Create and Use A Payment Funnel to Reinvent Your Receivables

It’s no secret that getting paid in the construction industry can be difficult. Obstacles to payment seem to spring up constantly: pay when paid provisions, bankruptcyjoint check agreements, workmanship disputes, and more all cause hassles when companies attempt to get paid for the work they’ve done.

The cost of this payment problem is severe. In both a cause and effect of the payment quagmire in construction projects, construction companies have some of the highest failure rates in the nation. Since the margins are so small, every little bit of uncollectable debt has a huge impact. The extra revenue needed just to break even may be impossible to find. Think about this: With a 10% profit margin, every time your company can’t collect on $100,000 of debt it will need $1 million in revenue just to even out the bottom line. This is a huge burden, and can even be fatal to your business. And, just when you may have thought the recovering economy and construction industry growth was there as a life-preserver, it turns out that construction businesses are three times more likely to fail in a recovering economy than in an economy struggling through a downturn or recession.

Sometimes it may seem like write-offs are unavoidable, and it’s easy to see how they happen. Besides all the roadblocks to payment outlined earlier, there are also practical workplace challenges in collecting amounts extended as credit. The amount of paperwork can be daunting, and the time seems to fly by until the accounts go stale. After so much time passes, it becomes difficult or impossible to collect the amounts due, and the effort needed to even try becomes insurmountable. Once this pattern takes hold, it becomes impossible for any company to keep up, and debts are written off. This may come with some sort of general “house-cleaning” of accounts and a flimsy promise to re-set the process, but all too often the same pattern emerges and the company is left chasing old bad debts again and again.

How can you stop this cycle, and break out of your receivables rut?

Create A Payment Funnel To Fully Utilize Notices and Liens To Your Advantage

It is possible to achieve remarkable success at cleaning up an aging accounts receivable report, and then actually keeping it clean and collected, by efficiently and thoroughly utilizing the notice and lien tools provided to construction companies to your full advantage. This can be accomplished and managed by placing all credit accounts into a “payment funnel” that provides a step-by-step process to handle accounts as they age, and influence other parties to make payments.

[quote style=”boxed” float=”left”]In order to get paid every time, you need to influence your customers to prioritize your accounts above everyone else’s.[/quote] I recently posted a short article entitled 3 Steps To Improve Your Bottom Line. Creating a formal payment funnel allows your business to incorporate those 3 steps into a systematic and functional policy that can revolutionize your entire receivables process.

The first step in understanding why a payment funnel would have such an impact is determining why customers aren’t paying in the first place. Not every non-paying client has declared, or is in the process of, declaring bankruptcy – not by a long shot. So, why aren’t the solvent companies paying their bills? The simple, but unfortunate, truth of the matter is that they are. These customers are paying lots of bills — they just aren’t paying yours. The determination of which bills to pay when comes down to an evaluation by that company of which specific bills should be prioritized over others. There are even software programs that are specifically designed to assist companies in making the determination of which invoices should receive the highest priority, and which are more easily allowed to slip.

So, it’s easy: In order to get paid every time, you need to influence your customers to prioritize your accounts above everyone else’s.

While the above is clearly a little bit tongue-in-cheek, it’s not actually as daunting a task as you may imagine. You can cause your bills to be prioritized by drafting and completely adopting a well-defined credit policy that includes the parameters for your Accounts Receivable Funnel. With some limited changes possible on a company-by-company basis, a proper funnel for companies in the construction industry should look pretty much like this:

  1. Beginning of Project:  Send preliminary notice to protect mechanics lien rights and inform parties of your involvement
  2. After Account in Default after a relatively short set period of time:  Send a notice of intent to lien to urge payment
  3. If payment not received within 15 days after NOI sent:  File a mechanics lien to secure the debt with the property itself
  4. If mechanics lien not paid within 45 days:  Send to collections / attorney
  5. If mechanics lien not paid within 4 months:  File a foreclosure / collection suit

While all steps are integral parts of the funnel, very few projects will even make it to Step 3 before payment is received. And, of those that do, even fewer will ever reach steps 4 and 5. In fact, if you stick to the policy of sending a preliminary notice on every project, and sending a Notice of Intent if payment is not promptly received, you can expect to actually file liens on only 1% – 2% of your total projects.

Use-Liens-To-Create-Payment-Funnel

Does It Work?

[quote style=”boxed” float=”right”]Creating and implementing a thorough and well-crafted credit policy…is an incredibly powerful way to collect the money you are owed on every project.[/quote] In a word: YES. Creating and implementing a thorough and well-crafted credit policy as a whole (with special attention given to the notice and lien policy subparts and the Receivables Funnel) is an incredibly powerful way to collect the money you are owed on every project. You do the work (or supply the material) so you should be paid for it.

In a recent case-study performed on a medium-sized construction industry business ($15-$20M Annual Revenue), the adoption of a strict receivables funnel had a profound effect on their A/R. This company used the third-party  zlien  platform to manage their projects, and to send notices and liens when required. The results of their decision to implement a concrete payment funnel were phenomenal. Their uncollectable account percentage in 2010 (.035%), 2011 (.067%), and 2012 (.012%), after adoption of the payment funnel concept, was less than 1%.

Not only did the amount of uncollectable debt diminish into obscurity, the fact that they could be so confident in receiving payment actually encouraged the company to more actively and aggressively seek out new business. They now have more ability to accept customers who may have been in a grey area of credit extension previous to the implementation of the payment funnel concept.

Creating and following a credit policy that incorporates a notice and lien rights payment funnel can be the best decision your company has ever made to collect the money you are owed.

Comments

One response to “Create and Use A Payment Funnel to Reinvent Your Receivables”

  1. Scott Wolfe Jr Avatar

    Thanks for the comment Jonathan. I agree with you. Also, went to the llt-group.com website and love that line about NASA needing it’s designers back. Cool site.

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