4th Quarter Financial Planning-Keeping up good relations with your Bond Company: CARES ACT Update…Act Now
For numerous contractors 2020 has been a year like no other…a vast understatement to say the least. As we are now entering the 4thQ of 2020 part of your financial planning process with your CPA should include a discussion about how to treat PPP monies in your financial statement for those who have received these loans. There is a path to partial or full forgiveness of these loans that your CPA and Banker can guide you through. The benefit of having these loans forgiven is that it will have a positive direct effect on Working Capital and Equity… 2 Critical Key Ratios Bond Companies utilize for establishing the amount of surety credit given to the contractor. For some contractors who experienced a sharp reduction in revenues and profits, if these funds can be forgiven, it could help save the company from going out of business while also maintaining levels of financial strength to enable continued bonding support. Basically, a direct purpose of the CARE ACT. For other contractors who fared better and were able to keep a fully staffed operation, these funds could benefit the company allowing them to acquire more work and hire more people. Whatever category you fall into, it is in your best interest to go through the forgiveness process now and have the results reflected in your December 31, 2020, CPA F/S. To a Bond Company, a definitive response from the SBA and memorialized in your F/S goes a long way. It is much better than to just verbally communicate a best-case scenario of what you anticipate the results may be.
So start your FYE financial statement and tax planning now and incorporate any PPP money forgiveness. This would involve discussions with your CPA, Surety Agent, Banker, and other key business advisors. December 31 is one day in time, making it important to focus your efforts on making it look as strong as possible.
There are obvious measures that are taken to minimize taxes while keeping your financial picture at a level to sustain the amount of bonding you’re accustomed to. It’s a fine line to walk between showing profits and minimizing taxes. Some companies are able to report taxes using a different method than their CPA financial statements, which are generally percentage completion.
Having two separate methods allows for tax planning that will not affect the CPA financial statement in most situations. Your bond company puts more emphasis on your CPA prepared financial statements, as those generally reflect your operations more accurately. With that being said, it is important for your company to align with business advisors who understand the various aspects of construction, including accounting, surety, banking, and legal. These professionals will instill confidence that you have the best representation enabling you to maximize your surety support for bid bonds and performance and payment bonds. Thereby allowing you to focus on what you do best: construct and make money.
In regards to your bond company, there is one key thing to remember: Bond companies do not like surprises. No contractor is perfect, and not every job or year is a home run financially. Bond companies understand that and know how to work with the ups and downs. You gain more trust and support from your bond company by keeping them informed throughout the year in terms of financial progress and any significant changes in the organization. If you have a bad job, let them know. If you expect the year to be a loss, let them know. You’ll be surprised at how much they appreciate your candor and how much it strengthens the relationship.
On the flip side, if negative information is held back, it will eventually be revealed. Bond companies are pretty in tune with the lay of the land. If they feel information has been delayed, omitted, or misrepresented, they will intuitively know it. This obviously does not build trust in the relationship. I can tell you during the tough years 2008-2010 when the market was down, numerous contractors were hurt by lack of work and suffered financially. From a personal perspective, we had a few contractors who were severely impacted. Through proactive communication with their bond companies, they maintained bonding support and eventually pulled out of it when the construction market rebounded.
As you’re going into the last Q of 2020, The CARES ACT funding ramifications will play a major role in how your company is viewed by the Bond Company. Proper planning is essential.
Hopefully the above has provided some further insight into financial planning for your company and how it effectively interacts with your bond company relationship.