By Henley Executives’ Peter Henley
As a business owner, does the thought of giving your bonding company your financials
become a stressful process? After all, why does a bonding company even care about your
financial statements and your Work in Process report when your projects are doing just
fine?
Well to begin with you have to remember just what the bonding company’s position is
with your company and the owner of the project(s) being bonded. If your company fails
to perform on a bonded project, the owner has the ability to terminate your contract, and
call in the bonding company to make sure another contractor or contractors will complete
their project. Of course this is a simplified statement as many legal issues arise as to
justification for termination.
If a contractors’ contract is terminated, and a bonding company is called in to complete
the project, they will expend the funds to do this in the short term, but guess who they are
going to look for reimbursement from? Not the replacement contractor. Not the owner,
because remember, the bond guarantees to the owner that the project will be completed
for the same cost as the original cost.
Of course the answer will be your company, and possibly even you personally!
Remember all the paperwork the bonding company had you sign when your bonding
relation was first started? Most, if not all bonding companies will have personal
guarantees from, yes, you the owner. So if your company cannot repay the bonding
company for completing work that your company was originally contracted to do, you
could personally be responsible.
Of course no one wants any of this to happen, which is why bonding companies are so
interested in your financial statements. Before they issue your company a bond, they
want to make sure your company has enough resources to complete the projects you are
looking to do. The quickest overview of this ability is looking at what’s called Working
Capital. Basically, this is your current assets minus your current liabilities.
Although many questions can be raised by a bonding company when looking at your
financials, in my experience, one of the most common issues is lack of Working
Capital. This most often comes up when a business owner has a lot of inter-company
transactions. This happens when a business owner also owns other businesses, which
have funds going back and forth. Under current assets, the business owner may show a
large amount of money being owed from one, or more, of the other companies. Under
normal circumstances money owed from another company is an asset, but in this case,
many times a bonding company will remove those amounts from its’ Working Capital
calculations of the business. When removing these amounts, it can decrease your
Working Capital to a lower amount than what a bonding company feels is adequate for
your ability to complete projects. Sometimes removing these amounts can even put you
into a negative Working Capital situation.
Of course there are many other areas of your financial statements your bonding company
will also consider. Everything from the amount of cash you have in the bank, to accounts
receivables; especially those over 90 days old, to your working capital line of credit; both
total available, and amount currently used, to profits on your projects; shown on your
Work In Process report.
Henley Executives was established to help contractors with the financial management of
their company, so the owner can focus on field work. Drawing on nearly 35 years of
experience in the heavy construction industry, Peter Henley – CEO of Henley Executives,
LLC, is proficient in some of the most popular construction accounting software systems,
well-versed in the creation of quarterly financial statements and accustomed to working
directly with business owners, bank loan officers, bonding companies and Certified
Public Accountants. For more information contact Peter Henley of Henley Executives,
LLC at peter@henleyexecutives.com (716) 310-4245