Activity ratios reveal how credit management and cash flow drive Arkansas construction

Outline:

• Hook for Arkansas contractors: cash flow is king on job sites

• What the activity ratio really measures: how efficiently a business uses assets to generate sales, with a spotlight on credit management

• Why credit effectiveness matters in construction: delayed payments, retention, and inventory ties

• How this shows up in numbers: accounts receivable turnover and days sales outstanding (DSO), inventory turnover, and what they tell you

• A practical example tailored to Arkansas contractors

• Why improving credit management boosts profitability and liquidity

• Simple steps to strengthen credit practices

• Tools and real-world resources to track these ratios

• Quick wrap-up tying back to everyday operations

article begins

Cash flow is the lifeblood of any construction outfit, especially in a place like Arkansas where jobs move from dirt to deck in bursts. You’ve got crews to pay, suppliers to keep happy, and equipment to keep rolling. All of that rides on how well you turn your assets into revenue—and, frankly, how well you manage credit. That’s where the activity ratio comes in. It’s not a flashy metric, but it tells you how efficiently you’re using assets to generate sales, and it often shines a light on how strong your credit practices are.

What the activity ratio actually focuses on

Think of the activity ratio as a way to peek into two big gears of your business: asset use and credit management. The ratio looks at how quickly you convert inventory and receivables into cash, which is another way of saying: are you turning materials and customer promises into real money fast enough to cover today’s bills?

In construction, this matters a lot. You’re constantly juggling material purchases, subcontractor payments, and progress billings. If your customers stall on paying their invoices, your cash flow gets tight. If you’re carrying a lot of slow-moving inventory or aging receivables, you’re tying up cash that could be spent on a better mixer, a safer crane, or overlapping the next project. The activity ratio helps you see those patterns clearly, so you can act before a cash crunch becomes a disruption.

Credit effectiveness as the centerpiece

Within the activity ratio, the part that contractors care about most is credit effectiveness. How well are you managing who gets credit, how much credit they’re allowed, and how fast they pay you? For a typical Arkansas contractor, this translates into better control of accounts receivable, smarter payment terms with customers, and leaner inventory that doesn’t sit idle.

When you ask, “Are we collecting quickly enough?” you’re really asking: is our credit policy working? Are our terms clear? Are we following up on overdue accounts in a timely, professional way? Do our lien waivers and progress payments align with where we stand on a project? All of these cues show up in the activity ratios and, more importantly, in your cash flow.

How the numbers look in practice

Two core pieces of the activity ratio to watch are accounts receivable turnover and inventory turnover. There’s a third, asset turnover, but in construction, receivables and inventory are where the practical action lives.

• Accounts receivable turnover: This measures how many times you collect your average accounts receivable in a period. A higher turnover means you’re collecting faster, which is good for cash flow.

• Days sales outstanding (DSO): This translates turnover into time. DSO estimates how many days on average it takes to collect payment after a sale. A lower DSO is usually better, indicating swifter collections.

• Inventory turnover: This shows how quickly you’re moving materials and supplies through your hands and into revenue. For a contractor, high turnover often means you’re not sitting on excess stock, which frees up cash for payroll and seasonal gaps.

• How to read these in a real-world Arkansas context: If you’re a regional contractor in Little Rock, Fort Smith, or nearby towns, pay attention to your AR aging report and lien waiver timing. If customers delay, your DSO climbs and your ability to cover next month’s payroll and material bills can feel stretched.

A simple, relatable example

Let’s say you’re a mid-sized Arkansas contractor with yearly net credit sales of $2 million. Your average accounts receivable sits at $250,000. Your AR turnover would be 2,000,000 / 250,000 = 8 times per year. That’s decent, but what does it mean day-to-day? Divide 365 by 8 and you land on about 45.6 days DSO. If your project cycles routinely push payments at Net 30, you’re in a reasonable zone. If most clients are closer to Net 60, you’ll see the DSO creep toward 60 days, and that’s where cash crunches begin to pinch.

