The information you present in your company’s financial statements gives sureties a sense of your company’s operating results and financial strength. You are more likely to get the bonding you want at a competitive rate when sureties believe that your company is financially sound and carefully managed.
Here are some steps you can take between now and year-end to highlight your company’s strengths and make it more attractive to sureties.
Take Time To Plan
Take the time necessary to present your surety with carefully prepared, accurate, and timely financial information. Typically, your surety will ask you to provide basic year-end financial statements, including a balance sheet, an income statement, and a cash flow statement. In addition, you should include information on accounts receivable, current inventory, and an explanation of overbillings and underbillings. Also include corporate tax returns for several years. Give your surety a listing of completed contracts and contracts in progress as well as data on general and administrative expenses.
Boost Working Capital
You can improve the chances of securing the bonding you need if you have a strong working capital position. Look to convert short-term debt into long-term debt through refinancing. Refinancing a loan can improve your current ratio and increase your working capital.
Manage Overbillings and Underbillings
Overbillings and underbillings send a red flag to sureties that something may be amiss with your financial controls and processes. Substantial underbillings, for instance, may point to potential losses, unreasonable profit estimates, inadequate estimating, and inaccurate billing systems. Large overbillings may indicate a future cash flow squeeze.
Focus on Accounts Receivable
Delays in getting receipts credited to your business account can weaken your working capital position. And without access to working capital, your company may be forced to resort to short-term borrowing. Sureties dislike seeing high levels of short-term debt and may be reluctant to provide bonding in the amount your company wants. To prevent this from happening, make sure you have appropriate collection procedures in place.
Reduce Inventories
Since many sureties discount the balance sheet value of inventory, it may be best to keep inventory levels down.
Review Estimates
Review contracts in progress to ensure that your estimates are accurate.
Reduce Expenses
Sureties like to know that your company is making an effort to hold the line on expenses. However, be careful that you don’t cut costs so much that it impedes your ability to compete.
Hold Off on Making Loans and Advances
You could deplete your cash position by making large cash advances to employees or loans to shareholders. It is generally strategically smarter to postpone any such loans or advances while you are applying for bonding.
Control Debt
A low debt-to-equity ratio demonstrates financial prudence, a trait sureties like to see in contractors they work with. It can also help your standing with sureties if you hold off from tapping into your available line of credit.
Review Planned Equipment Purchases
Debt levels that are high relative to similarly sized contractors can make your company less attractive to sureties. If you have plans to buy equipment, it may be wise to review those plans. You do not want to deplete your cash reserves or increase the outstanding debt on your balance sheet at year-end. You may have to delay planned equipment purchases or investigate leasing options.
Meet Obligations
Sureties scrutinize your record of repaying debt and meeting the terms of other financial obligations. It is important that your company meets the terms and conditions of any loan covenants and other financial agreements it enters into.
