Sunday, October 26, 2008
Communicating with your Bond Company
As CPAs who work in the construction industry, we have developed many positions and strategies to help our contractors become best of class and manage successful businesses. No matter what industry you are in, communication will be a cornerstone in your success. Many of our contractors regularly use their surety line while others obtain a bond once in a while. Still other contractors working in the private sector are rarely, if ever, asked to provide a bond. My advice to contractors falling in any of these categories is all the same…be sure to regularly provide financial reports and communicate with your agent!
It seems obvious for contractors who regularly use their bond program to be in regular contact with their bond agent and providing financial information, however it isn’t always the case that they do so. If your company gets bonds less frequently or rarely to never, you probably aren’t too concerned about proactively keeping your agent in the loop. This is a mistake for many reasons. The contractor must continuously, in all aspects of business, strive to position their companies as best of class. This basically means doing things better than most, if not all, of their competitors. There are few areas easier to do this in than in keeping the lines of communication open with your bond company. If your company rarely or never is asked for a bond, it is still a good idea to develop a relationship with a quality bond agent to prepare for the moment when an opportunity arises. I have seen many times over the years where a contractor is awarded a job and needs a bond. The problem is the contractor doesn’t have a relationship in place and has to scramble to convince a bond agent (who then needs to find the right market and convince a bond company) that their company is worthy of a surety program. It is so easy, without any time pressures involved, to ask your CPA or other business advisor to connect you with a good bond agent. They will ask for basic corporate data and have a market on standby for when you land that great opportunity requiring a bond. Have the relationship in place before you have the need!
My recommendation is basically twofold in terms of a proactive communication plan with your bond company. The first is to provide, without being asked, quarterly financial statements and job schedules (which obviously reconcile) to your agent. It is always prudent to have your outside CPA review your internal financial reports before you send them on to the bond agent. I have seen cases where financial reports, with errors, were sent to the bond agent (and the bond company) and this is counterproductive as credibility (one of the 3 “Cs” in the surety world, character, capacity, credibility) is diminished. Providing accurate, timely financial information to your bond agent should be very easy as you are producing this type of information monthly (or at least you should be) in order to effectively manage your business. Since you are sending this package to your bond agent, you should also send this same package to your banker. There is a chance that the parties to whom you send this information may not spend a lot of time analyzing it but that is unimportant. The mere fact that you provide timely and accurate financial information speaks volumes about the type of organization you manage. The second part of my recommendation for your proactive communication plan is to call, at least once a year, an all hands meeting to communicate the state of your company’s financial and operational affairs to the surety underwriter and agent. You should also invite your CPA and perhaps your banker as well. Relationships drive business and there is no better way, especially in today’s world of email, phones, scanners, etc., than to do so in a face to face meeting. One way to do it is to schedule it at 11AM and have lunch brought into your office. If you don’t have a conference room suitable for this size of a gathering you might ask your CPA for use of his/her conference room resources.
The benefits of this communication strategy are numerous. First, no one likes surprises and this method of regular, proactive communication avoids surprises. Second, how many times have you bid on a job requiring a bond and then scrambled to provide financial information to your bond company? This method avoids that crisis and uncertainty as the bond company needs to get up to speed on your account. Also, I’ve heard people in the surety industry say “Oh, guess they need me now…now we’re important.” No one likes to feel like they are only a means to an end…it gets back to the relationship; the two-way mutual respect being shown by both parties.
Communication is a cornerstone for your business’s success. Communication is important inside your organization within your management team, office and field personnel. It is equally important with your outside business partners. As a business owner, you should regularly be reviewing various financial information including your financial statements. Other dashboard type reports should be monitored on a daily or weekly basis. These reports are also referred to as Key Performance Indicators. Providing quarterly financial statements and job schedules to your bond agent should be a very easy task as they are already being done monthly. The benefits are significant and there are no costs associated with doing so. Following this program will help place you in that “Best of Class” position with your bond agent and bond company.