A serious list of challenges faces construction firms today: reduced backlogs, new projects that never get off the ground because of financing issues, too many contractors responding to bids, bids that come in 20 percent below cost, and difficulty in collecting retainages because the lender stopped funding.
A good construction CPA can help contractors overcome these adversities and assist in the surety underwriting process.
A contractor seeking surety credit must be able to provide the surety with timely financial statements that contain all the pertinent financial data about the company. The ability to produce accurate financial information demonstrates that a contractor is in control of the company. A CPA that understands the construction industry can ensure the financial statements are prepared correctly and contain all the disclosures the surety needs to make sound credit granting decisions.
At underwriting meetings between the surety and the contractor, a CPA can ease the process of analyzing the financial statements by explaining issues such as under-billing on a specific project, the company’s approach to estimating, or the treatment of costs incurred on unapproved change orders and claim revenues.
Successful contractors know that it makes good business sense to treat their surety as a partner, and quality construction CPAs support this arrangement. If a CPA takes a contractor client down a path of excessive profit distributions and incomplete financial statement disclosures to the detriment of the surety, it is doing a disservice to its client even though it may sound attractive to the contractor.
CPAs and Cash Flow Projections
Although profitability is the ultimate measure of success for a contractor, it is equally vital to maintain a close relationship between profitability and cash flow. Often, a profitable company that pays no attention to its cash flow will fail faster than a less profitable company that makes cash flow a high priority.
As a result of the economic downturn, contractors are experiencing difficulty collecting receivables, as well as seeing lines of credit reduced or canceled by banks. A CPA can assist clients by improving internal control functions, developing internal reports that monitor and project cash flow needs, streamlining the billing process to accelerate collection, and maintaining a closer relationship between the costs incurred and the contractor’s billings.
Monitoring the costs incurred on projects and controlling spending are of paramount importance in managing cash flow. A CPA should get involved by helping the contractor produce cash flow reports by project, by project manager and for the company as a whole, as well as committed cost reports and estimated-to-actual comparisons.
A good construction CPA can help a contractor make the tough decision to settle for less than 100 cents on the dollar when a receivable appears to be in serious doubt. Contractors, as a rule, find it difficult to accept less than they deserve for work they performed and completed on time.
Working Capital
One of the most important items in a contractor’s balance sheet and the driving force behind surety capacity is working capital: the amount of capital that is left over after the company has realized its current assets and paid its current liabilities, such as payroll. A multiple of working capital is usually the amount of capacity a surety is willing to extend to a contractor.
A good construction CPA makes it a priority to help a contractor institute a discipline of capital retention and negotiate debt in a way that least impacts the working capital.
Given the importance of cash flow, CPAs also can help contractors with tax planning. Several different methods of revenue recognition are available to contractors depending on the kind of work they perform and their volume of annual revenue. These methods may allow the payment of taxes to be postponed, which has temporary cash flow advantages.
CPA firms with many construction clients have the resources to understand industry best practices and can share that knowledge with their clients. These firms have expertise on issues such as equipment acquisitions, the pitfalls of cost shifting, the need for sound internal control structures and the discipline to understand the next job may not materialize.
Construction CPAs don’t always tell contractors what they want to hear, but they do produce accurate financial statements with the full knowledge that multi-million dollar decisions largely will be based on the information they provide.
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Wednesday, February 8, 2012