Michael Tinsley of NeoSystems offers a checklist for analyzing your operations in order to understand where you are growing and where you aren't.
Government contractors face serious and mounting challenges, from reduced government spending to tighter financial and reporting regulations. Therefore, execution is more critical than ever.
To drive, grow and maximize value, business leaders need current and accurate information for making correct business decisions, avoiding financial pitfalls and capitalizing on strategic opportunities, including a potential sale or acquisition.
Unfortunately, these management fundamentals often are overlooked, especially at small and mid-size government contractors where senior managers have numerous responsibilities. For companies that are growing, and facing resource and priority strains, these actions are especially important.
The following check list can help companies approach their financial management challenges efficiently and thoroughly.
Analyze unbilled receivables regularly. Depending on the contract, revenue will likely be recognized and billed at different times. With fixed-price contracts, for example, revenue is generally recognized as work is completed and billed at scheduled milestones. Some fixed-price contracts, though, are only billed at final customer acceptance. As such, there is a clear reason why revenue recognized is “unbilled” until the contract allows billing to occur.
With cost-plus contracts, only a modest amount of unbilled receivables is expected, and should generally be limited to variances between actual and provisional indirect rates. These variances will be billed after actual indirect rates have been audited, so timely and accurate processes and thorough documentation of allowed expenses will help companies successfully navigate a government audit with few cost disallowances.
With time and materials contracts, generally, little to no unbilled receivables will be expected. A significant unbilled receivable may be an indicator that performance problems exist or that accounting processes are not supporting timely and accurate billing.
Focus on 90-day billed receivables. Are there significant billed receivables that are more than 90 days past due? These should be immediately monitored and addressed. Past due receivables are often an indication of operational problems and impair cash flow.
Scrutinize the contract backlog. Is the contract backlog accurately stated – and verifiable? Backlog is a critical indicator of the health of your company as it expresses the amount of future revenue you’ll be able to earn from contracts already won. However, because it is so critical, there is a tendency to overstate the backlog value by including delivery orders not yet awarded or modifications expected to be made.
Establish forecasts. Whether for investors, potential business partners, employees or others, companies should set goals regarding revenue and rate projections, profit targets and other key performance indicators. It is also critically important to explain how they expect to reach these goals and to track performance over a given time (e.g., 24 months). Such practices enable business leaders to pinpoint the sources that have driven value higher, and to show that company leadership can manage and drive growth, rather than simply ride a positive financial wave.
Furthermore, when there is a hiccup in business operations, companies are better able to determine the key factors that led to the setback and to take corrective action. By graphically explaining bumps in the road, and the periods when they occurred, companies are better able to retain the support of key constituencies.
Be certain the numbers are certifiable. Having accurate numbers is essential. Whether the issue is a government audit, internal planning or seeking outside financing, having accurate, verifiable numbers is imperative. Today, companies should have financials that have been processed through a reliable, trustworthy accounting system designed to meet government requirements. You will realize the value of annual reviews or audits when it comes time to raise financing or when facing potential sale.
At the end of the day, contractors are unable to control the size or pool of federal contracting dollars. Therefore you must enable your company to take advantage of the opportunities when they arise, whether that be a significant contract opportunity, an acquisition or even a sale. An important part of that strategy should be a strong accounting system, sound financial indicators, clean audits and a high degree of accuracy in financial forecasts.
Now, more than ever, it is important for business leaders to focus on these issues so they can drive value and seize all available opportunities.