By
W. Eric Powers, CPA
Increasing
bonding capacity is a common concern for contractors. Increased bonding
capacity means boosting the size and number of projects you can take on. And
presenting financial information in a manner that is clear for the sureties’
analysis is important in any bid for increased bonding capacity. A surety
analyzes your company’s financial statement by making certain adjustments to
net worth and working capital. Ensure that your company’s financial
statements are clean and in good condition for the surety’s scrutiny by
reviewing the following areas:
1. Examine
Accounts Receivable
Because a portion of working capital is in receivables, this
area is very important to the surety. The surety will look closely at the
likelihood of payment and make adjustments to assets accordingly.
2. Clearly
Define Inventory
With inventory, be sure to thoroughly disclose its
composition, differentiating between work-in-process, deferred construction
costs, or parts and supplies. The surety will analyze each of these components
differently. If the inventory is not identified separately, the surety will
generally make adjustments that are less favorable to one’s working capital.
3. Don’t
Borrow from a Line of Credit
Borrowing from a line of
credit to finance equipment purchases has the effect if immediately increasing
current liabilities and noncurrent assets thus reducing the amount of working
capital.
4. Structure
Debt Composition Carefully
The debt composition of
current and noncurrent liabilities should be structured to minimize working
capital requirements. If possible, refinance the debt to reduce rates and debt
service, and convert debt to long-term.
