Construction Financial Issues
December 10, 2014
Agenda Goal of session Case study Other considerations Future sessions
Balance Sheet - Assets 2013 2012 Cash & Equivalents 2,716,000 1,436,000 Trade Accounts Receivable 4,846,000 3,336,000 Prepaid Expenses 46,000 24,000 Underbillings 244,000 74,000 Total Current Assets 7,852,000 4,870,000
Net Fixed Assets 660,000 564,000
Total Assets 8,512,000 5,434,000
Balance Sheet - Liabilities2013 2012
Accounts Payable 4,506,000 1,710,000 Notes Payable - - Accrued Liabilities 156,000 282,000 Current Portion of Long-Term Debt 48,000 46,000 Overbillings 440,000 584,000 Total Current Liabilities 5,150,000 2,622,000
Long-Term Debt 102,000 150,000 Total Long-Term Liabilities 102,000 150,000
Total Liabilities 5,252,000 2,772,000
Balance Sheet - Equity2013 2012
Capital Stock 2,000 2,000 Additional Paid-In Capital 48,000 48,000 Retained Earnings 3,210,000 2,612,000 Total Equity 3,260,000 2,662,000
Total Liabilities and Equity 8,512,000 5,434,000
Income Statement2013 2012
Sales 33,962,000.00 26,508,000.00 Cost of Sales 28,850,000.00 21,134,000.00 Gross profit 5,112,000.00 5,374,000.00
Operating Expenses 3,830,000.00 3,104,000.00 Operating Profit 1,282,000.00 2,270,000.00
Other Income 2,000.00 2,000.00 Loss on Sale of Assets 0.00 0.00 Earnings Before Interest 1,284,000.00 2,272,000.00
Interest Expense 16,000.00 22,000.00 Net Income 1,268,000.00 2,250,000.00
Income Statement – Additional Information2013 2012
Officer Compensation 2,318,000.00 1,976,000.00 Depreciation & Amortization 162,000.00 160,000.00 Earnings Before Interest, Amortization & Depreciation 1,446,000.00 614,400.00
Distributions 670,000.00 688,000.00
Liquidity Ratios Measure a company’s ability to meet short
term obligations
Can assets be quickly converted to cash?
Critical in industries where cash flow is unsteady
Key predictor of a company’s ability to make timely debt service payments
Liquidity Ratios – Current Ratio2013 2012 Industry
Current Ratio 1.52 1.86 1.60 Current Assets/Current Liabilities
Liquidity Ratios – Current Ratio
Current ratio0
0.5
1
1.5
21.52
1.861.6
20132012Industry
Compared with the industry baseline of 1.6, this company’s ratio of 1.52 indicates its ability to service short-term obligations is not satisfactory
Liquidity Ratios – Quick Ratio2013 2012 Industry
Quick Ratio 1.47 1.82 1.40 (Cash + Marketable Securities + Trade Accounts Receivable)/Current Liabilities
Liquidity Ratios – Quick Ratio
Quick ratio0
0.20.40.60.8
11.21.41.61.8
21.47
1.82
1.420132012Industry
Compared with the industry baseline of 1.4, this company’s ratio of 1.47 indicates its ability to service short-term obligations is favorable
Liquidity Ratios – Sales to Working Capital2013 2012 Industry
Sales to Working Capital 12.57 11.79 12.40 Sales/(Current Assets - Current Liabilities)
Liquidity Ratios – Sales to Working Capital
Sales to working capital11.211.411.611.8
1212.212.412.6
12.57
11.79
12.4
20132012Industry
Compared with the industry baseline of 12.40, this company’s ratio of 12.57 reveals the company’s level of working capital is strong
Activity Ratios Gauge a company’s operations
Based on account balances on a single day
Seasonal fluctuations not necessarily reflected
Activity Ratios – A/R Turnover2013 2012 Industry
Accounts Receivable Turnover 7.01 7.95 6.70 Sales /Trade Accounts Receivable
Activity Ratios – A/R Turnover
A/R turnover6
6.26.46.66.8
77.27.47.67.8
8
7.01
7.95
6.7
20132012Industry
Compared with the industry baseline of 6.70, this company’s ratio of 7.01 is on target with company objectives
Activity Ratios – Days Sales in Receivables2013 2012 Industry
Days Sales in Receivables 52.08 45.93 54.00 Trade Accounts Receivable/(Sales/Days)
Activity Ratios – Days Sales in Receivables
Days sales in receivables4042444648505254 52.08
45.93
54
20132012Industry
This company’s ratio of 52.08 indicates it may not be effective in collecting outstanding receivables
Activity Ratios – A/P Turnover2013 2012 Industry
Accounts Payable Turnover 6.40 12.36 12.70 Cost of Sales/Trade Accounts Payable
Activity Ratios – A/P Turnover
A/P turnover02468
101214
6.4
12.36 12.7
20132012Industry
Compared with the industry baseline of 12.70, this company’s ratio of 6.40 indicates the company’s ability to promptly pay creditors may need improvement
