All construction contractors have experienced the financial pain of bad debt which is defined as a customer who refuses to pay no matter what you do.
I've been there before and it will probably happen again in the future. Owning and operating any business including accounting means sometimes you provide goods and services and not get paid.
Knowing The Answers Helps
"If you know the answers the questions will not bother you" - Randalism. In school when you sat for an exam or a test and you knew the material forwards and backwards it was fast and easy. The exams and tests for the classes you struggled with were the opposite.
In your construction company it is the same, you need the answers in order to develop understanding and that is what helps us all let go of the past and move forward.
Answer #1 - Separate The Good From The Bad
Not everyone who never pays you is a bad person. Sometimes things happen which are beyond their control.
We have clients who have experienced situations beyond their control in all of our companies and when it is legitimate we have been known to issue a letter stating the debt is cancelled and they owe us nothing. Oddly enough most of them paid the debt years later and all of them were very appreciative that we treated them with courtesy and respect.
Some people are just bad, like Bad Bookkeepers, and personally I would rather be the person who was taken advantage of than the one who took advantage. Do whatever you think is within reason to collect the debt and no more.
Answer #2 - The Two Percent Rule
Some cab drivers in New York City have said 2% of their passengers will attempt not to pay for the ride. After more than thirty years of being involved in construction and contractors bookkeeping services I have seen the following regarding construction bad debt:
The one person construction business has little or no bad debt; however, as we see they do not make a lot of money and that is O.K.
Answer #3 - Contractors Are Not Bankers
You are not a bank so never, ever use your high interest credit cards and supplier accounts to provide financing to your customers in the form of providing a lot of labor, material, subcontractors and rental equipment hoping to get paid later on down the road.
You can offer financing by getting a merchant account setup at a bank and/or credit union that will offer to loan your construction client's money for small projects. Your construction client signs paperwork with the lender; you do the work and get paid.
Accepting credit cards is another way to offer financing and it is like having an "Electronic Armored Car" on standby 24 hours a day, seven days a week ready to take your money to your bank automatically. If your QuickBooks is setup properly an invoice can be emailed to your customer or clients and when they open it there is an option for them to pay by credit card immediately.
We recommend not ever financing your customer or client's project by providing a substantial amounts of labor, material, subcontractors and rental equipment hoping to get paid later on down the road.
Having owned and operated several construction businesses I know how important cash flow is to the success or failure of any business and especially construction companies like yours!
We have contractor clients who took a while to understand why I was hard on them and kept saying "Get The Money". Once they realized what real peace of mind was, paying all the bills on time and having money left over for vacations, toys and to support their favorite charities it became crystal clear.
Ask and receive job deposits and progress payments so that you are always using "Other People's Money" (O.P.M.) to pay for the labor, material, subcontractors, rental equipment and overhead of their construction projects.
This is only the tip of the Iceberg. Everything we publish in our blog posts, articles in other websites, and anything you can find on the web is nothing compared to what is available to you as our client.
We show only the basic tools to open your mind to the possibilities that are available to you. The best finish carpentry tools in the hands of a golf professional without proper carpentry training will not produce anything near to what a skilled finish carpenter can. The same can be said about the best construction business consulting and accounting tools in the hands of a skilled finish carpenter. And I say that with respect and admiration for everyone in construction.
When You Become A Client - Then we can tap into our resources of knowledge and strategy banks. We use the reports hidden in you QuickBooks in order to diagnose and understand your construction business and develop plans and help you implement a path to success for you and you alone because every contractor has unique Strengths, Weaknesses, Opportunities and Threats (S.WO.T. Analysis) that when understood can lead to a Strategic Roadmap which cannot help but make a lot of money.
Answer #4 - Paradigm Shift
As a construction company owner grows their company sometimes they experience "Growing Pains" which is another way to say "Paradigm Shift" while they learn what worked in the "Dog And Pickup" stage does not work in the "Professional Contractor" stage.
It makes sense that sometimes contractors want to use "leverage" in order to get paid; however, you could open yourself up to unintended consequences. The Universe is always in balance which means if you have done the work with integrity you will be repaid one way or another so perhaps consider letting them off the hook and forgetting all about it.
Answer #5 - The 80-20 Rule
Finally consider the 80/20 rule which means investing your time and energy in the highest and best use for example:
#1 Chasing a client who cannot or will not pay?
#2 Focusing on your top 20% clients and finding more of them?
We work with a lot of contractors, remodel contractors and tradespeople and we coach the ones who listen to not sweat the small stuff and instead focus on developing a system that can help you win the big game.
Answer #6 - Which Is Better
#1 Annual sales of $250,000 with $45,000 net income including your salary
#2 Annual sales of $2,500,000 with $350,000 net income including your salary
The right answer is whichever one lets you sleep well at night!
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