While many of us shake the last bit of sand from our beach blankets, your GovCon firm is preparing to greet the new year.
The end of the year brings more unique challenges for GovCons than for most other business sectors. You should be continuously balancing indirect rates, taxable income (for cash-basis taxpayers), cash flow, and profit margins. Move too far in any direction, and you risk disrupting the balance that keeps your firm in the black and growing.
Whether you are on the fiscal year-end or the calendar year-end schedule, make sure you’ve checked these boxes before passing go and advancing to the next year. After you assess where you stand at the year’s end, you’ll then be able to paint a picture of how to maintain your business balance into 2021:
✓ Carefully track indirect rates.
This is especially important if you have Cost Plus Fixed Fee (CPFF) work. If you have a significant overrun or underrun on indirect rates, you need time for course correction. If you don’t have enough time, you can at least uncover the root cause(s) of over- or underruns and work to prevent them moving forward.
A few tips for tracking include:
- Run budget scenarios when setting indirect rates. This will help you understand risks, vulnerabilities, and your ability to pivot if your predictions are off or conditions change.
- Put into place systems that produce accurate, real-time cost management and control data so you can course-correct for over- and underruns before they become significant—plan mitigating actions if your rates head toward over- or underrun.
- Take into account economic shifts, especially if you have long-term contracts. Assess the effects as soon as possible—particularly when they are sudden and unexpected (the coronavirus pandemic)—and begin brainstorming your response.
- Know the dollar value of the rate over- or underrun anticipated at year-end. If you are not tracking this key metric, start now.
✓ Cash basis taxpayers– sync up your accounting team and your tax team.
Bringing together these financial strategists will help ensure you coordinate handling taxable income and tax strategy heading toward the year’s end. For example, if you have cash on hand, will you gain the best business and tax advantages from equipment purchases, prepayments to vendors, or some other type of investment? Consult your accounting and tax advisors now to avoid unwelcome surprises during tax season.
✓ Ensure your tax strategy and year-end spend plans do not unintentionally impact cash flow.
As mentioned above, tax planning and indirect rate management have inevitable impacts on cash flow. Forecasting how you expect these effects to play out can ensure you start the new year with the cash flow to continue business as usual.
Additionally, if you have a credit line with a financial institution, contact your banker and know your credit availability as you head into year’s end. A healthy line of credit can supply quick funding for short-term needs and allow you to seize opportunities or cover unexpected expenses.
✓ Keep banking partners in the loop about your performance and expectations for the year’s end.
Your end-of-year strategies—especially spend plans—are bound to impact your bottom line. Most reputable banking institutions that work with GovCons understand this reality. Bankers can advise you about year-end line-of-credit use and help ensure that potential losses do not violate the covenants in your line-of-credit agreements. In many cases, you can request a waiver for such circumstances or better, request a temporary line increase.
✓ Get a jump start now on launching a strong calendar year 2021.
Make the upcoming holiday season a little less hectic by starting your calendar year-end planning right now. See our year-end guide for more details and do not neglect these critical elements:
- Prepare to submit provisional rate packages to the Defense Contract Audit Agency (DCAA). DCAA and your Contracting Officer(s) must review and approve your new year rates before January billing.
- Start your budget process now. Reference our budget forecasting series for a detailed how-to description. Your budget is the foundation for determining key factors that will affect your profitability in 2021 (see our budget building philosophy here), including indirect rates. Setting these rates ASAP is especially critical if you evaluate staff for wage increases in January. A change in indirect rates can affect what you can offer during salary negotiations.
With organized strategies in place to greet the fiscal and calendar new year, your firm can toast to 2021 with greater confidence and a realistic plan for profitability. Whether you need help getting started or need a set of experienced eyes to check over the details, feel free to contact the government accounting and financial experts at CAVU. Plan to greet 2021 with a marketplace advantage.