You’ve spent considerable time and effort in running your projects well. You make sure that your customer is kept very happy during project execution, and you’re expertly handling the multitude of challenges that come along with a complex project. Your project is going well, your customer is happy. But you still can’t seem to get paid on time. What’s with that?
There’s no doubt about it, keeping your project healthy and well managed has a huge impact on achieving healthy cash flow, but that’s really only part of the overall strategy of getting cash flowing happily into your organization. The other half of it – the half that can really bite you – is making sure that you invoice efficiently, and your customers pay you efficiently. Many construction organizations spend a great deal of cost and effort towards invoicing their customers in an attempt to improve their cash flow performance. The challenge, however, is that they’re using the same old process, the same old tools, subject to the same old risks. And they’re getting the same old results: accounts receivable aging stretching to 120 days, accountants and auditors insisting on an allowance for uncollectable accounts, board members and bank managers tapping their fingers waiting for the latest receivables schedule.
It’s no wonder when you consider the inherent challenges that practically all construction companies have to deal with in getting their invoices out the door. Those challenges, however, can be minimized, and cash-flow significantly accelerated by implementing the following four cash flow management strategies.
Having an efficient invoicing process that invites fast turnaround of payment can make or break even a well-run project.
Meet John. John needs all project invoicing information compiled by month-end to complete billing. But Bob in the West Side project is vacationing in the Bahamas and no-one is quite sure if all his project progress has been recorded for billing, or which report is the most current. So, the invoice information that John needed by the 1st arrives on the 7th… and 6 days get added to the cash flow forecast.
Now, Bob gets back and realizes that two change orders that need to be billed out this month have never been approved – he knows the customer has, but he doesn’t think he ever got an approved change order back. There should be a record in the project file, but it could be that Project Controls has it and didn’t upload it to the project file yet.
Situations like this are common and are a result of key project data residing in multiple locations. The first tip in accelerating cash-flow is to consolidate your project information in one application for easy tracking. Make it accessible to those who need it and eliminate the risk of using the wrong report, or the right report on the wrong laptop sitting in Bob’s home office while he’s on the beach in Nassau.
After Bob has updated his Project Progress report, he sends it to Ryan, his Project Engineer who then compares the report to the Completion Survey completed by the quantity surveyor. Ryan updates the Progress report and sends it back to Bob, who updates it again for a change order that was missed in the previous month’s billing. Bob sends everything to Sarah in Accounting. Because of the varied information involved, in addition to the customers needing to have detailed information presented on the invoice, it takes Sarah some time to re-enter Bob’s information into XYZ Accounting System. She then has to create the invoice and attach all the different reports and documents.
Ouch – that’s a whole lot of fingers on some pretty critical data. Not only do those multiple inputs, or touches, of billing data increase the inefficiency of getting an invoice out the door – and getting cash in – but the level of complexity involved increases the risk in the information accuracy. The numerous spreadsheets that Bob maintains to record his Project Progress, which Sarah then needs to turn around and recreate in an invoice, is a big stack of extra effort and ripe with the risk of errors.
If they were to consolidate their data into a single, organized place that didn’t require all this redundant effort; it would be a key first step in improving their billing efficiency, accuracy, and would shrink the lag in their cash flow.
So, what is this single organized place? Construction organizations need to take advantage of innovative project software that will reduce the complexities involved with tracking complex projects with complex billing requirements. Remember – the fewer fingers you have moving and manipulating data – the more timely and more accurate your billings will get. And the faster the cash comes in.
John has been waiting for this invoice to get out the door – it’s a pretty big chunk of his forecasted cash flow 60 days from now. This customer doesn’t pay 60 days from invoice date – they’ve had too many instances themselves of contractors submitting significant invoices late, so in an attempt to get contractors to submit promptly and accurately, they now only pay 60 days from invoice receipt and approval.
John scans through, hurriedly reviews the progress report and change orders….and sighs. Apparently too relaxed from the beach, Bob failed to note the specific conditions on the change orders. It wasn’t enough just to get the approval from the customer, he needed to provide evidence of completion, which either hadn’t been done or hadn’t been provided. John checks his clock – 12:30 pm and tries Bob on his cell. Just his luck, Bob’s at the site and won’t be able to get back to the office until the next day late afternoon to get the documents John needs. Three days later, with all information finally in, John signs off on the invoice.
Yes, issues are going to come up that affect your ability to approve and get an invoice out the door; and the financial control involved with approvals is critical. But delays introduced because of a manual or time-consuming approval process is completely unnecessary, and a direct hit to your cash flow. Now, if the approval process was automated and available online – if John had an opportunity in advance to take a look at the progress report, the change orders and their conditions – he would have had a chance to ensure that all information required for his approval, and billing, had been provided.
Two days later, John’s much agonized over invoice is still sitting in the Accounts Payable email queue. No confirmation of processing. It seems the customer has a few questions about the progress report and the change orders, and won’t be providing approval until his questions are answered. Another delay. Another unnecessary cash-flow delay.
This is another avoidable situation. Most of the questions and disputes on the invoice should have already been taken care of during the billing month. If they would have used proactive, regular reporting to the customer – like, before Bob’s holidays and the rush to invoice – they would have already known these details and could’ve circumvented this delay. By the time month end rolls around, however, and the corporate cash forecast is due, Bob and the customer are no closer to working through the discrepancies on the Progress Report and change order billing. John realizes with a sick feeling that this situation is once again going to significantly impact his cash flow.
Now, contrast this with a billing process that starts with proactive, real-time reporting to the customer. Rather than updating multiple spreadsheets during the month to demonstrate status, progress, performance – consolidate your information, manage only the data needed and provide it to your customer on demand – or better yet, even before they demand it! If your billing is reliant on critical reporting or information, aim to provide your customer with frequent reporting prior to billing. Make it easy for the customer to get from you, and make it easy to get together. The effort you take to communicate early and frequently with your customer will pay off with fewer disputes on the payment end.
By using these four tips for accelerating cash flow, a construction organization can vastly improve their internal efficiencies (saving time and money), and reduce the lag between invoice and payment. Cash flow is king in this world. Spend a little time, invest in the right tools, and get your cash in a happy positive place.