Author, Andy Roberts, Account Executive, Surety Department, Rancho Mesa Insurance Services, Inc.
Contractors often ask us what bond companies are looking for when they are reviewing balance sheets and income statements. The answer isn’t a simple one, because there are many items that underwriters look at when determining if they will write a bond for a contractor. Typically, the first thing an underwriter will do is calculate a contractor’s working capital.
Simply put, working capital is calculated by subtracting a contractor’s current liabilities from their current assets on the balance sheet. Current liabilities are any obligations due within one year, while current assets are the most liquid like cash, accounts receivable, and items that can be converted to cash within a fiscal year. This calculation measures what is available for a company to pay its current debts, finance its current operations, and provides an indication of a company’s overall health.
With bond companies placing an emphasis on working capital and tightening their underwriting guidelines through these uncertain times, it is critical that contractors pay close attention to their balance sheet. Managing their working capital can ensure a contractor receives the bond credit that they need. One specific area a company can focus on to accomplish this is being more diligent with collecting receivables.
Accounts receivable are listed as a current asset. However, bond companies will review the aging of a company’s accounts receivable and likely deduct any that are 90 days or more past due from the amount listed on the balance sheet. These are viewed as not likely to be received and will lower a company’s total current assets, which lowers working capital. This can directly affect the amount of credit that a bond company is willing to offer and possibly lead to bond requests being denied.
With so much remaining uncertainty in the economy, it is more important than ever for contractors to re-visit their balance sheets and take an aggressive stance with collecting receivables. These techniques can quickly build or re-build a strong risk profile to secure the level of surety credit a contractor may need for their bond program.
As you develop your financial strategy and look to strengthen bonding options, consider Rancho Mesa’s Surety team of advisors. Contact Andy Robert at (619) 937-0166 or email him directly at aroberts@ranchomesa.com.