Payment delays create challenges for every construction company and field service provider. Smaller contractors often wait 30 to 60 days or more to receive payments, delays can create strain on their cash flow.
So, why is it taking so long to get paid for work that has already been done? Usually, the primary reasons for prolonged delay is the continual delay in preparing and sending invoices, lack of communication to clients, limited payment options, and weak follow-up systems.
Fortunately, it is not as complicated as it may seem. The following article suggests some tips to cut Days Sales Outstanding for contractors.
Understanding DSO for Contractors
DSO (Days Sales Outstanding) is how long it takes contractors to receive payment from the date an invoice is generated. A high DSO number is usually indicative of late invoices, poor follow-up on collections, or friction in payment.
If the amount of time it takes to receive the payment from an invoice continues to increase, pressure continues to increase on the operations of the contractor. The goal is to minimize the waiting period, and securing some payment before work starts is advisable.
Request for a deposit as part of your approval process to speed up the collections process. By receiving a financial commitment from a client, you clearly establish the expectation regarding payment before any work takes place.
Dividing Large Projects Into Payable Stages
For long-term projects or complex jobs, billing the entire project at the end creates risk for the contractor. Progress billings allow you to bill your clients according to the progress of a job.
It can help reduce potential disputes regarding a single large invoice at the end of the job. Clients feel less pressured with smaller payments.
Invoicing While on the Job
Most delays in receiving overdue invoices can be traced back to the timing of sending the invoice. Studies show that invoices sent immediately upon completion of a job, or as close as possible to the completion date, are paid more quickly than those sent later
When clients see the completed work and receive the invoice right away, they’re more likely to act quickly. Tools like Joist streamline the process by turning estimates into invoices, allowing contractors to request payment before leaving the job site.
Let Automation Handle the Follow-Ups
As much as you may want to follow up with clients for payment, manual follow-up can be tedious and unpleasant. They don’t happen as quickly as you would prefer. Automating your invoice follow-ups with reminders relieves both of these concerns.
Having invoice reminders sent to clients at regular intervals, before and after the due date, will keep the invoice visible and require very little ongoing effort. Short, courteous, and consistent invoice reminders perform much better than aggressive or sporadic ones.
Make it as Easy as Possible for Clients to Pay You
Payment friction is one of the biggest hidden reasons for high DSO. If your clients have limited options for paying invoices, chances are the payment will be delayed. By providing several payment options for your clients, you increase your chances of getting paid on time.
It is especially important to offer options like bank transfers (ACH) and cards. ACH payments are generally processed faster than other forms of payment. Additionally, ACH payment processing generally has lower fees than other forms of payments.
Be Clear About Your Terms and Enforce Them
When payment terms are not clear, it leads to hesitation and delays. By having clear expectations set out, you increase the likelihood of clients acting on time.
Shortening your payment terms to Net 7 or Net 14 is one way to increase turnaround times significantly. However, clarity does not equate action. Consistency of enforceability is what dictates how clients behave regarding payment timelines.
Track What’s Actually Happening
You need visibility into what is actually taking place to reduce Days Sales Outstanding. You can track your average DSO, assess aged invoices, and analyze payment methods for processing times. You will get insight into where the delays are originating from.
You will also begin to see patterns over time. They can help you identify which clients have a history of making late payments, which payment method is the fastest to collect, and what part of your process needs to be tightened up.
Create a System That You Can Repeat
The real objective isn’t simply getting paid faster. It is about getting paid consistently on a regular schedule. You need an efficient workflow that naturally moves you from one step in the process to the next.
To create a smooth process, establish a clear workflow from estimating to collecting deposits, invoicing, and following up on payments. Being organized reduces the time spent chasing payments, allowing you to focus on growing and managing your business.
Turning Fast Payments into a Competitive Advantage
As your cash flow improves, you will not only stabilize your business but also be able to use your improved cash flow and working capital as leverage. It can assist with the following:
- Taking on new projects
- Negotiating more competitive rates with your suppliers
- Reinvesting in new tools or talent ahead of your competitors
This would all be made possible by the ability to pay faster. Over time, low Days Sales Outstanding (DSO) will become part of how you are perceived by your clients.
Stop Late Payments Before They Start
DSO reduction is not pushing clients to pay their bills sooner. It is identifying why clients delay paying their bills and eliminating the reasons. There are simple changes that can dramatically cut your payment cycle.
Begin with one of these changes and then increase your efforts. As you improve your processes, your cash flow will improve, and you will be able to grow without unnecessary financial stress.
