As a construction contractor, income taxes are probably the furthest thing from your mind. And you’re probably not too excited about writing big checks to the respective taxing authorities.
You work in a very competitive environment that continually requires you to shave margins during the bidding process, control costs and deal with regulatory agencies. You may have suffered cash flow crunches during your busiest time of the year and struggle to pay your bills until the money starts rolling in from completed projects. Or you may have had to draw from a credit line just to cover wages and materials. You’re faced with all of these challenges, and have to work long hours just to keep everything running smoothly.
What you may not realize is that paying taxes isn’t the end of the world. Whether we like it or not, the amount of tax paid is sometimes seen as a “measure of success.” Successful businesses pay taxes. To accumulate cash in your bank account, taxes must be paid. When cash increases, working capital does as well. Furthermore, if a company continually loses money, or hovers at break-even, it could be considered a credit risk. So what are ways you can ensure your company has enough cash flow?
One component of the bidding process for municipal projects is performance bonds. Performance bonds can come with some steep fees. Factors determining whether you qualify for a bond and the rate paid for a bond (beyond experience and number of years in the business) are directly linked to cash in the bank and the calculation of working capital. The better your cash and working capital position, the lower the bond rate.
I’ve seen bond rates from 0.5 percent to 3 percent. A good rate is between 1 and 1.5 percent. Rates lower than that are reserved for the extremely strong performers, while rates of 2 percent to 3 percent are generally offered to companies with weaker balance sheets. On $10 million of work, the difference in the bond cost between a 1.5 percent rate and a 3 percent rate is $150,000.
Is Borrowing An Option?
Another consideration is borrowing. If your company isn’t performing well, lenders will be reluctant to extend credit. Imagine a busy season without a line of credit. A major piece of equipment fails, and it needs extensive repairs or replacement, and you have no means of paying for it. A viable, successful, company that makes money on an annual basis will typically have less trouble borrowing money.
Tax Help For Contractors
While no one likes to pay more in income taxes, some analysis is needed before making those decisions. If you need help seeing the bigger picture or need assistance with financial analysis, contact Rea & Associates. Rea’s Ohio accounting and tax professionals will look out for the big picture of your business’ finances. We’ll help you analyze your financial statements and minimize your income tax.
Tags: borrowing, cash flow, Cash Flow Management, contractors, Marietta CPA Firm, Ohio Accounting Firm, performance bonds, Tax