Keeping up Good Relations with your Bond Company
For contractors with calendar-year fiscal year-ends, the first quarter of each year is generally the time your financial statements will be published. Now that we are into the third quarter of 2019, it is a good time to do some planning for the end of the year in regards to both tax and financial statement purposes.
This would involve discussions with your CPA, surety agent, and other key business advisors December 31 is one day in time, making it important to focus your efforts into 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, 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.
Hopefully the above has provided some further insight into financial planning for your company and how it effectively interacts with your bond company relationship.