Secrets of Bonding #6: Christmas in February

This gift is for you – even if you don’t celebrate Christmas!

In the world of Bid and Performance Bonds, there are annual cycles.  Certain things are important at different times of the year.  For example, construction may follow the seasons and be less active in winter. The underwriting relationship tends to follow the contractors accounting cycle which revolves around the company’s “fiscal year-end” (FYE).  This day is the end of the fiscal year, and is when federal and state taxes are calculated.  The most common FYE date for companies is December 31st.  Therefore, February is crucial because their fiscal year recently ended, but it is likely that CPA prepared financial statements are not yet ready.  When they are produced, they will be an important building block for re-approval of the bond account and to determine capacity levels for the coming year. (Our comments here are applicable regardless of when the FYE date actually occurs.  You just apply the principles to that annual cycle.)

So here is the gift: This time, during the first quarter of the contractors new year, is the prime opportunity to assure the financial presentation is maximized. The contractor worked all year to produce good results that will enhance bonding and banking relations and carry the firm into the new construction season. Now is the final chance to manage and maximize that critical info.  Here’s how:

The contractor’s business plan for the current year should determine the amount of surety capacity needed.

The surety should review the internally prepared (i.e. QuickBooks) company FYE Balance Sheet and Profit & Loss Statement.  If a draft of the CPA financial statement is available, that’s even better.  The question to ask is “Based on this preliminary FYE info, does it appear we will qualify for our desired amount of surety capacity: $___ per contract and $___ in the aggregate (maximum at any one time)?”

If the answer is no, NOW is the time to make adjustments before the documents are produced in their final version.  Talk to the surety about the issues.  Talk to the accountant about how to address them.  Not everything can be corrected. But some problems are caused by discretionary actions that ARE reversible.

This procedure is important because it facilitates the discussion that prevents capacity problems that can last all year. No back pedaling allowed, only forward!

Maximize the bonding, increase revenues and produce higher profits.  Everybody wins.

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