Contractors Want Money; Banks Want To Lend Money, What's The Problem?
Think of all the times:
You loaned money to a friend or relative
Provided labor and material for somebody's home or business without a deposit check
Did change order work that you never got paid for doing and never will
Gave employees an advance on their paycheck that and you never got paid back
Multiply That By 100,000 And You Will Begin To Understand Why Banks Seem So Tight Fisted About Loaning Money
Banks stay in business is by loaning money and earning interest. They work hard to find people and businesses and contractors that are good credit risks they can loan money too and get paid back in a timely fashion, with all of the interest due to them. Do your best to avoid raising any red flags.
Five Red Flags To Avoid
#1 Your Profit & Loss and Balance Sheet Reports do not conform to financial industry standards
#2 The financials tell the banker your bookkeeper doesn't understand Construction Accounting
#3 The preparer's signature on the annual tax returns are not from a qualified tax specialist
#4 You have no access to a construction accountant, not even for quarterly check-ups
#5 You don't have a formal documented Business Plan with a budget and projections
If you find you have already raised some or all of these red flags, no worries, we can help you fix most of them.
Bankers love chatting with accountants because we speak the same language. Just like house builders love chatting with sub-contractors and building material suppliers because you all speak the same language.The Construction Specifications Institute (CSI)
Nobody has to tell a builder not to install carpet after the walls have been framed because that would be foolish. It is common sense to anyone in construction. In fact, contractors have over the past several thousands of years developed a sequence to how structures get built.
In March 1948, The Construction Specifications Institute (www.csinet.org/) was formed to improve the quality of construction specifications. They improved existing specifications standards in order to meet the demands of the post-war construction boom. They developed new specifications, best practices, standards and formats, professional education, and more to help streamline construction and get more done is less time.
Most of the language and methods used to develop project plans and the steps and phases of construction came from the work of The Construction Specifications Institute. Even QuickBooks For contractors has an entire section devoted to tracking the costs of construction and they attempted to put it together in a way that mirrors the high-level phases of building a house.
Unfortunately, in my opinion it is useless. In order to have something that works you need QuickBooks Setup Specifically For Whatever Type Of Construction You Are Doing. We can help with that if you need it, Call Sharie 206-361-3950 or firstname.lastname@example.org
Getting back to financing strategies for your contracting Company it will help if you understand the banking version of The Construction Specifications Institute.
A Bit Of History Helps With Understanding
According to the FBI http://www.fbi.gov/about-us/history/famous-cases/al-capone in 1931, the IRS took down the alleged gangster Al Capone by “Reverse Engineering” his financials using some of the tools provided by The Risk Management Association. Essentially the IRS collected receipts from everywhere that Al Capone spent money including his tailor, Marshal Field and Company, hotels, restaurant and food suppliers and more.
Using the information gathered the IRS was able to make a compelling case from the bottom up of his annual income. The rest as they say is history. In October 1931, Mr. Capone was convicted and sentenced to 11 years in federal prison, which included Alcatraz. He was released after seven years and owed $215,000 plus interest in back taxes.
The Risk Management Association (RMA)
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 payoff.
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 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.
Hopefully you have gained some insights to the banking, lending and bonding industry. I strongly suggest you get your contractor bookkeeping into the hands of someone who understands the difference between construction accounting and regular accounting and put together a Board of Advisors so that you can get your construction company on track to making you lots of money!
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About The Author:
Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and construction accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and Xero accountants to the benefit of all of the construction contractors he serves across the USA. Visit http://www.fasteasyaccounting.com/randal-dehart/ to learn more.
Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes and Follow Randal on Google+