Here is a list of my business and accounting courses in college:
I majored in education (teaching), so I didn’t get anything on financial statements “FSs”. When I started out as a bail bond underwriting apprentice, I realized I had no idea what a Balance Sheet was – 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 box.
For completeness, each financial statement must include As minimum:
2) Profit and Loss Account
the balance sheet
This document is a one-day snapshot of the funds in the business (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.
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 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 out in the next fiscal year (as Accounts Payable).
Total Stockholders’ 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 be left 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 Revenue) and money spent (Expenses) over the previous period, usually a year. At the bottom of the column is the Net Income, which is the money the business “earned” during the year after paying all related bills and taxes.
Now that you can pick a couple 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 guarantors, banks, and other credit grantors. It is found by subtracting Current Liabilities from Current Assets. It is an indicator of the expected cash flow for the next year.
the smell test
Here’s a quick, simplified test to use when considering a particular offer or performance guarantee. The evaluation is made based on what is expected. contract (not bonus) amount. This is an instant indication of the adequacy of finances regarding the upcoming project.
First part: the target amount of working capital is 15% of the contract amount. For example, if the contract amount is $1,000,000, the warranties 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 underwriting surety bonds 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 overdone. 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. Taking security subscription many factors in consideration. In this article we offer a very simplified version of the process, although it is good as a quick review. This procedure will allow you to make a quick financial assessment and relate it to the next security exposure.
This item doesn’t 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 likelihood of obtaining warranty 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!