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