Rather than investing free capital in growth opportunities, buy new equipment or introduce new services, your money is locked up on your balance sheet. You could also incur losses on the financing charges. If your customers are paying late, then your construction business may need to borrow money to meet its obligations. The quicker the turnaround on accounts receivable, the better. To pay for expenses and payroll, you may end up draining your cash reserves. Long periods between the billing and collection are typical for the construction industry.
Some businesses simply don’t realize how much cash is trapped in their balance sheets! With this in mind, construction contractors should always stay on top of customer accounts and pay especially close attention to those that are significantly past due.
Think of accounts receivable as mini loans to your customers.
That’s why the second step is just as important: collection. And since you have already made the delivery of a service or have completed the project, it’s a cash outflow. When you think about it, accounts receivable is kind of a no-man’s land between money inflow and outflow. Payment delays can even threaten the life of your construction business. Payment issues can expose your construction business to even greater financial risks if not addressed on time. All phases of construction have risks, but payment delays and nonpayments can be the most dangerous ones – especially for your cash flow. Now that we know what it is, let’s learn why accounts receivable is important.Īt a high level, AR is important because it affects your cash flow. Importance of Accounts Receivable in Construction Accounting Cash “to be received” is filed as accounts receivable (AR). When you have completed a project or performed service, but you have yet to be paid for it, that money is still owing to you. What is Accounts Receivable in Construction How do you manage your accounts receivable so that they yield the most benefit? Find out everything you need to know about accounts receivable with our comprehensive guide. This is why payments must be collected in a timely manner and in a way that is beneficial for your construction business. In essence, your day-to-day operations depend on accounts receivable. It’s where you withdraw money to pay your employees, cover your company’s daily expenses, and grow your company. Managing the accounts receivable is extremely crucial for your construction and service business. In the construction accounting world, accounts receivable is a kind of cash inflow “in waiting.” It’s cash legally owed to you, which in theory is good, but it’s not yet cash in hand. If accounts receivable is an asset, it’s basically money in the proverbial bank, right? Not exactly. But what is accounts receivable when it comes to construction accounting? How do you manage your accounts receivable so that it benefits your business? Is accounts receivable considered an asset and how should it be classified in your financial record keeping?įirst of all, yes, accounts receivable is an asset, because it’s defined as money owed to your construction or service company by a customer and also because it’s convertible to cash in the future. When your company extends credit to customers for a job completed or services provided, the amount owed is referred to as “accounts receivable”. Most construction and service companies operate by allowing a portion of their trades to be on credit.
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