What 3rd Parties Actually Look at in Your Reviewed Financials...

Your CPA firm finishes the annual audit or review engagement. The audited/reviewed financial statements get forwarded to your bank, bonding agent, etc. A few days later you get an email: everything looks good, just a couple of clarifying questions.

Those questions are not casual. They are the underwriter telling you, politely, that something in your financials gave them pause and they want to see if you have a good explanation before they decide how to proceed.

Most contractors treat the audit or review as a formality. Hand over the financials, wait for approval, move on. The contractors who consistently get bank/bond increases approved on the first submission understand something the others don't: the audit/review is not about your financial statements. It's about the story your financial statements tell and whether that story is coherent, consistent, and credible across multiple years.

Here's what the underwriter is actually looking at.

The four things underwriters actually focus on:

Underwriters are not reading your financial statements the way you read them. They're concerned with one question: if this contractor gets into trouble on a job, do they have the financial capacity to finish it?

That question leads them to four specific areas:

Working capital. Current assets minus current liabilities. This is the number that tells an underwriter whether you can fund your operations through a cash flow disruption. A contractor with strong revenue but thin working capital is a risk because when a job goes sideways and billings slow down, working capital is what keeps the lights on and the crew paid. Most sureties want to see working capital of at least 10% of your backlog.

Equity. Your net worth on the balance sheet. Underwriters track this year over year. Equity that is growing because earnings are being retained in the business rather than distributed signals a contractor who is building financial strength. Equity that is flat or declining while revenue grows is a warning sign: the profits are leaving the business as fast as they're being made.

WIP schedule consistency. The WIP schedule you submit with your reviewed financials gets compared to the WIP schedules you submitted throughout the year. Underwriters are looking for consistency in how you calculate percent complete, how you handle change orders, and whether your estimated costs at completion are realistic. A WIP that looks dramatically different at year-end than it did mid-year raises questions about whether the numbers are being managed.

Backlog. How much contracted work do you have in front of you? A contractor with strong financials but an empty backlog is a different risk than a contractor with the same financials and 18 months of signed contracts. Underwriters want to see that the revenue is going to continue because bonding capacity is essentially a bet on your future performance, not just your past.

The ratios that matter

Beyond the four focus areas above, underwriters apply specific ratios that determine how much credit capacity you have and whether a bond or LOC increase is supportable. Most contractors have never seen these calculations.

Working capital ratio: Current assets divided by current liabilities. Most underwriters want to see this above 1.5, ideally above 2.0. Below 1.2 and you're going to get questions regardless of how profitable the income statement looks.

Equity-to-backlog ratio: Your net equity divided by your bonded backlog. This tells the underwriter how much financial cushion you have relative to the work you've committed to perform. A contractor with $500,000 in equity trying to bond $10,000,000 in backlog has a ratio of 5% and most sureties want to see 10% or better. This ratio is often the binding constraint on how much bonding capacity a contractor can actually access.

Underbilling trend: If your WIP schedule shows growing underbillings, particularly on the same jobs month over month, an underwriter reads that as a contractor who is either losing control of their billing process or sandbagging costs to make future periods look better. Neither is a good story.

What “a few clarifying questions” actually means

When an underwriter says they have a few questions, they are almost never asking because they don't understand your financials. They understand them fine. They're asking because something in the numbers doesn't match the story they expect to see and they want to give you the opportunity to explain it before they draw their own conclusions.

Common triggers for clarifying questions:

Equity decreased year over year. The most common cause is owner distributions. The owner took money out of the business. This isn't necessarily a problem, but the underwriter wants to know it was intentional and planned, not a sign of financial distress.

Working capital dropped significantly. Could be a large equipment purchase, a slow collections period, or rapid growth consuming cash. All of these have explanations. The underwriter wants yours.

A large underbilling on a specific job. They want to know why. Is it a billing cycle issue with the owner? A disputed change order? A job that's genuinely behind? The answer matters.

Profit margin that looks different from prior years. Either significantly better or significantly worse. Both get questions. A margin jump might suggest aggressive revenue recognition. A margin decline might suggest a problem job that's being smoothed over.

The contractors who answer these questions clearly and with documentation get their bond increases processed.

How to present your financials proactively

The single most effective thing you can do to improve your experience is stop being reactive and start being proactive. Don't wait for questions. Answer them before they're asked.

If necessary, you can submit a one-page narrative with your financial package. It covers:

Working capital and equity: Here's where we are, here's the trend, here's why any changes from last year happened.

WIP summary: Here's our active backlog, here's our percent complete methodology, here are any jobs with unusual billing positions and why.

Backlog and pipeline: Here's what we have signed, here's what we have in hand that we expect to sign in the next 90 days.

Any anomalies explained upfront: If equity dropped because the owner took a distribution to pay personal taxes, say that. If a job is underbilled because the owner has a 60-day billing cycle written into the contract, include the contract language.

A narrative package like this signals something that numbers alone never can: that the contractor understands their own financial position and has nothing to hide.

The bottom line

The contractors who get bond or credit increases on the first submission aren't luckier. They're better prepared. They know what the underwriter is looking for, they present their financials in a way that tells a clear story, and they answer questions before they're asked.