STEP 2 - FINANCIAL STATEMENT

 

Licensed Accountant

 

Contact a Certified Public Accountant (CPA) or a Licensed Public Accountant (PA) actively licensed to prepare reviewed or audited financial statements, in the state where their business operates. In Tennessee, you may check with the Tennessee Board of Accountancy to perform a License Search to verify if they are properly licensed.

 

The CPA/LPA must prepare a financial statement with a:

• Reviewed opinion (required for a monetary limit of $1,500,000 or less); or
• Audited opinion (required for a monetary limit exceeding $1,500,000); based on
• Generally Accepted Accounting Principles (GAAP).

(Please review T.C.A. section 62-6-111 of the law.) The financial statement portion of the application is not public information and considered confidential.

• Compiled financial statements are NOT acceptable
• Financial statements prepared on an income tax basis are NOT acceptable
• Contractor licenses are issued according to the NAME appearing on the financial statement and the name should match on ALL related information, such as the Charter, Articles of Organization, and Line of Credit, Contractor’s Affidavit or Guaranty Agreement. In addition, the contractor should only operate in the name as licensed.

Monetary Limit Determination

 

Inform your accountant of the size license you need. For example, if you plan to contract homes no more than $150,000 per contract, your CPA/LPA can help determine if your financial statement meets the criteria. Monetary limits are based 10 times the lesser of both working capital and net worth. In order to hold a license with a limit of $150,000, you would need to show working capital and net worth of at least $15,000, as well as experience for this amount. Since the limit is based on the lesser of the two, a contractor with a working capital of $10,000 and net worth of $200,000 would qualify monetarily for a limit of $100,000. The contractor may supplement a "Line of Credit" (on the Board’s format) in the amount of $5,000 to increase working capital or submit a personal or parent company financial statement with a "Guaranty Agreement". Personal supplemental statements may be prepared by the contractor. (In addition, the Board may limit the monetary license limit based on prior experience.) Be sure to list all experience, including qualifying agent’s!

 

Unlimited License Limit

 

To obtain an unlimited license, the contractor must show in excess of $300,000 in both, working capital and net worth, as well as experience, with an audited financial statement.

 

Working Capital and Net Worth

 

Please ask your CPA/LPA to determine the amount of your working capital and net worth. Working capital is current assets minus current liabilities. Net worth is total assets minus total liabilities.

 

CURRENT ASSETS are cash and those assets that are reasonably expected to be realized in cash or sold or consumed within one year or within a business’s normal operating cycle if it is longer. Generally, current assets include the following:

• Cash and cash equivalents available for current operations
• Marketable securities representing the investment of cash available for current operations, including investments in debt and equity securities classified as trading securities.
• Under billings on work in progress
• Inventories (to include materials and/or houses built for sale). Also, developed lots for sale. Raw, undeveloped land is not a current asset.
• Retirement Plans, specifically an IRA, 401K and Profit Sharing, will be allowed at 50%
• Cash surrender value of life insurance policies
• Trade accounts receivable and notes and other receivables that are expected to be collected within one year
• Prepaid expenses such as insurance, interest, rents, taxes, etc.

The following are not current assets, however, since they generally are not expected to be converted into cash within one year:

• Related party or owners receivables (not allowed as a current asset)
• Cash restricted for special purposes (Restricted cash may be classified as a current asset if it is considered to offset maturing debt that has been properly classified as a current liability)
• Long term investments
• Receivables not expected to be collected within one year
• Land and other natural resources
• Depreciable assets (buildings, equipment, tools, etc.)
• Prepayments or deferred charges that will not be charged to operations within one year
• Notes receivables from stockholders

CURRENT LIABILITIES are obligations whose liquidation is reasonably expected to require (a) the use of current assets or (b) the creation of the other current liabilities. Generally, current liabilities include the following:

• Payables for materials and supplies
• Line of Credit balances and credit card balances
• Amounts collected before goods or services are delivered (over billings on jobs in progress)
• Accruals for wages, salaries, commissions, rents, royalties, and taxes
• Other obligations, including portions of long-term obligations, that are expected to be liquidated within one year*

Current liabilities do not include long term notes, bonds, and obligations that will not be paid out of current assets.

 

 

Monetary Limit

 

The monetary limit is the total dollar amount per each individual contract or project. A contractor cannot split a contract into phases to work within their limit, however, a 10% tolerance is allowed. A contractor with a monetary limit of $150,000 may contract up to $165,000 without being in violation. In addition, there is no limit of the number of projects a contractor may perform.

 

Guaranty Agreement

 

A Guaranty Agreement (GA) [pdf] submitted with personal or parent company financial statement may be needed, in addition to the required financial statement prepared by the CPA, for the following:

1. Contractors submitting cash only financial statements due to being a new company with no operating statement may be required to submit a Guaranty with their personal financial statement.
2. Spouse, if applicable, must also sign Guaranty Agreement
3. Contractors needing to supplement their working capital or net worth for their monetary limit may use personal statement at 50% value
4. Contractors which are a subsidiary or division must submit Guaranty with the parent’s financial statement
5. The Board requires a Limited Liability Company (LLC) to provide a Guaranty Agreement by the owners with a personal financial statement, as a condition of licensing an LLC.

Note: Guaranty Agreements are considered public record. They remain on file, indefinitely. A contractor may supply a written request to remove indemnification upon supplying another means of protection to the public. An LLC would need to change mode of operation.

Line of Credit

 

A Line of Credit (LOC) [pdf], in the Board’s exact format, may be considered to supplement working capital. (The Line of Credit must be in the same name as on financial statement.)

 

OTHER

The Board may require the submission of additional financial information and may also require the financial statement to be audited and attested to by a certified public accountant (CPA). In addition, they may request for the financial statement be examined by the Comptroller of the Treasury or their designee. The Board is charged with the responsibility of protecting the safety and welfare of the public, therefore, are required to ensure the financial solvency of an entity obtaining a license.