Apr 1, 2016
Do You Feel Like The System Is Rigged To Keep You From Getting Financing For Your Construction Company?
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.
Being Unaware Of The Rules Of Business Causes Many Contractors To Believe:
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.
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
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 for Contractors 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.
Ten Little Things Hindering You From Getting Loans For
Your Contracting Company Which Can Be Fixed
The following can be found by doing a bit of work in Excel and getting the raw data from your Financial Statements. Or by contacting clicking on the link below 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.
#02 Bill Paying
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.
#07 Job Status
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.
#08 Everybody Is Your
Customer Which Means You Have No Clients
Bankers and lenders may ask you to describe the people you work for and if you start the conversation talking about your Customers they will presume you are one of those contractors stuck in your "Do Gooder Phase" where most people enter in their 20's and grow out of in their 30's; doing lots of work for friends and family who are "On a Budget" and persuade you to work for FREE or even less!
Study your Job Profitability Reports and determine who is your Prime Customer and begin to understand the Difference Between Customers And Clients. It is found in the 80/20 For Construction Success.
#09 Working On Jobs
Outside Your Area Of Expertise
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.
#10 Working On Jobs
Outside Your Prime Geographic Area
Windshield time kills profits! The only people who make money on windshield time are the construction workers. Sharp bankers and lenders will ask about this one. Make sure you have Job Profitability Reports to show why you are working outside your geographic area.
Your prime geographic are will depend on the type of contracting work you do. Consult your construction accountant and your Job Profitability Reports to help you determine what makes sense.
I trust this podcast helps you understand that outsourcing your contractors bookkeeping services to us is about more than just “doing the bookkeeping”; it is about taking holistic approach to your entire construction company and helping support you as a contractor and as a person.
We understand the good, bad and the ugly about owning and operating construction companies because we have had several of them and we sincerely care about you and your construction company!
That is all I have for now and if you have listened this far please do me the honor of commenting and rating podcast www.FastEasyAccounting.com/podcast Tell me what you liked, did not like, tell it as you see it because your feedback is crucial and I thank you in advance.
I trust this will be of value to you and your feedback is always welcome at www.FastEasyAccounting.com/podcast
This is one more example of how Fast Easy Accounting is helping construction company owners 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 construction contractors like you so stop missing out and call Sharie 206-361-3950 or email firstname.lastname@example.org
Thinking About Outsourcing Your Contractors Bookkeeping Services?
Click On The Link Below:
This guide will help you learn what to look for in outsourced construction accounting.
Thank you very much and I hope you understand we really do care
about you and all contractors regardless of whether or not you ever
hire our services.
Bye for now until our next episode here on the Contractors Success MAP Podcast.
Randal DeHart | Contractors Accountant