As financially risky as the construction industry is, contractors should give priority to the relationships with sureties, banks and other stakeholders. To lose them is to be thrown adrift in uncertain and fiscally dangerous waters.

Contractors need to provide more than lip service. Occasional proof of profitability and a round of golf aren’t enough. What lenders and sureties need is a top-to-bottom understanding of a contractor’s financial management systems and plans for the future.

The best way to share this information is with a comprehensive reporting package presented once or twice a year. This can allay many anxieties.

To continue issuing loans, lines of credit and bonding, banks and sureties need to be certain a contractor is operating an effective financial management system. They need accurate forecasts of cash flow and numbers from job-cost ledgers to work-in-progress reports. They want to see that receivables are turning over in a timely manner, bills are paid on time and vendors aren’t demanding cash on delivery.

Lenders want an inside look at other aspects. For example, whether the contractor’s revenue and margins are decreasing over time and if there are continued operating losses. On the management side, financial partners look for adequate organizational depth and supervision, proper administration of contracts, and timely completion of projects.

Lenders and sureties need regular updates on organization, finances, marketing, project control and planning. Reporting packages can go a long way in instilling confidence.

Although they can take various forms, reporting packages need to include a detailed look at finances over the past 12 months, current balance sheets and future projections. Here are a few tips for preparing this information:

Past History A reporting package should provide a balance sheet and income statement for the prior year. The explanation of past history should include a work-in-progress schedule with a description of significant changes in job-profit estimates. Include a brief discussion of operations, including comments on favorable and unfavorable outcomes. Be honest; lenders are suspicious of rosy reports. No business is entirely positive, so be forthcoming about failures, and introspective about why certain efforts may have been misguided.

Current Status To provide information in sequential order, the reporting package should follow its description of the past FY with an explanation of the current financial condition. This should include a current balance sheet and an explanation of changes from the prior year end. Present the current status of bank lines of credit and notes payable, and delineate any problems with payment provisions and collateral changes. Hand-in-hand with this information, contractors should provide a thorough status report on accounts receivable and an overview of the collections process. Included, too, should be discussions of disaster preparedness and succession plans. Lenders need to know that a contractor has a contingency plan for resuming operations in the wake of a natural catastrophe. They also need to see evidence of a formal succession plan.

Leslie V. Guajardo

Future Projections Once the reporting package has covered the past FY and current conditions, address the future. The central element should be a forecast of cash flow over the next 12 months, including an explanation of significant purchases of capital equipment, anticipated material loans to shareholders or employees, changes in lease payments, investments and distributions to shareholders. This should include a projected balance sheet for the next FY with explanations of material changes. There should be a projected income statement showing operations for the next FY, supported with a work-in-progress schedule. As an extension, the report should provide a discussion of any management changes at the corporate level, and a discussion of the depth of personnel in the field. Finally, the report should provide an objective overview of the construction market. This should explain to financial partners the types of jobs that will be targeted and anticipated fees. Rounding out the discussion, contractors should provide an assessment its competitive situation. This should include an explanation of how the company intends to deal with new markets, competitors, the pursuit of top-notch personnel and other competition-related matters.

Leslie V. Guajardo, CPA, CCIFP, is a partner at Padgett, Stratemann & Co. LLP. in San Antonio. She can be reached at 210-253-1530 or Leslie.Guajardo@padgett-cpa.com.