Accounts receivable for contractors
Accounts receivable is the money customers owe you for work you've already done. For residential service work it should be zero: take a card when the job is booked and charge it when the tech finishes. For commercial jobs and construction accounts receivable, get a deposit before you buy materials, make every invoice due the day you send it, and work the aging report once a week.
Every dollar in receivables is a dollar you're lending a customer, often with money you borrowed. Brandon Vaughn, who coaches home service owners, put it plainly to an owner who was paying interest on his line of credit while customers owed him money:
All the interest that you're paying right now is because you're paying tax on not being able to collect from your customers in a timely manner.
Residential: get the card when you book
A plumbing or HVAC repair is done in an afternoon, so there's no reason to send a bill. Brandon gave this script to an owner whose office manager was chasing invoices that sat out for two weeks:
Every single job, get a credit card in advance. … So every single job residentially when you call up and you book it and you say, okay, we have you scheduled for 15th, Mrs. Jones payment is due at time of service. So what I'll do is I'll get your credit card number from you now to reserve your appointment slot. We won't charge you until the job's completed. But then we'll just go ahead and run that credit card that you choose at the time of completion. And 80% of your customers will be fine with it.
For the customers who won't give a card, the script confirms someone will be home when the job is done so the tech can take payment on the spot. Either way, the office charges the card the moment the tech closes the job, before anyone forgets.
Commercial and construction: deposits first
Bigger jobs need a different setup, because you carry payroll and materials for weeks. Start with a deposit sized to the cost you're about to carry. Brandon did this on a big job in one of his own companies:
We had a $60,000 apartment cleaning job that we did once. And we got a third upfront on the project because payroll was going to be a beast. So they gave me a $20,000 check before we even stepped foot on the property.
Then set up the billing so the rest comes in on time:
- Bill at milestones. On a job longer than a couple of weeks, put progress payments in the contract and send each invoice the day you hit the milestone.
- Date invoices due on receipt. Some commercial customers will still pay on their own cycle, but the clock on a past-due invoice starts right away instead of 30 days later.
When a builder won't pay
Construction accounts receivable has one tool residential work doesn't: the lien. Brandon told an owner whose builder customer kept stalling what finally worked for him:
I've been strung along by builders for months and months and months and months oh yeah it's coming it's coming it's coming it was not until we actually just said hey here's a lien that we got to put against the property. They actually paid they paid lightning fast once that came they had the money all along but they just didn't want to pay it.
Lien rights come with deadlines set by each state's law, so learn yours from a construction attorney before you need them. Our construction bookkeeping page covers the rest of the billing side.
Read the aging report every week
An aging report sorts every unpaid invoice by how late it is, and it belongs in the set of reports every contractor should get. Here's an example for a plumbing company doing about $1.5 million a year, with a plan for each line:
| Age | Balance | What to do |
|---|---|---|
| Not yet due | $18,000 | Nothing. It's on schedule. |
| 1 to 30 days late | $13,000 | A reminder email, then a call. |
| 31 to 60 days late | $9,000 | Call whoever approves payment, and hold new work until it's paid. |
| 61 to 90 days late | $5,000 | Final notice in writing. |
| Over 90 days | $4,000 | Lien, collector or write-off. Decide this week. |
| Total | $49,000 |
Two numbers come off it. Days sales outstanding, how many days of revenue are sitting unpaid, is $49,000 ÷ ($1,500,000 ÷ 365) = about 12 days. And if the $31,000 that's past due sits on a line of credit at an example 10% rate, that's $3,100 a year in interest before anyone counts the time spent chasing it.
To run it in QuickBooks Online, per Intuit's help page:
- Go to Reports, then Standard reports.
- Under Who owes you, choose Accounts receivable aging summary. Choose Accounts receivable aging detail to see each invoice.
- Open General options and use Aging to set the periods.
- Select Save as to keep the report for next week.
What to do this week
Run the aging report, call the three biggest past-due balances, and add the card script to every booking call. Then put the expected payments into your cash flow forecast by the week they'll actually land.
If your receivables in QuickBooks don't match what customers really owe, bring the aging report to a free profit call. We clean up books in about two weeks, and you get the same specialist every time (how it works).
Questions owners ask
Is accounts receivable an asset?
Yes. It's a current asset on your balance sheet, money you expect to collect within a year. It isn't cash, though, and an invoice you'll never collect should be written off so the balance sheet tells the truth.
What's the difference between accounts receivable and accounts payable?
Receivables are what customers owe you. Payables are what you owe the supply house and your other vendors. Accounts payable for service businesses covers the other side.
