center, not an administrative cost center that inhibits the sales process.
8. Get your organisation on board
From management to sales, get everyone together to announce that cash flow is now the top priority and that your focus will be on increasing the speed of receivables. Make sure you're armed with answers to likely questions so the meeting moves fast and little time is lost. When everyone has the same goal, it becomes more attainable.
9. Keep in touch with your customers
Communication is key! Reserve time for personal contact with your customer. Only by actually speaking to each other can you figure out what the motivation is behind a failure to settle. Discuss what you can do to speed up the payment and jointly determine a feasible payment agreement.
10. Use reports for insight
Regularly assess the effectiveness of your credit management department. Is the workload realistic? Do your employees manage to follow the planned policy and planning? Are you achieving the desired results with your current policy? Flexibility in your approach keeps the focus on results.
The bottom line
Making the credit management operation run more efficiently will help improve cash flow for any construction company. There are many ways to plan and execute credit management, and credit management software is the perfect technology to support it.