Author, Matt Gaynor, Director of Surety, Rancho Mesa Insurance Services, Inc.

We often hear the term “cash is king” in the construction business. When referring to our contractor clients’ bond line of credit, this term is paramount. The various sources of cash listed on a balance sheet (i.e., cash in the bank, accounts receivable, available bank lines of credit) will largely influence the bond company’s calculation of the bond credit line. Let’s focus on accounts receivable.

When we provide the bond company a financial statement from a client, they will often request we include a Schedule of the Accounts Receivable and Accounts Payable statement. Generally, the schedule breaks out the receivables by 30, 60, and 90 day increments. Regarding the open receivable balances scheduled as “over 90 days past the invoice date,” the bond company will subtract this amount from the equity and working capital analysis because they feel that a greater risk exists in the collection of these receivables.

The over 90-day receivables become very important since the collection of these receivables can mean the difference between a bond company approving or declining a specific bid request (for a project which our contractor may already be heavily invested). The bond underwriter wants to ensure that the contractor has sufficient cash coming in the door to pay the labor, suppliers, and subcontractors on current projects – and may not want to take on additional risk if they are concerned about receivable collections needed to pay for these costs.

Being awarded a contract, whether bid or negotiated, is extremely important to a contractor’s success. But right behind the importance of winning and executing the contract, is the contractor’s ability to collect the money to ensure they are getting paid for the work they do. Make sure you have a good receivables team in place so that paperwork is issued correctly/timely, and consistently follow up on late payments to collect your money.

If you would like a better understanding of how the accounts receivable collection process affects your bond line of credit, feel free to contact me at (619) 937-0165 or mgaynor@ranchomesa.com to discuss ways to ensure your bond program is efficient as possible.