There’s NOTHING NEW in Surety, except maybe this: “Runway”
Investors are familiar with the concept. It estimates how long a start up can operate on it’s initial capitalization. I apply this to surety analysis, as well.
Underwriters calculate Net Quick as an indication of future cash flow. NQ will be used to finance the start of new contracts and may solve problems on existing ones.
Under Worst Case circumstances, NQ will fund company opeations in the absence of new revenues. The unaviodable, future costs of operating are called “overhead,” or General and Administrative Expenses on the Profit and Loss statement. The ratio between the expected cash flow and the typical overhead will show the staying power or length of “Runway” for the company.
How to Calculate Runway on a Surety Account
On the last company fiscal year-end financial statement, find the average monthly overhead expenses. For example, on a Profit and Loss Statement covering a 12 month period, divide the General and Administrative Expenses by 12. Now you know the average monthly expense it costs to keep the lights on, pay the office salary, insurance charges, etc. These expenses arise even when the company has no active projects (no new revenues). Let’s say the average monthly overhead is $100,000.
Next, we divide the Net Quick by the monthly OH. If the NQ was $400,000, 400,000 divded by 100,000 = 4, meaning (theoretically), in the absense of any new revenues, the company can run for four months covering ongoing expenses with the expected cash flow (NQ).
In an ongoing business, there are many other factors to consider. But Runway is worth knowing and tracking because it is a measure of the client’s staying power. And that’s something we always want to know about.
Also worth knowing, FIA is a carrier providing A rated, T listed bonds in all states: Contract, Site & Subdivision Bonds. We’re problem solvers!
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Morris Plains, NJ 07950
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