In the construction industry, A/R aging refers to the number of days it takes to receive payment from a client after submitting a pay application, calculated either from the day of pay app submission or from the last day of the billing period. This metric is critical to managing cash flow and staying profitable. In this blog post, I’ll share the importance of A/R aging and explain how you can use this data to bid strategically and improve your cash flow.
What is A/R aging?
A/R aging is a critical metric that determines the number of days between submitting a pay application to a client and receiving payment for it. This metric is also known as Days Sales Outstanding (DSO) in some industries. Tracking A/R aging can be complicated for construction trade contractors due to partial payments, outstanding retention, revisions, and resubmissions of pay apps. But, comprehensive tracking enables teams to optimize project finances and bid packages, helping them bid confidently and avoid unexpected upfront costs that they may need to cover.
Why Does Aging Matter?
Collections and Payment Timelines
Tracking A/R aging can help your team stay on top of collections and make sure your clients are sticking to their contractual payment timelines, letting you work proactively instead of reactively. A comprehensive, up-to-date A/R aging report can help collections teams get in touch with clients as payment deadlines come up and help operations teams spot patterns and trends in late payments.
Cash Flow and Working Capital
By tracking A/R aging, you can have more cash on hand to pay your vendors and lower tiers, pay back loans and lines of credit, and invest in growing your business. Extra cash on hand could be the difference between turning a profit or taking a loss on a project.
To put things in perspective, a contractor with $30M in annual revenue can increase its cash on hand by $300,000 at any given point in the year with just a three-day reduction in A/R aging!
A/R aging data can help you spot patterns in time to payment across project teams, GCs, and owners, leading to more strategic bid pricing and more accurate project cash flow projections. Data that proves a GC has historically paid in full and on time can give you the confidence to lower your bid amount and gain a competitive edge. Similarly, knowing that a GC has historically struggled with on-time payments can help you account for that in your pricing or even decline to bid on a project outright to focus your resources on more profitable jobs.
How Can I Track This Information?
There are different ways to track A/R aging, and the best option depends on the size and complexity of your business. Tracking through a spreadsheet can work for smaller businesses, but it's an entirely manual process that can lead to errors and information slipping through the cracks. ERP software packages can track A/R aging automatically, but they're disconnected from the actual day-to-day billing workflow.
The best option is to use billing automation software, like Siteline, that not only helps you identify trends in delayed payments but also prevents payment delays from happening in the first place. See how Binswanger Glass uses Siteline to unlock unprecedented levels of visibility and reduce invoice aging by 4 days.