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Blog: Collection Principles to Improve Cash Flow

Many trade contractors focus their resources on bidding and winning contracts, but a business cannot be successful without collecting payment for work performed or goods delivered. Subcontractors fail because of poor cash flow management more often than a lack of work or technical expertise. 

Collections program

A successful collections program starts with a proper attitude. Thus, it is important that all parties involved in the collections process—the people in your company as well as those in your customers’ firms—are continually made aware that timely payment is of the utmost importance. 

The following steps will improve your collections results:

•    Set an example by treating collections as a vital part of your daily activities.
•    Show your commitment to results through actions, not words. Demonstrate in tangible ways the need to get earned money into your hands on time.
•    Accept the fact that some contractors have developed practices designed to keep subcontractors off-balance and on the defensive as a way of paying less than what is due. 

Basic principles

Without a carefully developed and implemented program, all of the good intentions in the world will not improve your cash flow. Such a program should be built on the tenet that there is no substitute for actually getting money into your account. Only then can you cover the cost of project materials and the work that you have financed in order to attain a reasonable profit. 

The following are four basic principles of an effective cash flow program:

1.    Establish a good foundation. There are three building blocks of a sturdy foundation for your cash flow program: equitable subcontract terms, a billing schedule that provides adequate compensation during the progress of the job, and a requisition form and system that helps your customer help you.

2.    Heed the lessons of a general contractor’s track record. Be prepared if, based on your past experience with the customer or the reputation of the customer, there is a history of practices such as improper back charges or excessive deductions from payments.

3.    Use your time and employees to advantage. Many customer collection contacts can be made during regular visits or telephone calls about other matters. Prioritize contacts and separate the unusual from the routine in assigning basic follow-up responsibilities. In most instances, administrative staff can carry out a systematic program of routine contacts so that senior staff can concentrate on exceptional conditions and major problems.

4.    Do not hesitate to use leverage any time you can. For example, you may be able to apply leverage when a customer is looking for a great price, a scope change, accelerated or out-of-sequence work, or whenever the customer needs your help to meet its own goals. The common element in each of these situations is that the customer needs special consideration from you. When these conditions arise, it is always best to make your agreement contingent on favorable payment terms and the removal of any obstacles for getting your money without delay.

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The American Subcontractors Association is a national trade organization representing construction subcontractors, specialty trade contractors, and suppliers. For more information about ASA, visit www.asaonline.com

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