Bonding Secrets146: Financial Statement Sniff Test

Here is a list of my business and accounting courses in college:

1.

2.

3.

I majored in education (teaching), so I didn’t get anything on financial statements “FSs”. When I started as a bail bond underwriting trainee, I realized that I had no idea what was a Balance Sheet – but I learned.

If your first reaction when looking at FS is “Duh”, we’ll fix that right now. Keep reading! This will be a view from 30,000 feet. Big picture.

To be complete, each financial statement must include As minimum:

1) Balance

2) Profit and Loss Account

balance sheet

This document is a one-day snapshot of the funds in the company (Assets) and who owns them (Liabilities). Assets and liabilities are equal in “balance” because every dollar in the company is shown from two points of view: the Asset side and who owns it, the Liability side.

The Balance has three important parts that we can review initially. We will identify them based on their functionality.

Current Assets – This line item is a subtotal that is located near the middle of the Assets column. Represent those assets easily convertible to cash within the next fiscal year (as Accounts Receivable).

Current Liabilities: found near the middle of the Liabilities column, these are debts to be paid in the next fiscal year (as Accounts Payable).

Total Shareholders’ Equity, also known as Net Worth: Usually the last subsection near the bottom of the Liabilities column. This is the net worth of the company that would remain if they closed and liquidated everything.

The profit and loss statement

This is a historical summary of all money brought in (sales, also known as income) and money spent (expenses) during the previous period, usually one year. At the bottom of the column is Net Income, which is the money the company “earned” during the year after paying all bills and related taxes.

Now that you can pick a pair of strategic numbers in any FS, what are we going to do with them?

Calculate working capital

This is a primary measure of financial strength used by all analysts, including guarantees, banks, and other creditors. It is found by subtracting Current Liabilities from Current Assets. It is an indicator of the expected cash flow for the coming year.

the smell test

Here’s a quick, simplified test to use when considering a particular offer or performance bond. The evaluation is made based on what is expected. contract (not bonus) amount. This is an instant indication of the adequacy of finances for the upcoming project.

Part One: The target amount of working capital is 15% of the contract amount. For example, if the contract amount is $1,000,000, the guarantees expect to see working capital of at least $150,000.

Part Two: The target amount of net worth is 20% of the contract amount, or about $200,000 in our example.

Certainly, there is more to surety underwriting than this simple analysis. However, by using this method, you can get a quick idea of ​​whether the financial statement easily supports the link or whether it may be overstated. If your analysis reveals negative numbers, which are shown in parentheses on financial reports, that’s obviously a bad sign.

Also note, applicants who do not meet these criteria you can still qualify for bonuses based on other factors – and the reverse is also true. Security subscription socket many factors in consideration. In this article we offer a very simplified version of the process although it is worth a quick review. This procedure will allow you to perform a quick financial assessment and relate it to the next security exposure.

Summary

This item does not make you a bonus subscriber, but now when you get a new FS instead of “Duh!” you can say “Let me analyze this!”

Run one more quick scan the smell test will indicate the probability of obtaining guarantee support. You learned a lot in three minutes, but when you have a bond that doesn’t pass the sniff test, that’s where our experience and market access come into play. Call us!