Industry Insights

Your fiscal year-end is fast approaching, and your annual audit or review will begin before you know it. Now is the time to determine what management can do to improve your company’s overall financial condition. Whether you’ve had a good year financially or one that could have been better, there are steps you can take before year-end to improve presentation of the company’s overall financial condition to owners, lenders and bonding companies. Below are a few of the ideas you may consider as a part of your year-end cleanup.

To strengthen your current ratio and working capital, consider negotiating with your banker to have your line of credit extended so that its maturity date will extend more than one year beyond your year-end balance sheet date. This will allow you to classify the line as a long-term note payable, rather than a current liability. Be sure to check and see if you have a subjective acceleration clause in your line of credit agreement. If so, extending the line of credit agreement beyond one year will not allow you to classify the debt as long-term.

If you have financed current-year equipment purchases with short-term lines of credit, consider obtaining long-term financing. By “terming out” the debt, your working capital position will improve and you will be able to match your debt classification with the associated asset classification.

Meet with your project managers on a regular basis, at least monthly. Engage your project managers in a comprehensive review of all jobs in progress to determine the most accurate cost estimates to complete and estimated year-end profit. Address cost overruns sooner rather than later. As you are well aware, owners, bankers and bonding companies don’t like to see large swings in profit between interim internal financial statements and year-end audited statements. In addition to these matters, an extra push should be made at year-end to get all progress billings out for work performed during the year.

Many debt agreements include computation of a borrowing base, which excludes accounts receivable more than 90 days past due. While efforts should be made all year to collect aged receivables (including retainage on previously completed jobs), a special effort should be made prior to year-end to vigorously pursue collection and resolve any disputed amounts. Timely collections will improve cash flow and related financial ratios and will reduce both bad debt expense and the allowance for doubtful accounts. Extra steps should be taken at year-end to clean up related party receivables and payables and resolve any open issues, as these amounts are required disclosures in the financial statement and footnotes.

Management also should attempt to reduce any large dollar concentrations of inventory, stored materials or prepaid assets at year-end. While these items represent current assets on the balance sheet, any increase from prior-year balances results in operating cash outflows and either reduces cash or increases current liabilities.

Management will be better able to determine what discretionary bonuses, profit sharing or 401(k) contributions should be accrued at year-end with reliable internal financial statements and will be able to better assess the effect they will have on the company’s overall financial position.

As always, tax planning considerations for both the company and its owners need to be factored into these recommendations. Contact your BKD tax advisor when developing your year-end plan.