Efficiently managing accounts receivable (AR) is vital for the financial health of any construction company. In an industry where projects often extend over long periods, maintaining consistent cash flow is crucial but challenging. Issues like payment delays, invoice disputes, and complex billing for multi-phase projects can severely impact your cash flow.
QuickBooks Online (QBO) offers powerful tools to streamline AR processes, helping you manage invoicing, track payments, and optimize cash flow. To maximize these tools, it's essential to implement best practices that cater to the specific needs of construction companies, such as progress invoicing and automated reminders.
This guide outlines key AR best practices tailored for construction companies and explains how to implement them in QBO to improve cash flow, reduce unpaid invoices, and ensure your business's financial stability.
1. Implement Progress Invoicing
What is Progress Invoicing
Progress invoicing allows you to bill clients incrementally for portions of the total contract amount as specific milestones or phases of the project are completed. Instead of waiting until the entire project is finished, you can invoice based on the percentage of work completed.
Benefits
- Maintain a steady cash flow throughout the project to cover ongoing expenses like labor and materials.
- Reduce financial risk associated with large, end-of-project invoices that may be delayed or disputed.
- Improve client relationships by providing transparency and regular updates on project progress.
How to use in QBO
- Create an Estimate: Navigate to "New" → "Estimate" under the Customers section, and fill out the project details.
- Release Invoices from Estimate: Convert portions of the estimate into invoices as milestones are achieved.
- Set up Progress Invoicing: Enable this feature under "Sales" → "Progress Invoicing" in QBO settings.
2. Manage AR Retention
What is AR Retention
AR retention is a process where a percentage of the total contract amount is held back until project completion, ensuring that the contractor fulfills all obligations before the final payment is made.
Benefits
- Provides security for both parties, ensuring the work meets agreed-upon standards before full payment is released.
- Reduces the risk of incomplete work or disputes.
- Proper retention management helps avoid cash flow problems and prevents distortion in financial reports.
How to use in QBO
- Set Up Retention Items: Go to "Products and Services" under "Sales" and create service items representing retention percentages.
- Apply Retention on Invoices: Subtract the retention amount from the invoice total using the retention item, keeping it separate as a liability.
- Release Retention: Once the project is completed, adjust or create a final invoice to release the retained funds.
Check out our more detail blog Master Retention in QuickBooks Online - A Contractor’s Guide
3. Set Clear Payment Terms
What are Payment Terms
Payment terms define when clients are required to pay for services rendered, including discounts for early payments and penalties for late payments.
Benefits
- Reduces the likelihood of disputes over payment deadlines.
- Provides legal protection in cases of non-payment.
- Offering early payment discounts encourages faster payments, while late penalties deter delays.
How to use in QBO
- Define Payment Terms: Create custom payment terms under "Sales" settings.
- Apply Terms to Invoices: Select appropriate payment terms when creating invoices.
- Communicate Terms: Clearly display payment terms on invoices and contracts to avoid misunderstandings.
4. Offer Multiple Payment Options
What are Multiple Payment Options
Providing various payment methods—such as credit cards, bank transfers, and digital wallets—makes it easier for clients to pay invoices.
Benefits
- Increases the likelihood of on-time payments by accommodating client preferences.
- Enhances client satisfaction and speeds up the receipt of funds, improving cash flow.
How to use in QBO
- Enable Payment Methods: Go to "Settings" → "Payments" and connect to payment processors like QuickBooks Payments.
- Add Payment Links: Include payment links in invoices for easier payment.
- Monitor Payment Methods: Track the most popular methods among clients and adjust offerings accordingly.
5. Monitor AR Aging Reports Regularly
What is an AR Aging Report
An AR Aging Report categorizes unpaid invoices based on how long they have been outstanding, typically breaking them down into 0-30, 31-60, 61-90, and over 90 days.
Benefits
- Helps prioritize collections by identifying overdue accounts.
- Reduces the risk of bad debt, improves cash flow, and maintains healthy client relationships.
- Provides insight into clients who may need more flexible payment terms.
How to use in QBO
- Access AR Aging Reports: Navigate to "Reports" → "Accounts Receivable Aging Summary" or "Detail."
- Customize Reports: Filter by date range, customer, or aging period.
- Schedule Automatic Reports: Set up scheduled email delivery of AR Aging Reports to team members.
6. Utilize Automated Reminder Features
What are Automated Reminders
Automated reminders notify clients when invoices are due or overdue. These can be scheduled before, on, or after the due date.
Benefits
- Reduces administrative workload by automating the tracking and sending of payment reminders.
- Increases the likelihood of on-time payments by keeping invoices top of mind for clients.
- Minimizes the need for follow-up collections, improving cash flow.
How to use in QBO
- Set Up Reminders: Configure reminder schedules under "Settings" → "Automation."
- Customize Reminder Emails: Include branding, specific messages, and payment instructions.
- Monitor Effectiveness: Track how reminders impact payment behavior and adjust accordingly.
What RedHammer Can Do For You
At RedHammer, we specialize in helping construction companies optimize their accounts receivable processes in QuickBooks Online. Our expert services include:
- AR Process Auditing and Setup: We’ll ensure your AR process is tailored for efficiency and accuracy.
- Progress Invoicing Management: We’ll assist with setting up and managing progress invoicing for multi-phase projects.
- Retention and Payment Terms Optimization: Let us help you manage retention amounts and customize payment terms to improve cash flow.
- Automation and Workflow Solutions: We can automate reminders and collections processes, so you spend less time chasing payments and more time growing your business.
- Ongoing Support and Training: Our team provides ongoing support and training to help your staff leverage the full potential of QBO for better financial outcomes.
Partner with RedHammer to streamline your AR processes, maintain steady cash flow, and ensure the long-term success of your construction business.
Conclusion
Effectively managing accounts receivable is critical to maintaining a healthy cash flow, especially in the construction industry, where projects are long-term, and payments can be unpredictable. By implementing best practices such as progress invoicing, correct AR retention management, clear payment terms, multiple payment options, regular AR aging report reviews, and automated reminders, you can optimize your AR processes in QuickBooks Online.
These strategies help ensure timely payments, reduce bad debt risk, and contribute to your construction company's financial stability and growth. By staying proactive in your AR management and leveraging the full capabilities of QBO, you can mitigate common financial challenges, keep projects on budget, and ensure long-term profitability.
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