Full Financial Reporting Strengthens Relationships

By Jim Jordan

Jim Jordan is director of construction services for Dallas/Fort Worth-based Weaver and Tidwell LLP.

Offering a comprehensive reporting package can make financial partners more comfortable.

As financially risky as the construction industry is, contractors should always give priority to the relationships they share with their financial stakeholders. To lose one of these partners is to be suddenly thrown adrift in uncertain and fiscally dangerous waters.

What lenders and sureties need to uphold their confidence is a top-to-bottom understanding of a contractor's financial management systems and plans for the future.

For contractors, the best way to share this information is by means of a comprehensive reporting package presented to financial partners once or twice a year. Such a package can allay many of the anxieties that lenders and sureties may harbor, and given that a large number of contractors have failed over the past 20 years, these anxieties are well-founded.

To continue issuing loans, lines of credit and bonding, banks and sureties need to make certain a contractor is operating an effective financial management system. They need to see a system that accurately forecasts cash flow and produces accurate 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 being paid on time and vendors aren't demanding cash on delivery. Lenders want an inside look at other aspects such as whether the contractor's revenue and margins are decreasing over time and whether there are continued operating losses. On the management side, financial partners need to know whether there is 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 to help determine whether it is prudent to continue partnering with a contractor. Reporting packages can go a long way in instilling the necessary level of confidence.

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

Past History To adequately describe the past 12 months, a reporting package should provide a balance sheet and income statement for the prior year. In addition, the explanation of past history should include a work-in-progress schedule for the period with a description of significant changes in job profit estimates, either up or down. Include a brief discussion of operations over the past year, including comments on favorable and unfavorable outcomes. Be honest in these comments because lenders are highly suspicious of entirely rosy reports.

Current Status To provide information in sequential order, follow the description of the past fiscal year with an explanation of the current financial condition. This section of the report should include a current balance sheet and an explanation of changes from the prior year end. As part of this information, a contractor should present the current status of bank lines of credit and notes payable and should delineate any problems with payment provisions and collateral changes. Contractors should provide a thorough status report on accounts receivable and an overview of the >> collections process. Also include discussions of disaster preparedness and succession plans. Lenders need to know that a contractor has a contingency plan for quickly resuming operations in the wake of a natural catastrophe. They also need to see evidence of a formal succession plan.

Future Projections The central element in addressing the future 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. The information also should include a projected balance sheet for the next fiscal year with explanations of any material changes in accounts. There should be a projected income statement showing operations for the next fiscal year, supported with a work-in-progress schedule. 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 and any significant changes. And the report should provide an objective overview of the construction market explaining to financial partners the types of jobs that will be targeted over the next year and anticipated fees. Rounding out this discussion, contractors should provide an assessment of their competitive situation, including an explanation of how the company intends to deal with new markets, new competitors, the pursuit of top-notch personnel and other competition-related matters.

A reporting package can and should include more information than what is presented here. However, these issues are fundamental if a lender or surety is to totally understand -- and support -- a contractor's business model.