Happy Thursday Folks!

If you didn’t see this on Tuesday that’s on me. Had a sending glitch on my end but it should be fixed now.

Today I'm kicking off a two-part series covering a topic that is very important to contractors, especially from a cash flow standpoint - Accounts Receivable.

For those that don't know this already, I've spent over half of my professional career working in the accounting and finance departments for Fortune 500 companies.

I've seen firsthand how they work.

The good.

The bad.

The ugly.

Throughout my time in corporate accounting I've had my fair share of working with and in Accounts Receivable departments of various sizes. I've seen how they operate firsthand and know what they prioritize.

Today in part 1, I'm going to walk you through what Accounts Receivable departments in Fortune 500 companies prioritize, how they manage their AR, and things you can steal and implement in your own business to streamline your AR process. I'm also including a simple guide on how to follow up on past due invoices, so you can build out and implement this system in your own business.

Let's dive on in!

When you break it down to its core, the companies I've been a part of have four main priorities when managing Accounts Receivable:

This is what they care about. Every part of the process is designed to reduce the time between completing the work and receiving payment. The longer invoices sit unpaid, the more pressure it puts on the business.

Fortune 500 companies tend to be ruthless when it comes to collections. This is how I imagine corporations are when collecting on their invoices:

If there's one thing I've learned throughout my time in corporate America, it's that corporations love systems and process documentation. All of the best and high-functioning corporations I've worked in all have systems and documented processes.

Everything is systematized and documented. When to invoice, how to apply payments, when a customer gets a credit hold, who approves payment plans, what happens when a check bounces - every one of those has a defined process. It's not just in someone's head, it's documented somewhere where anyone can pull it up.

The result is a department that runs the same way on its best and worst day. If Mary goes on vacation, the whole operation doesn't stop; there's someone that can pick up the slack in their absence. This is possible because the answer to "how do we do this" is in a document or video saved out in a folder vs. only in someone's head. The performance of the whole operation stops depending on any individual showing up or remembering.

Now let's look at the typical contractor's back office. Invoicing may happen when someone gets to it. Payment application follows whatever logic the bookkeeper or office manager created. Collections run on the owner's memory. What happens when a customer disputes an invoice? The honest answer is: it probably depends on the day. Nothing is written down, so everything quietly falls on one person, usually the owner.

Steal this and implement: you don't need a full-on procedures manual. Pick three processes that impact cash the most: invoicing, payment application, and past-due invoice follow-up. Write a simple standard operating procedure (SOP) document detailing what happens, when it happens, and who is responsible for it.

That's all. Three pages.

To test if it works, can someone else do this task or handle this process without having to ask you anything? When the answer is yes, the process is no longer dependent on memory and is something that can eventually be delegated to another staff member such as an office manager.

Large corporations tend to be ruthless when it comes to Accounts Receivable and cash collection.

The AR Aging isn't something that is only reviewed occasionally, it's reviewed weekly. Every week the AR Aging Report is pulled and every balance gets looked at. When the aging is reviewed, management is typically looking at: What's the total open AR, what's just slipped past due, what balances are becoming significantly aged, and what is the possibility that some of these balances may potentially become uncollectable. They're also looking at the customer profiles and trends when reviewing these balances. For example, are most of the past due balances concentrated in a handful of large customers or are they spread throughout the entire portfolio?

One of the best AR departments I ever worked with reviewed their receivables daily. Every morning they had a standing meeting called "daily management." Each day they covered a different customer profile and the account owners had to report on where things stood with their accounts and any issues that were preventing the company from getting paid.

Now, that's an extreme example because that particular company was far more complex than most contractor businesses.

Many contractors, meanwhile, look at their AR aging report when cash gets low. Which means the report is only getting looked at after the damage is done. When an invoice has been outstanding for 47 days before the first follow-up, you've already trained them to pay late, and once this happens it's hard to undo.

Steal this and implement: Set aside 30 minutes on your calendar, the same day each week, to pull and review your AR aging report. Ask these three questions: What past due balances are new this week? What's aged into another bucket? Who do I need to contact this week for payment?

The 30 minutes each week to do this is the difference between finding out about a problem on day 7 versus day 47.

In a Fortune 500 AR department, an invoice becoming past due sets off a sequence of follow-ups: a gentle reminder, a firmer reminder, a phone call, an escalation to someone with authority to hold future work or negotiate terms.

Each stage has an owner and a deadline. The customer size doesn't change it and the AR clerk's workload doesn't change it. When an invoice becomes past due, the system starts. This is important because it removes the decision of "what do I do now?" The decision has already been made and the first reminder needs to be done.

For the typical contractor, it is usually the opposite. There's no sequence, so every past due invoice just sits there waiting for someone to deal with it. Follow-up happens when the frustration of non-payment comes to a head, usually around day 45. Customers eventually learn the pattern: you don't chase payment, so your invoices go to the bottom of the pile to be paid.

Steal this and implement: Build and document your AR follow-up sequence. What do you do when an invoice is 1 to 15, 16 to 30, 31 to 60, 61 to 90, 91 to 120 and 120+ days past due? Write down what each touchpoint says and when it starts. Then the only weekly task is checking the AR aging report and executing the action for whatever stage the invoices are in.

The things I’ve listed above doesn’t hiring anyone, buying anything or becoming a corporation to execute. However, it requires deciding how collections work in your business and then letting the system do the work. The contractors that get paid the fastest are the ones that have the dedicated systems and processes in place to streamline their collections process.

That’s all for this week folks!

Til next time, cheers!

Preston