The document discusses financial ratios and bonding capacity calculations for a construction company. It provides the company's balance sheets and income statements for 2013 and 2012, calculates various financial ratios to analyze liquidity, activity, profitability, and coverage, and estimates the company's total bonding capacity based on its adjusted working capital and net worth. While some ratios indicate issues with receivables collection and accounts payable turnover, other ratios show the company is performing well in areas like return on assets and equity. The estimated total bonding capacity is $32.6 million. Future session topics could include job costing, internal controls, and loan covenant compliance.

1. Construction Financial Issues
December 10, 2014

2. Agenda
 Goal of session
 Case study
 Other considerations
 Future sessions

3. 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

4. Balance Sheet - Liabilities
2013 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

5. Balance Sheet - Equity
2013 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

6. Income Statement
2013 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

7. Income Statement – Additional Information
2013 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

8. 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

9. Liquidity Ratios – Current Ratio
2013 2012 Industry
Current Ratio 1.52 1.86 1.60
Current Assets/Current Liabilities

10. Liquidity Ratios – Current Ratio
0
0.5
1
1.5
2
Current ratio
1.52
1.86
1.6
2013
2012
Industry
 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

11. Liquidity Ratios – Quick Ratio
2013 2012 Industry
Quick Ratio 1.47 1.82 1.40
(Cash + Marketable Securities + Trade
Accounts Receivable)/Current Liabilities

12. Liquidity Ratios – Quick Ratio
0
0.5
1
1.5
2
Quick ratio
1.47
1.82
1.4
2013
2012
Industry
 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

13. Liquidity Ratios – Sales to Working Capital
2013 2012 Industry
Sales to Working Capital 12.57 11.79 12.40
Sales/(Current Assets - Current Liabilities)

14. Liquidity Ratios – Sales to Working Capital
11.4
11.6
11.8
12
12.2
12.4
12.6
Sales to working capital
12.57
11.79
12.4
2013
2012
Industry
 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

15. Activity Ratios
 Gauge a company’s operations
 Based on account balances on a single day
 Seasonal fluctuations not necessarily reflected

16. Activity Ratios – A/R Turnover
2013 2012 Industry
Accounts Receivable Turnover 7.01 7.95 6.70
Sales /Trade Accounts Receivable

17. Activity Ratios – A/R Turnover
6
6.5
7
7.5
8
A/R turnover
7.01
7.95
6.7
2013
2012
Industry
 Compared with the industry baseline of 6.70, this
company’s ratio of 7.01 is on target with company
objectives

18. Activity Ratios – Days Sales in Receivables
2013 2012 Industry
Days Sales in Receivables 52.08 45.93 54.00
Trade Accounts Receivable/(Sales/Days)

19. Activity Ratios – Days Sales in Receivables
40
42
44
46
48
50
52
54
Days sales in receivables
52.08
45.93
54
2013
2012
Industry
 This company’s ratio of 52.08 indicates it may not
be effective in collecting outstanding receivables

20. Activity Ratios – A/P Turnover
2013 2012 Industry
Accounts Payable Turnover 6.40 12.36 12.70
Cost of Sales/Trade Accounts Payable

21. Activity Ratios – A/P Turnover
0
2
4
6
8
10
12
14
A/P turnover
6.4
12.36 12.7
2013
2012
Industry
 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

22. Activity Ratios – Sales to Assets
2013 2012 Industry
Sales to Assets 3.99 4.88 3.20
Sales /Total Assets

23. Activity Ratios – Sales to Assets
0
1
2
3
4
5
Sales to assets
3.99
4.88
3.2
2013
2012
Industry
 Compared with the industry baseline of 3.20, this
company’s ratio of 3.99 indicates the company is
performing well in this area

24. 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

25. Profitability Ratios - Percent Rate of Return
on Assets
2013 2012 Industry
Percent Rate of Return on Assets 14.90 41.41 9.20
Earnings before Taxes /Total Assets * 100

26. Profitability Ratios - Percent Rate of Return
on Assets
0
10
20
30
40
50
% rate of return on assets
14.9
41.41
9.2
2013
2012
Industry
 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

27. Profitability Ratios - Percent Rate of Return
on Equity
2013 2012 Industry
Percent Rate of Return on Equity 38.90 84.52 27.00
Earnings before Taxes/Total Equity * 100

28. Profitability Ratios - Percent Rate of Return
on Equity
0
20
40
60
80
100
% rate of return on equity
38.9
84.52
27
2013
2012
Industry
 Compared with the industry baseline of 27.00%, this
company’s ratio of 38.91% indicates the company is
performing well in this area

29. 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

30. Coverage Ratios – Debt to Equity
2013 2012 Industry
Debt to Equity 1.61 1.04 1.50
Total Liabilities /Total Equity

31. Coverage Ratios – Debt to Equity
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Debt to equity
1.61
1.04
1.5
2013
2012
Industry
 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

32. Estimate of Bonding Limit for a Single Job
Current 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 0.00
Deduct 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

33. Estimate of total bonding capacity
Adjusted 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

34. 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

35. 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

36. Other Resources
 National Association of Surety Bond Producers
 www.sio.org – general surety information
 www.suretylearn .org – for small, emerging contractors

37. Future sessions potential topics
 Quickbooks
 Independent contractor versus employee
 Internal controls
 Job costing schedules
 Loan covenants and how to effectively deal with
violations