Year-End Financial Statements and Your Bond Program

Understanding the Importance of Year-End Statements

Preparing credible year-end financial statements is critical for all business owners, including construction contractors. Preparing year-end financials play a significant part in determining bonding capacity for the following six months to a year.

Some often say that “cash is king when it comes to providing year-end financial statements to a surety. A contractor that needs surety bonds must provide their surety with year-end financial statements. These statements, while only a single day in time, have a significant impact on the amount of bonding capacity available to a contractor in the subsequent year.

Most contractors want to and maybe need to maximize every dollar of bonding capacity they can get and should plan to have a balance sheet at year-end to evidence their financial position. In some cases, bonding capacity can be based on working capital (current assets- current liabilities) as well as liquidity expressed contractor’s year-end financial statements. The more working capital and liquidity a contractor has, the more potential bonding capacity will be provided by their surety the following year. Adjustments are made to certain asset items. In most cases, some of the adjustments needed are:

• Cash – no adjustment (cash is king)

• Marketable securities/ investments –can be 25% excluded

• Accounts receivable – Only includes receivables less than 90 days outstanding unless explainable.

• Retainage included with the reasonable expectation of receiving

• Under billings – All that relate to unapproved change orders and profit fade are excluded

• Inventory – 50% excluded unless turned inside of six months

• Prepaid expenses – 100% excluded

• Related party receivables – 100% excluded

Understanding how the surety reviews a company’s balance sheet will help with required year-end planning. Here are a few things business owners should consider at year-end to help manage the balance sheet for bonding capacity:

Collect related party receivables before year-end.

Consider buying inventory in January, instead of December.

For inventory purchased for a specific job, bill for it or classify as unbilled receivables or under billings.

If the company has prepaid expenses that are paid annually, consider adjusting those payment terms to monthly.

If the company is considering a year-end purchase of real estate, equipment, or large disbursements, consult your bond agent as to the impact it may have on your bonding capacity.

Construction owners should work with an experienced accounting team before the end of the year to help get the company’s balance sheet in good shape for bonding purposes. Accountants and auditors will weigh decisions made for bonding capacity against any unintended tax increases that could arise