The Importance of Year-End Balance Sheets for Bonding Capacity
“The Importance of Year-End Balance Sheets for Bonding Capacity” by Chris Benko, CPA | Principal – Audit & Assurance
When it comes to providing year-end financial statements to a surety, some people say “Cash is King”. A contractor who 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 need to maximize every dollar of bonding capacity they can, and should plan to have the balance sheet at year-end help with that.
How Bonding Capacity is Determined
Bonding capacity is based on working capital and liquidity on the contractor’s year-end financial statements. The more working capital and liquidity you have, the more bonding capacity will be provided by their surety. Working capital is defined by most sureties as current assets minus current liabilities, after adjustments are made to certain asset items. In most cases some of these adjustments are:
- Cash- no adjustment (cash is king)
- Marketable securities/ investments- 25% excluded
- Accounts receivable- Only includes receivables less than 90 days outstanding
- Under billings- All that relate to unapproved change orders and profit fade are excluded
- Inventory- 50% excluded
- Prepaid expenses- 100% excluded
- Related party receivables- 100% excluded
Maximizing your Balance Sheet for Bonding Capacity
Knowing how your balance sheet is viewed by your surety will help with your year-end planning. Here are a few things to consider at year-end to help your 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 you have prepaid expenses that are paid annually consider adjusting those payment terms to monthly
These are just some of the items to consider before your year-end. It is important to work with your trusted advisor at Apple Growth Partners before the end of the year to help get your balance sheet in good shape for bonding purposes. We will also weigh these decisions made for bonding capacity against any unintended tax increases that could arise.