Managing accounts payable (AP) in the construction industry is a critical aspect of maintaining a healthy cash flow and ensuring long-term profitability. From handling vendor invoices to tracking retainage, effective AP management is the backbone of financial stability for contractors and subcontractors.
In this guide, we’ll explore what accounts payable entails in the construction industry and share seven actionable tips to help you streamline your processes for maximum efficiency.
What Is Accounts Payable in Construction?
Accounts payable refers to the outstanding bills your construction business owes to vendors, suppliers, and subcontractors for goods and services. These costs can include materials, equipment, and general overhead expenses. AP balances fluctuate as invoices are received and paid, making accurate management essential for maintaining cash flow and meeting project deadlines.
Unlike other industries, construction AP often ties directly to customer payments. For example, contractors may not pay suppliers until they receive funds from project owners. This makes accurate AP management essential for budgeting, forecasting, and ensuring profitability.
7 Tips to Improve Accounts Payable Management
1. Centralize Invoice Processing
Designate one person or a single email address to receive all incoming invoices. This prevents confusion about where invoices should be sent and ensures no invoice is missed or misplaced.
Encourage vendors to submit invoices electronically to streamline tracking and reduce the risk of lost paperwork. Digital submissions also allow for faster approval and payment processing.
2. Enter Invoices as Soon as You Receive Them
Recording invoices in your accounting software as they arrive creates an immediate record, ensuring they won’t get overlooked. This step is crucial before routing invoices for approvals or coding.
If invoices are sent to managers for approval before being entered into the system, they can easily get lost, leading to missed payments and untracked expenses.
3. Track Retainage Owing and Paid
Retainage, the portion of payments withheld until a project is completed, is a key component of construction accounting. It’s crucial to record retainage separately from regular accounts payable.
Use a separate "retention payable" account to track withheld funds and move amounts into accounts payable once the subcontractor invoices for retainage. If your accounting software doesn’t automatically handle retainage, ensure you have a manual process in place.
4. Go Paperless
Digitizing your accounts payable process reduces errors, saves time, and improves accessibility. Save scanned copies of invoices to a cloud-based storage system or server, ensuring all records are backed up and easily retrievable.
Take advantage of accounting software features that allow digital routing and approvals. This minimizes the risk of losing invoices and improves the accuracy of your financial records.
5. Run Regular AP Reports
Generate accounts payable reports on a weekly or monthly basis to maintain visibility into outstanding invoices. Many accounting programs let you filter reports by payment due dates, helping you prioritize which invoices to pay first.
Regular reporting provides insights into your upcoming cash flow needs and ensures you’re prepared to cover expenses without delays.
6. Schedule Payments at Regular Intervals
Establish a consistent payment schedule to streamline your AP process. For example, you could pay invoices every first and fifteenth of the month or every Wednesday.
Having a predictable schedule allows you to better manage cash flow while maintaining positive relationships with vendors. Frequent payments, such as weekly, also enable you to handle urgent invoices without falling behind on regular expenses.
7. Mark Joint Check Payees on Invoices
If an invoice requires joint checks (e.g., to a subcontractor and supplier), make a clear note of this on the invoice or in your accounting system. This ensures the person issuing checks is aware of the joint payee arrangement.
This step is especially important if different individuals handle invoice entry and payment issuance, reducing confusion and avoiding payment delays.
Managing Accounts Payable While Protecting Cash Flow
Accounts payable plays a vital role in your construction business’s financial health. Ensuring accurate records and timely payments not only strengthens your vendor relationships but also safeguards your cash flow.
Leverage technology like construction-specific accounting software to automate your AP processes and reduce errors. Regular reporting and a proactive payment schedule will further support accurate cash flow forecasting, helping you manage expenses and plan customer billings effectively.
By implementing these best practices, you’ll be better equipped to handle the complexities of construction accounts payable and maintain a financially stable business.
For expert guidance on improving your construction accounting processes, contact PVM Accounting today! We specialize in helping construction businesses optimize financial operations for success.
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