Secret Of Bonding 99: The Awful Truth About Working Capital

Secret Of Bonding 99: The Awful Truth About Working Capital

Surety Bond underwriters DEMAND it. Contractors maneuver to maximise it. Bond agents pray correctly… What’s Working Capital, what is the awful truth which everybody ignores?
Define the word
When contractors sign up for bonding, the company financial statement is analyzed with the surety underwriters. They always calculate the running Capital As Allowed (WCAA) for the Balance Sheet, which can be simply:
Current Assets minus Current Liabilities
This number can be at the mercy of interpretation through the analyst. By way of example, they may disallow assets they feel are overstated or of questionable value – thus the title “As Allowed.”
The working capital figure might be when compared to the size bonds and aggregate (overall) program the contractor desires. Here is the important part:
For most bonding companies, if the WCAA is deemed insufficient, it comes with an immediate declination.
It’s true that “everything is important” in surety underwriting. Yet it’s also correct that this can be a life or death issue for many decision-makers. Specifically, the fiscal year-end Working Capital As Allowed has to be adequate to the capacity requested. That is not the awful part…
Underwriters focus their decision-making for the fiscal year-end (FYE) of the company, tax day. For several contractors, this day is 12/31 each and every year. This is the natural and convenient annual milestone that is presumed being realistic and conservative. Underwriters will not want puffed up numbers designed to impress them. Which makes sense.
Awful Truth #1
The FYE WCAA is simply correct for just one DAY. If the company spends cash on January 1st, bills a binding agreement, incurs a bill, the WC is immediately different.
Awful Truth #2
The WC calculation is always depending on obsolete info. When will the 12/31 statement get produced? Maybe February, but much more likely March, April or later. This GUARANTEES that this WC calculation is outdated.
Awful Truth #3
Considering the great emphasis added to the value of fiscal year-end info, interim financial statements (produced on other days around), are largely ignored by underwriters. This means when the company carries a good event occur, it can be overlooked – however a downturn is definitely looked at!
Conclusion
Just like an elusive pot of gold, the WCAA underwriters rely on may never materialize as cash flow. But another “truth” is underwriters must base their decisions on something, and historically it is been a relevant indicator of future success. Regardless of the often overlooked flaws we cited, Working Capital analysis will remain portion of surety underwriting.
It is recommended that underwriters keep your relative valuation on this indicator in perspective, and remember that interim statements along with other underwriting elements also need to play a huge role.

error: Content is protected !!