What would your surety find if it reviewed your firm’s financial statements today? The reality is that what your surety finds on the financial statements will determine whether you receive bonding and the amount you will be charged. Your fiscal year-end statements generally will form the basis for your bonding credit for the full year.
As a contractor, you need to show your company in the best light possible to secure bonding at a competitive rate. You can take several steps now to make your company more attractive to sureties.
Plan Properly
Make sure you are prepared to provide accurate, timely financial information. Your surety will likely require basic year-end financial statements — including a balance sheet, an income statement, and a cash flow statement — along with a variety of supplemental financial information.
Be sure to include details on your accounts receivable, a detailed listing of the inventory your firm is carrying, and an explanation of your over- and underbillings. Don’t forget to include information on your revenue recognition method as well as a detailed list of jobs/projects pending (your backlog).
In addition, sureties will want to see corporate tax returns for at least several years. You should also be willing to provide sureties with a listing of completed contracts and contracts in progress as well as data on your administrative, sales, and general expenses.
Increase Working Capital
Having a strong working capital position can greatly improve the chances of securing the bonding you need. One way you can boost working capital is by converting short-term debt into long-term debt through refinancing. Let’s say, for example, you tapped into your $450,000 line of credit to buy two large construction vehicles for $150,000. By refinancing the vehicles with a four-year term loan, only 12 months of the principal payments generally will be classified as short-term debt. This approach will improve your current ratio and increase your working capital.
Control Over- and Underbillings
Large overbillings may point to a future cash flow squeeze. Substantial underbillings could indicate potential losses, unreasonable profit estimates, inadequate estimating, and poor billing systems.
Collect Accounts Receivable
Boosting your efforts to collect money owed to your firm can improve your cash position. In addition, billing all contracts before year-end will lower net underbillings.
Reduce Inventories
Try to reduce inventory toward the end of the year since sureties typically discount the value of inventory on the balance sheet.
Review Estimates
Check estimates on contracts in progress to be sure they are accurate.
Reduce Prepaid Expenses
Prepaying expenses doesn’t really improve your financial position from the perspective of a surety.
Avoid Loans and Advances
Don’t deplete your cash position by making large cash advances to employees or loans to shareholders.
Control Debt
Maintain a low debt-to-equity ratio and try not to tap into your available line of credit.
Review Planned Equipment Purchases
If your debt levels seem high compared to other contractors of a comparable size, it might be smart to review any plans you have to buy new equipment. You don’t want to increase the outstanding debt on your balance sheet at year-end or deplete your cash reserves. Consider delaying planned purchases or look into leasing.
Meet Your Financial Obligations
Make sure you meet the terms and conditions of any loan covenants and other financial agreements your firm has entered into.
Talk to Us
Many construction firms end their annual reporting cycle on December 31, but it’s not too early to start planning now. We would be happy to help you with that planning.