This post is part of a series sponsored by Old Republic Surety.
If you’re an independent agent with construction contractor clients, here’s an article to share with them about accounting best practices. When your contractor client requests your help — as surety companies recommend that they do — be prepared with both bonding and accounting advice.
We often hear contractors say that getting a job is the hard part — completing the project is the easy part. Many factors go into that, one of which is having proper accounting in place.
Whether it’s pricing a job, financing new equipment or meeting payroll, a construction company must understand its numbers to be successful. Proper accounting is an essential management tool that can’t be overlooked. Contractors need solid financial reporting to accurately track expenses, recognize revenue and manage their cash flow.
Accounting that grows with your business
Your accounting needs probably were fairly simple when you started your business. You might have run your company strictly on a cash basis. As the firm expanded, you likely moved to a form of accrual accounting.
As you seek larger and more complex projects, you may need a construction-oriented CPA to help you switch to the percentage-of-completion method, which recognizes revenue and expenses based on the percentage of a job you’ve completed. With a percentage-of-completion statement, and accompanying notes and financials, you’ll be in a position to obtain needed surety credit for larger projects.
Working with a good construction-oriented CPA firm puts you ahead of the game — and primed to get larger surety bonds approved when you need them. Here are five reasons why you should hire a CPA firm with construction experience to help you grow your firm:
- Construction accounting is specialized. Just as contractors specialize in different types of construction, CPAs have specialties, too. A CPA with construction industry experience will understand your business and be able to help you allocate job expenses, maintain a healthy cash balance, minimize borrowing and prevent profit fading. A construction-oriented CPA can help identify the drivers of your company’s profit, analyze your costs, and understand why a project might be behind. Most important, these CPAs understand how to prepare the financial statements you’ll need to submit for bonding.
- A CPA can help you obtain higher levels of bonding and credit. The higher the comfort level a surety company or lender has with the financial information you provide, the further it is willing to stretch to meet your bonding or credit needs. Construction CPAs understand the guidelines commonly used by surety underwriters to determine bonding. They also can offer advice on structuring large transactions — such as capital asset purchases, debt financing and equity transactions — to maximize bonding capacity.
- A CPA statement will result in faster surety decisions and greater ease of doing business. More than anything else, sureties want to see accurate and timely information about your firm’s operations. A statement from a CPA firm that the surety knows and trusts — one on the percentage-of-completion basis with appropriate schedules and notes — will make the process go smoother. The more reliable the information, the quicker turnaround time from your underwriter. A good CPA firm ensures your financial statements include the disclosures and supplementary information that underwriters look for, even if it is not technically required by GAAP accounting rules.
- Developing a relationship with a CPA pays off in expert financial advice throughout the year. A good CPA is like a partner, advising you on cash flow, recognition of revenue and credit needs. Your CPA can help you understand your financial statements and quarterly reports; track billings and backlogs; and balance your income and growth needs with tax-minimization strategies.
- Solid financials become tools for better management. Smart contractors understand that a CPA’s report can be a gold mine of information. These are essential tools for monitoring your company’s financial condition. CPAs ask questions designed to spot trends and improve operations. The answers will help you become more efficient, improve your workflow and increase your profitability. It’s important for you to hire a CPA firm that will dig into your business and be available to regularly consult with you.
Get a recommendation from your agent or surety
Rules governing revenue recognition (ASC 606) changed recently, making it critical that you find a CPA firm experienced in construction accounting. A good construction CPA should be able to explain how the new rules will impact your financial statements, including work-in-progress statements and liquidated damages. Ask your agent or Old Republic branch office for a recommendation. They should know CPA firms in your area with a reputation for doing solid work and providing accurate statements that conform to surety underwriting standards.
Ready to take your business to the next level? Partnering with a CPA firm with construction experience is a smart first step. The earlier you begin to upgrade your financial house, the better prepared you’ll be for future growth and success.
If you would like more information about having a trusted adviser, WIP schedules, using a construction oriented CPA or anything else related to surety bonding, please check out the Old Republic Surety contract bond video series.
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