Activity Ratios – Sales to Assets2013 2012 Industry
Sales to Assets 3.99 4.88 3.20 Sales /Total Assets
Activity Ratios – Sales to Assets
Sales to assets0
0.51
1.52
2.53
3.54
4.55 3.99
4.88
3.220132012Industry
Compared with the industry baseline of 3.20, this company’s ratio of 3.99 indicates the company is performing well in this area
Profitability Ratios Measure a company’s ability to use its capital
or assets to generate profits
Key component in determining success
Based on earnings before taxes
Profitability Ratios - Percent Rate of Return on Assets
2013 2012 IndustryPercent Rate of Return on Assets 14.90 41.41 9.20 Earnings before Taxes /Total Assets * 100
Profitability Ratios - Percent Rate of Return on Assets
% rate of return on assets05
1015202530354045
14.9
41.41
9.2
20132012Industry
Compared with the industry baseline of 9.20%, this company’s ratio of 14.90% indicates the company successfully uses its asset base to generate profits
Profitability Ratios - Percent Rate of Return on Equity
2013 2012 IndustryPercent Rate of Return on Equity 38.90 84.52 27.00 Earnings before Taxes/Total Equity * 100
Profitability Ratios - Percent Rate of Return on Equity
% rate of return on equity0
102030405060708090
38.9
84.52
27
20132012Industry
Compared with the industry baseline of 27.00%, this company’s ratio of 38.91% indicates the company is performing well in this area
Coverage Ratios Assess a company’s ability to meet its long-
term obligations, remain solvent, and avoid bankruptcy
Measures how well a company’s cash flow covers its short-term financial obligations
Assess vulnerability to economic downturns
High debt levels pose higher risk to creditors
Coverage Ratios – Debt to Equity2013 2012 Industry
Debt to Equity 1.61 1.04 1.50 Total Liabilities /Total Equity
Coverage Ratios – Debt to Equity
Debt to equity0
0.20.40.60.8
11.21.41.61.8 1.61
1.04
1.5
20132012Industry
Compared with the industry baseline of 1.50, this company’s ratio of 1.61 indicates there may be some issues with the way the company is financed
Estimate of Bonding Limit for a Single JobCurrent assets (GAAP) 7,852,000.00 Deduct receivables from owners or employees 0.00 Deduct receivables over 90 days old 0.00 Deduct 50 percent of retainage receivable 468,000.00 Deduct 50 percent of inventory not on job site 0.00Deduct 50 percent of prepaid insurance 22,000.00 Deduct 100 percent of other prepaid amounts 2,000.00
Subtotal 7,360,000.00 Add: Cash surrender value of life insurance 0.00
Current assets for bonding capacity 7,360,000.00 Deduct current liabilities (GAAP*) 5,150,000.00 Adjusted working capital for bonding capacity calculation 2,210,000.00 Single job bonding capacity 22,100,000
Estimate of total bonding capacityAdjusted Working Capital for Bonding Capacity Calculation 2,210,000.00 Add fair market value of all assets not considered in calculation of Net Working Capital above 1,152,000.00
Subtotal 3,362,000.00 Deduct All liabilities not considered in calculation of Net Working Capital, with adjustments to eliminate GAAP required provisions that are not "real liabilities". 102,000.00
Adjusted Net Worth for Bonding Capacity Calculation 3,260,000.00 Total bonding capacity = 32,600,000.00
Additional bonding considerations Estimated gross profit in backlog should be
greater than 50% of annual general and administrative overhead
Underbillings should not exceed 20% of Adjusted Net Worth
Net Quick Ratio should be greater than 1 to 1
Total liabilities should be less than 3 times Adjusted Net Worth
Additional bonding considerations – cont. Interest bearing debt should be less than 75%
of adjusted net worth
Debt coverage should be at least 125%
General and administrative overhead should be less than 10% of contract revenue earned
All other information should compare favorably to industry averages or other benchmarking data
Other Resources National Association of Surety Bond Producers
www.sio.org – general surety information www.suretylearn .org – for small, emerging
contractors
Future sessions potential topics Quickbooks Independent contractor versus employee Internal controls Job costing schedules Loan covenants and how to effectively deal
with violations
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