Financial Statements: What Do Banks & Bonding Companies Really Want to See?

Running a successful construction company means maintaining strong relationships with banks and bonding companies. Whether you want to increase your line of credit, secure a new loan, or get bonded for an upcoming project, these institutions need to understand your financial position. While preparing financial statements might seem daunting, following Generally Accepted Accounting Principles (GAAP) provides a roadmap for creating the reports these institutions need to see.
Required Financial Statements
1. Balance Sheet
Your balance sheet provides a picture of your company's financial health at a specific moment. It shows everything you own (assets), everything you owe (liabilities), and your company's net worth (equity). Banks and bonding companies rely heavily on this document to understand your liquidity and calculate your bonding capacity and factors that directly impact your ability to take on larger projects.
2. Income Statement
Consider your income statement as your company's performance story. It reports how well you're turning construction activity into profit by tracking revenues and expenses. This helps the reader understand whether your operations are efficient and if you're maintaining healthy profit margins, which are key indicators of a well-managed construction company.
3. Statement of Stockholder's Equity
This statement tracks how your company's ownership value changes over time. It shows how you balance reinvesting in growth with providing returns to owners, helping institutions understand your approach to managing company resources and long-term stability.
4. Statement of Cash Flows
When your business is moving money, it is telling a story. This statement shows how cash flows through your business, from operating activities to investment decisions and financing. Strong operational cash flow often indicates solid project management and financial stability, qualities that both banks and bonding companies want to see.
5. Footnotes
Footnotes fill in crucial missing details about your operations. They provide important context about:
- How you're collecting on contract receivables
- The status of ongoing projects
- Your financing arrangements
- Future work in the pipeline
- Key accounting approaches
What Banks Focus On
Banks dig deep into your financial statements to understand the complete picture of your company's health and management capability. Here's what catches their attention:
1. Working Capital Management
Working capital is your company's financial cushion. Banks want you to maintain enough working capital to handle day-to-day operations while preparing for unexpected challenges. They'll examine how you manage receivables, control inventory, and handle payables, which are all indicators of strong financial management.
2. Debt Service Coverage
Debt service coverage isn't just about whether you can make loan payments; it's about how comfortably you can meet those obligations. Banks examine your operating income to ensure you have enough breathing room to handle both current and potential future debt. Strong debt service coverage tells them you're managing growth responsibly.
3. Historical Performance Trends
Your company's track record speaks volumes. Banks look for patterns in your financial performance that indicate stability and good management. Consistent growth doesn't always mean dramatic increases. Steady, manageable growth often signals better risk management and operational control to loan officers.
4. Quality of Receivables
The age and quality of your receivables tell an important story. Banks want to see that you're actively managing collections and maintaining strong relationships with reliable customers. They'll pay particular attention to aging schedules and any concentration on specific customers or projects.
What Bonding Companies Want to See
Bonding companies look beyond basic financial statements to understand how well companies manage projects and estimate work. They focus on specific schedules that tell them more about your operational capabilities:
1. Summary of Earnings
This detailed view of your completed and in-progress contracts reveals how well you estimate and manage projects. If you consistently estimate 30% profit margins but only achieve 20% upon completion, bonding companies will want to understand why. Bonding companies analyze these discrepancies to evaluate your estimating accuracy, project management capabilities, and cost allocation practices. Understanding these patterns helps bonding companies assess your operational strength.
2. Schedule of Contracts in Progress
Think of this as your current project snapshot. Bonding companies want to see that you're staying on top of billing and that your results align with estimates. This job-by-job analysis helps them understand both your project management skills and financial stability. Bonding companies will pay close attention to the project budgets, underbillings, and overbillings. If a project has significant underbillings, it may indicate the profit margin is too high and the job includes profits you will not realize or that the company has worked on unapproved change orders, making the project appear farther along than it is. Overbillings can be an indicator of good billing practices and cash management, but you need to budget appropriately to avoid potential cash flow issues as the contract nears completion and avoid “job borrow” with the cash.
3. Backlog Analysis
Your backlog indicates potential. A healthy backlog shows bonding companies that you can secure new work and maintain steady operations, which are essential factors in their underwriting decisions.
Build Confidence in Your Financials with Lutz
Successfully navigating financial reporting requirements requires experienced guidance and industry knowledge. At Lutz, our construction industry experts have helped numerous companies implement effective reporting strategies while ensuring compliance. We understand the unique challenges in today's construction environment and can help design approaches that align with your business objectives. Contact us to explore how our expertise can help optimize your financial reporting strategy.

- Achiever, Competition, Restorative, Responsibility, Positivity
Mike Tichenor
Mike Tichenor, Audit Manager, began his career in 2017. Starting as an intern, he has developed extensive knowledge in audit and assurance services, with a particular focus on employee benefit plans.
Focusing on financial reporting, Mike provides audits, reviews, and compilations for clients, primarily in the construction and manufacturing industries. He also assists with wide-ranging consulting solutions. Mike values the opportunity to help clients tackle complex problems. His drive for achievement and positive outlook enables him to deliver effective solutions tailored to each client's unique challenges.
Mike, an avid Husker fan, lives in Omaha, NE, with his wife Samantha. Outside the office, he can be found outdoors and with family as much as possible.
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