SESSION 5 FINANCIAL MANAGEMENT

INTRODUCTION To obtain bonding and access to capital, contractor’s finances must be well managed Session explains the basics of accounting systems used by construction firms First part focuses on construction accounting methods, second part on reporting standards

PART A: ACCOUNTING

LEARNING OBJECTIVES Identify an accounting system Become familiar with methods that meet the needs for bonding, estimating, and reporting

COMPONENTS OF ALL ACCOUNTING SYSTEMS

FINANCIAL STATEMENTS Balance sheet Statement of earnings Changes in equity Cash flow Notes U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration https://www.flickr.com/photos/89228431@N06/11322953266/

REPORT RELATIONSHIPS

GAAP METHOD OF ACCOUNTING

CONSTRUCTION METHODS ACCOUNTING Note: Methods different from GAAP

PERCENTAGE COMPLETION METHODS

PERCENTAGE OF COMPLETION Revenue recognized as received Retention booked throughout the project Expenses recognized as obligated Estimated profits are distributed over time Profit based upon projected revenues and expenses U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration https://www.flickr.com/photos/wsdot/8669176689/

COMPLETED CONTRACT Revenue earned at completion Expenses booked at completion Revenues and expenses are known Useless for financial management May create large swings in income U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration https://www.flickr.com/photos/fotograzio/16303386603/

CONSTRUCTION ACCOUNTING SYSTEMS Hardware Software/Cloud Based Features to look for: Estimating Davis-Bacon Payroll Job Cost and Requisitions Cost Control

TOP 7 PROGRAMS 2014 What do you use? Sage300 Dexter & Chaney Sage100 Foundation Jonas Computer Ease Viewpoint What do you use?

CONSTRUCTION ESTIMATING ACCOUNTING BASICS Your calculated historic mark-up Purchased databases Negotiated rates

ESTIMATING SOFTWARE SUBROUTINES Proposal generation Cost database Labor and material Visual assemblies Project reporting “What if?” analysis

JOB COST LEDGER Provides breakdown of construction costs on income statement May provide a breakdown of revenues on the income statement Costs are broken down by: Job Phase (optional) Cost code Cost type U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration https://www.flickr.com/photos/wsdot/12395459893/

JOB COST LEDGER JOB COST LEDGER JOB # PHASE # COST CODE MATERIALS LABOR

COST REPORTING VERSUS COST CONTROL

COMPONENTS OF COST CONTROL SYSTEM MANAGEMENT BY EXCEPTION: Investigating only those situations in which actual results differ significantly from planned results. Strong job cost and equipment tracking Costs must be current and up to date Uses “management by exception” Higher management is to mainly target and address “strategic” plans and decisions! Follows established procedures Data must be readily available

TOP 7 PROGRAMS 2014 SAGE (Timberline) Construction Estimator Tally Pro Estimator Clear Estimates

ACTION PLAN Take 5 minutes to: Consider software options and needs Identify choice Incorporate into Action Plan

PART B: FINANCIAL REPORTING

INTRODUCTION In this session, you will learn key financial ratios, self-evaluation compared to benchmarks, and financial issues (red flags) for sureties

LEARNING OBJECTIVES Understand basic financial ratios Identify bond underwriting requirements Identify financial issues

SURETIES LOOK FOR… Acceptable method of accounting Related party transactions Litigation/contingent liabilities Totals and ratios: assets, debt, etc. Backlog/billings over/under Disclosure of an activity U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration https://www.flickr.com/photos/wsdot/10058321424/

SPECIALTY TRADE CONTRACTORS KEY FINANCIAL RATIOS GENERAL CONTRACTORS SPECIALTY TRADE CONTRACTORS CURRENT RATIO 1.1+ 1.5+ [CURRENT ASSETS] / [CURRENT LIABILITIES] CASH RATIO 0.2+ 0.35+ [CASH + CASH EQUIVALENTS + INVESTED FUNDS] / [CURRENT LIABILITIES] WORKING CAPITAL TURNOVER 10.0 - 2.0 6.0 - 10.0 [SALES] / [WORKING CAPITAL]

DEBT-TO-EQUITY RATIO

EXAMPLE TOTAL ASSETS $825,000 CURRENT ASSETS $748,000 CURRENT LIABILITIES $525,000 TOTAL LIABILITIES $650,000 EQUITY $175,000 SALES $2,000,000 CASH + CASH EQUIVALENTS $150,000 & INVESTED FUNDS

WORKING CAPITAL

WORKING CAPITAL TURNOVER Measures gross contract sales compared to working capital Is working capital being leveraged to produce revenue? $2,000,000 = 8.97 $223,000

DEBT-TO-EQUITY Measures equity capital leverage Total liabilities (debt) equity $650,000 = 3.71 $175,000

RED FLAGS FOR SURETIES Late financial statements Errors in financial documents Insufficient supporting schedules Change in CPA (good/bad) Increases in non- construction activity U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration https://www.flickr.com/photos/wsdot/14826544779

SELF EVALUATION Take 10 minutes to review firm’s reports in comparison to benchmarks How can your firm improve reports?

NEXT STEPS Link Session material to Action Plan elements as necessary U.S. Dept. of Housing and Urban Development - Community Planning and Development U.S. Small Business Administration https://www.flickr.com/photos/23954607@N03/2325477734

RESOURCES These resources provide more information on Accounting: IRS: Construction Industry Audit Technique Guide (2009) National Association of Surety Bond Producers (www.NASBP.org) Surety Information Office (www.sio.org)