Are your construction financial statements ready for their close up? The first user of financial statements is generally not the surety
but a bonding agent who represents several sureties. This bonding agent performs the first analysis and determines which surety is best suited for a particular contractor.
Since sureties are the largest providers of unsecured credit to contractors, it is important to understand what information the surety expects to see included in the financial statements unique to the construction industry. The surety will request the last three years of financials prepared by a CPA firm. The financial statements should include the following:
- Schedule of Contracts In-Progress
- Schedule of Completed Contracts
- Backlog List
- Debt Schedule
- Related Party Transactions
- Subsequent Events
In addition to the financial statements, they will ask for aging scheduled of accounts receivable and accounts payable.
After reading the construction financial statements, the surety applies analytical procedures that address the following items.
- Profitability: The contractor should be making adequate profits to allow the business to grow.
- Liquidity and Cash Management: The contractor should maintain adequate liquidity to finance operations without having to rely on external sources.
- Fixed Assets: Fixed assets should be adequate but not excessive for the contractor’s current operations.
- Debt: Debt payments and accrued expenses should be covered by the profits being made by the existing operations.
- General & Administrative (G&A) Expenses: G&A expenses should be appropriate for the size of the contractor and should fluctuate with the changes in the contractor’s volume. It is important to make sure no job cost is included in G&A expenses.
- Officers’ Salaries: The relative size of officers’ salaries indicates whether the profits are staying in the business or being distributed to the owners.
It is very important to choose a CPA firm that is knowledgeable about construction accounting and can provide a positive impact to the contractor’s bonding capacity. By having the proper schedules that reconcile to the statements and reducing the uncertainty by answering the surety’s questions in advance, the financial statements provide the credibility that the sureties need in order to help evaluate the contractor’s performance and financial conditions.
Do you have questions about your first steps to improve your financial statements from a surety’s perspective? Are your financial statements ready for their close up? Call CRI’s construction CPAs for help taking your best possible financial statement picture.