Bonding ability is a very important factor for contractors that determines what kinds of projects they can take on and how big they can be. But what many contractors may not realize is that their internal financials can significantly impact their ability to secure higher bonding limits. The stronger your contractor's financial health, the more trust a surety company will place in your ability to handle larger projects, increasing your overall bonding capacity
What Is Bond Capacity and Its Important
Bond capacity refers to the total amount a surety company is willing to back in bonds for a contractor at any given time. Contractors need bonds—such as performance bonds, payment bonds, and bid bonds—to qualify for public projects or large private sector jobs. Without adequate bond capacity, contractors may find themselves unable to pursue high-value contracts, limiting their growth potential.
But how exactly can contractors boost bond capacity? Strong internal financials reassure surety companies that the contractor is financially capable of fulfilling their obligations.
Key Financial Indicators Sureties Evaluate
If you want to maximize bond capacity, it’s essential to understand how surety companies evaluate your financial standing. They look at a lot more than just your credit score; they pay close attention to all of your financial details. These are the signs they look at:
1. Working Capital: This is your current assets minus your current liabilities. Sureties want to see a strong working capital position because it indicates your ability to meet short-term obligations and handle any unexpected expenses during a project.
2. Net Worth: A high net worth demonstrates financial strength and stability. Sureties prefer contractors who reinvest earnings into their business, as this shows long-term financial health. Strong net worth makes you less risky in the eyes of surety companies.
3. Profitability: Consistent profitability across multiple projects is very important. Sureties look at your past projects to see if you can make consistent revenue. If your financials show reliable profitability, you’re more likely to get higher bonding limits.
4. Debt-to-Equity Ratio: Sureties don’t like seeing contractors with too much debt. If your debt-to-equity ratio is low, it means that your business doesn't need any outside funding. Managing your debt well can help you get higher bonding amounts.
5. Manage Flow of CashContractors often face delays in payment, but how you manage your contractor cash flow can make or break your bonding capacity. Sureties want to see that you have enough liquidity to continue operations while waiting for payments.
What Does Strong Internal Financials Mean?
Now that we’ve explored the key financial indicators that impact bonding capacity, it's important to know what it means to have good internal financials. For contractors to keep their internal finances in good shape, they need more than just simple bookkeeping. They need financial tools that are specifically designed for the challenges of the construction industry. Strong internal financials mean:
Accurate job costing: All job costs are properly tracked and allocated to the correct projects, ensuring clear visibility into profitability at the project level.
Timely revenue and expense recognition: Revenue and expenses are recorded in the correct accounting periods, matching income and costs with the time frame in which they are incurred. This makes sure exactly financial reporting.
Work-in-progress (WIP) reporting: You are capable of preparing a detailed WIP schedule that tracks the progress and financial status of ongoing projects.
Integration with financial statements: Your income statement and balance sheet can be directly linked to the WIP schedule, providing a comprehensive view of your financial health and project status.
These components of strong internal financials give surety companies confidence that your business is financially organized, efficient, and capable of handling larger projects, ultimately increasing your bonding capacity.
How Contractors Strengthen Internal Financials
To improve bonding capacity, contractors need to take actionable steps to strengthen their internal financials. Here are some tips:
1. Maintain Accurate Financial Records
Accurate and well-organized financial statements are essential. Use accounting software like Sage 100 Contractor or QuickBooks Desktop to ensure your financial reporting is accurate and up to date. These tools also help you keep track of your profits, handle job costs, and keep your cash flow in good shape.
2. Increase Working Capital
Better management of accounts due and receivable will help you get more cash on hand. To stay flexible, you need to be able to send out bills quickly and get paid on time. You can also ask your sellers for longer payment terms to hold onto cash longer.
3. Reduce Unnecessary Expenses
Controlling costs is essential to improving your contractor's financial health. Review your overhead and operating expenses regularly to eliminate unnecessary costs. Streamlining operations and negotiating better terms with vendors can lead to higher profitability, which in turn boosts bond capacity.
4. Build a Diversified Project Portfolio
Surety companies prefer contractors with experience in various types of projects. Diversifying your investments helps keep your cash flow stable and shows potential employers that you can handle a range of job types, which makes you less risky.
5. Improve Cash Flow Management
Contractors often have trouble with cash flow. Set up a good method for managing your cash flow to make sure you have enough cash to pay for the project. This includes keeping an eye on due dates for payments, planning for delays, and negotiating good terms with both clients and providers.
6. Work with a Construction Financial Professional
Consider hiring a financial professional or an outsourced bookkeeping service that specializes in construction accounting. A professional can help you maintain clean financial records and ensure your contractor financial reporting is always audit-ready. This can help your standing with security companies and make it easier for you to get bonds.
Conclusion
Strong internal financial management requires more than just a basic understanding of accounting. Many contractors turn to outsourced bookkeeping services to ensure their financials are in order and their bond capacity is maximized. With professional bookkeeping, contractors can track their financial health, ensure compliance with industry standards, and confidently approach surety companies for larger bonding limits,
At Construction Cost Accounting, we specialize in providing outsourced bookkeeping services that cater to contractors looking to maximize their bond capacity. Our team knows the specific money problems contractors face and can help you find answers that will improve your finances and your ability to bond.