Now, inventory: suppose your cost of goods sold (COGS) is $1.2 million and your average inventory is $300,000. Inventory turnover is 1.2 million / 300,000 = 4 times per year. That’s a sign you’re moving material, but not extremely fast. If the season, supply chain quirks, or project delays cause you to hold on to more stock, your turnover drops and cash is tied up longer. The takeaway: both receivables and inventory sit at the heart of liquidity, and the activity ratio ties them together in a single lens.

Why this matters for profitability

When you manage credit effectively, you keep cash flowing. Cash on hand means you can:

• Pay crews on time, keeping morale high and preventing project slowdowns

• Meet supplier terms, avoiding late fees or premium charges

• Jump on new opportunities without scrambling for funding

• Maintain good credit ratings with lenders and vendors, which often translates into better terms later on

Conversely, weak credit management pulls you into a tight spot. You might win more jobs, but if you’re waiting 60 or 90 days for payments, you’ll feel the squeeze in payroll and equipment maintenance. In Arkansas, where construction ecosystems are local and relationships matter, staying on top of credit isn’t just financial prudence—it preserves reputation and project momentum.

Practical steps to strengthen credit management

Here are straightforward moves you can implement without turning your operation inside out:

• Set clear credit terms and stick to them: Net 30 or Net 45 terms, with a documented late-fee policy. Make sure customers know the expectations up front.

• Screen new customers and set limits: Don’t extend large credit to every new client. Start with smaller terms, then build as you prove reliability.

• Use AR aging reports regularly: A quick weekly glance can catch trouble before it becomes a crisis.

• Tie progress payments to milestones: Align cash receipts with work completed and certified values. This keeps cash flow more predictable.

• Offer early payment incentives: A small discount for paying early can improve turnover without eroding margins much.

• Manage lien waivers and retention carefully: In Arkansas, retention is common. Track it closely so it doesn’t lock up cash longer than necessary.

• Automate where possible: Modern accounting and project management tools—QuickBooks, Sage 100 Contractor, Viewpoint, Procore integrations—can flag overdue accounts and generate helpful dashboards.

Tools and resources to keep in the loop

• QuickBooks or Xero for day-to-day AR and aging

• Construction-specific ERP systems like Viewpoint or Sage 100 Contractor to tie project progress to invoicing

• Excel for custom dashboards and quick what-if scenarios

• Industry networks and local supplier relationships to gauge typical payment behavior in your market

• Local banks or credit unions that understand Arkansas construction cycles and seasonal swings

A few cautions and caveats

• Don’t chase numbers at the expense of relationships. A cooperative client who’s 10 days late once in a while isn’t the same as a chronic late payer. Use judgment and communication.

• Keep an eye on project mix. Some projects have longer payment cycles (public works, large public sector jobs) than private work. Different projects might require different credit approaches.

• Remember that liquidity isn’t only about cash flow today. It’s about preparing for tomorrow’s bids, equipment needs, and the occasional hiccup in supply chains. The activity ratio helps you see that bigger picture.

Bringing it together: the practical takeaway

Here’s the bottom line: the activity ratio is a practical lens on how well you’re using your assets to produce revenue, with a sharp focus on credit management. For Arkansas contractors, this means paying attention to how quickly you collect what’s owed and how fast you move materials into revenue. It’s not just about chasing numbers; it’s about stabilizing cash flow so you can keep crews busy, pay suppliers on time, and keep that project pipeline moving smoothly.

If you take anything away, let it be this: tighten your credit reins without strangling opportunity. Clear terms, disciplined collections, and smart inventory control can lift your cash flow without costing you your competitive edge. And when your cash flow is steady, your projects run with less stress, your team stays paid, and your plans for growth have real room to breathe.

Final reflection

In construction, every dollar tied up in accounts receivable or inventory is a decision not yet made—whether that decision will fund the next forklift rental or a new piece of safety equipment. The activity ratio helps you read those decisions before they become problems. With practical steps and the right tools, you can steer toward healthier liquidity, stronger profitability, and a more resilient Arkansas construction business.

If you’d like, I can tailor a simple starter dashboard you can build in Excel or QuickBooks that tracks AR turnover, DSO, and inventory days for your own company. A quick setup now pays off in smoother jobs, fewer late nights, and a better handle on cash flow as you keep building—literally.