One for you, one for me.
Two for you; one, two for me.
Three for you; one, two, three for me!
What fun, unless you are a surety underwriter and you’re incorrectly evaluating a financial picture.
When we review a new applicant for bonding, a range of factors are considered and the financial aspect is always one of them. Sureties want to be confident that the company is stable and will be able to perform the bonded contract. This includes the financial capability to finance the start of the work and deal with any issues that arise. Such problems, if left unresolved, are the things bond claims are made of.
Who is the typical applicant for performance bonds? Most often it is a privately owned company. The focus of the financial evaluation is the fiscal year-end (FYE) of the company, which frequently is December 31st.
A range of elements are reviewed to determine the health of the company and its ability to survive the issues that often arise on construction projects. One element is Cash. Always the first (most liquid) asset listed on the Balance Sheet, you’ve heard the expressions: Cash is king, Cold hard cash, A cash cow! A strong cash position is universally recognized as a sign of health.
As part of the primary financial evaluation, underwriters calculate the company’s FYE cash position. Secondarily, the finances and cash position of the company owners will be reviewed. These parties are indemnitors to the surety even though they are not direct bond applicants (bond “Principals”). In the event of loss, the surety is entitled to look to these parties for salvage and subrogation (financial recovery) – so the financial strength they add to the picture is relevant.
Trick Question: If financial statements show that the company has $100,000 cash at the 12/31 FYE and the owners personally have $100,000 on 1/31, do you have $200,000 for underwriting purposes?
Answer: You do unless that’s the same $100,000 that you’re counting twice.
Company owners may loan money to the firm and later pay it back. Money gets moved around, sometimes quickly. There should be corresponding debt entries on the financials. But if people “forget” to show them, readers can be tricked into counting the same asset twice. How can underwriters prevent being fooled into double counting dollars?
The solution is to always require concurrent financial statement dates. We will always request personal financial statements as of the fiscal year-end date of the company. Personal year-ends are automatically 12/31. But if the company has chosen a different date, that will be the personal FS date we want.
It is also typical, when reviewing unaudited (unverified by an independent third party) financial reports, to ask for proof of the cash assets – such as bank or brokerage statements.
So there you have it. When bond underwriters count the cash, they prevent counting the same dollars twice by requiring business and personal financials as of the same date, because Counting Counts!
Call us with you next Contract, Site or Subdivision Bond.
FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
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