Business Organization and Financial Management
Entity choice drives liability, tax, and licensing
A contractor picks among sole proprietorship, general partnership, LLC, and corporation (including S corporation). Questions test the trade-off: sole proprietors and general partners face unlimited personal liability and cannot easily raise capital, while LLCs and corporations shield owners but add filings, formalities, and record-keeping. A license issued to an individual ends when that individual leaves; an entity license depends on keeping a designated employee and ownership disclosures current with the state.
The three statements and the ratios built on them
The balance sheet shows assets, liabilities, and equity at a moment in time; the income statement shows revenue and cost over a period; the cash flow statement explains why a profitable company can still run out of money. Know working capital (current assets minus current liabilities), the current ratio (current assets divided by current liabilities), and the quick ratio. Sureties underwriting a bond program look hardest at working capital, net worth, and backlog relative to capacity.
Cost structure and markup discipline
Separate direct job costs from indirect (general conditions), company overhead, contingency, and profit. Apply contingency only to identified risk, never as a hidden profit line. Labor is priced loaded, not at the wage rate: payroll taxes, workers' compensation, general liability, and fringe typically add 25-40 percent.
Worked example
A carpenter earns $26.00 per hour; burden is 34 percent. Loaded cost = $26.00 x 1.34 = $34.84. With 12 percent overhead and 8 percent profit compounded: $34.84 x 1.12 = $39.02; $39.02 x 1.08 = $42.14 per hour billed. Estimating at $26.00 understates the rate by nearly 40 percent.
Watch for questions that confuse markup with margin, or that ignore retainage and over/under billing when describing cash flow.