Well, it is! There I said and I stand by it 100%. In most cases it's not your fault! The problem is you using painting a word picture to show how well your Construction Company is doing and describing all the new and exciting projects you are bidding on and expect to get while your Financial Reports are telling the banker or lender the exact opposite!
Prior to the 1960's Contractors and Bankers had a personal one-on-one relationship. They got to know you, like you and trust you which made getting a loan fast and easy. Then starting in the 1960's lenders started using The RMA more than ever before to influence their decisions.
What you don't know about business is 100X worse than what you know about doing the work you love doing so very much.
In the end what you don't know can slowly and painfully drag you and your Construction Company into a deep hole of debt, discouragement, depression and despair long after you have run out of time, money and energy.
"If You Know The Answers The Questions Will Not Bother You" - Randalism
In 1914, The Robert Morris Club (RMA) was formed to help businesses and bankers exchange credit information. It was named after Robert Morris who was a signer of the Declaration of Independence and was believed to be the primary financier of the Revolutionary War.
The RMA developed several tools among them was a system of Ratios that we use today to study financial statements of all companies in all industries.
The banking and lending industry has enormous databases and artificial intelligence software from places like The Risk Management Association (http://www.rmahq.org/) that allows them to separate the good contractor risks from the bad ones. It generates recommendations based on complex algorithms much more complex than any gambling casino and with a much higher payoff.
One of the keys to getting a banker, lender or bonding company to consider your construction company for financing is the way your financial statements are presented. In particular, your construction company Profit & Loss and Balance Sheet.
A banker, lender or bonding agent logs into their RMA account and fills out electronic forms, answers questions about your construction company and inputs specific numbers in specific blanks that are taken directly from your construction company Profit & Loss and Balance Sheet. Any construction accountant worth his or her salt knows exactly how to setup QuickBooks correctly for this process to take place.
If a contractor gives their banker, lender or bonding agent a set of financial reports that do not conform to the RMA requirements they may or may not try to extrapolate the numbers need using Excel or some other program.
In most cases they be very polite, and thank you for "applying" before giving you the "We will let you know as soon as we know anything" speech. I know this because I have heard it from many bankers, lenders and bonding agents who are frustrated because they know you are a good client and they know you are a man or woman of integrity that can be trusted to pay the loan back, on time, with all of the interest.
The RMA and other reports show where your contracting company stands in relation to other contracting companies serving similar geographic and demographic markets.
Each major category, Sales, Cost of Goods Sold, Overhead, Other Expenses and Other Income are rated on a scale of top 25%, middle 50% and bottom 25%.
Ideally all of the numbers on your Profit & Loss and Balance Sheet falls somewhere in the middle 50%. Whenever a contractor "forgets" to declare all of their income or "overstate their expenses" it will show up here like a red flag.
Finally a Z-Score is compiled which is a formula for predicting bankruptcy. Edward I. Altman published it in 1968. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Although not 100% accurate it is a useful tool, similar to a tape measure is not 100% accurate yet still useful.
This is why sometimes a contractor with excellent credit cannot get a loan or line of credit and yet another contractor with only good credit can get financing.
The following can be found by doing a bit of work in Excel and getting the raw data from your Financial Statements. Or by Clicking On This Link To Learn More About Our Contractors Management Reporting Service.
A ratio of cash on hand to accounts payable of less than 1:1. Ideally, this ratio should be 2:1 or 2.5:1.
Poor payment records, judgments, liens, bankruptcy, etc. for the firm and/or principals on credit agency reports.
Make certain your payroll taxes, income taxes, sales taxes are paid and you have cash reserves in a separate bank account
Unlicensed contractors and those with expired licenses are a huge red flag! Don't do this!
Contractors who can't get bonded or if your bonding capacity has been cut or your current bonding company refuses to renew it figure out why and get it resolved quickly.
Profit & Loss and Balance Sheet not current, formatted wrong or worse yet you feel the need to explain them.
List of current jobs you are working on with a breakdown of how much you have in job deposits vs. how much you have spent. In other words are you in competition with the bank by lending your customers and clients money in the form of Labor, Material and Subcontractors which is exactly what happens when a contractor does not keep getting draw checks against work that has been done and has at least a 10% residual.
If you are a residential remodeler and darn good at it don't fool yourself into thinking, you can just as easily be a spec home builder or worse yet someone who can work on commercial tenant improvement projects. The skills, tools, specialty contractors and work flows are different for each of these areas.
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This Is One More Example of how Fast Easy Accounting is helping construction company owners all across the USA including Alaska and Hawaii put more money in the bank to operate and grow your construction company. Construction accounting is not rocket science; it is a lot harder than that and a lot more valuable to people like you so stop missing out! Call Sharie 206-361-3950 or sharie@fasteasyaccounting.com and schedule your no charge one-hour consultation.
Profitable Contractors and Construction Company owners have known about the value of outsourced bookkeeping services and contractor coaching services like ours for a long time and now you know about it too!
We Scan Your Receipts And Invoices link the appropriate transactions to QuickBooks or Xero Accounting Online depending on the construction accounting service you are using and provide ongoing Cloud Based Contractors Bookkeeping Services by accountants who understand construction.
About The Author:
Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes and Follow Randal on Google+