How important is an accurate, up-to-date accounting system in the world of government contracting? So important that your approach to financial management can give you an enormous advantage over your competition.
The reason why can be summed up in one word: compliance. US government accounting standards for govcons are significantly higher than for businesses in the commercial market. The rules that govern commerce with federal agencies continue to become more rigorous with increased demand for fiscal responsibility to taxpayers.
Added to that is the reality that a govcon must maintain constant audit-readiness. When your accounting system aligns with audit demands—particularly those of the Defense Contract Audit Agency (DCCA)—your company can avoid serious repercussions, including contract payments withheld due to non-compliant status.
Does Your Accounting System Pass the Test?
When the stakes are high and the consequences steep, it’s a competitive imperative to make sure your company’s accounting system encompasses the dos and don’ts to sidestepping serious financial management mistakes:
1. DO NOT run your business based on your bank/checking account balance.
Cash flow woes can wreak havoc on your company, and it’s wise to have on hand liquid assets that equal three to six months of operating expenses. This is your cash-on-hand, however, not the records you can depend on to run your operation.
A bank account balance does not represent cash flow, nor does it track assets, liabilities, revenue, expenses, or any of the other data you need to make wise operating decisions, pay taxes, or comply with government accounting rules.
2. DO record all transactions (even the small ones).
Put in place and devotedly follow procedures for recording every transaction as it occurs. [A transaction is an agreement between a buyer and seller to exchange goods and/or services.] If you fail to record a significant transaction, it can throw off your books. Even small skips add up. And from a compliance standpoint, a data gap of any size can result in non-compliance.
3. DO stay compliant with your chart of accounts.
Your chart of accounts (COA) is an index of all the financial accounts in your general ledger. It includes your balance sheet and income statement accounts broken into subcategories tailored to reflect your company’s operations.
Federal compliance rules cover the contents of your COA, how you group accounts, and how you track certain accounts by job, and vary according to your operations and products/services. Understanding and implementing these requirements are crucial to getting and staying compliant.
4. DO be specific – your books will look a lot better.
If you don’t have the data to support a decision, it’s called a guess. And guessing is no way to produce a profitable strategy for your market. If you don’t have the answers for your potential federal client or auditor, you risk losing the contract or facing noncompliance.
Make sure you capture all necessary details, such as date, customer or vendor, amount spent or received, and account that reflect your business operations.
5. DO NOT operate without a budget.
A budget is a basic requirement to plan for the future of your business and keep those plans on track (or pivot to remain competitive). A budget matches revenue to expenses. This ensures that you know you have enough money to fund operations, expand your business, generate income, and contribute to your emergency fund.
Many firms review their budget annually, but if your market is volatile or you’re hit with an unexpected expense, you may need to adjust your budget more frequently. We also recommend having a “living” budget to compare to your annual plan. This is a forecast that includes actual results to date and your latest assumptions for the balance of the year.
6. DO track funding, burn rates, etc.
Burn rate is how quickly a company spends its cash reserves (including venture capital) before it generates positive cash flow. The term most often refers to the net burn rate or the amount a company loses in a month. For example, if your firm spends $100,000/month and earns $80,000/month, your net burn rate is $20,000. If your cash reserves total $120,000, you know you have six months before your burn rate exhausts reserves. You can plan whether to seek more funding and/or strategize on upping your revenue.
7. DO revisit your accounting system regularly.
Your accounting system generates the data you need to run your day-to-day business, pinpoint where improvements are needed and remain DCCA compliant. With continually evolving market conditions, technology, competition, and regulation, a checkup at least once a year is crucial.
Reach out to the govcon accounting experts at CAVU to help put in place a system that checks off the dos and don’ts for a competitive, compliant operation.