All businesses need to be able to identify and understand their ‘key performance indicators’ (KPIs). For an emerging government contractor, these can be a measure of your financial health, capabilities and growth potential.
Everyone knows that cash is essential, but it is not all you need to know. Keeping the flow steady and dependable allows you to pay your employees and vendors in a timely fashion. These basic financial measurements apply equally to all types of businesses and can factor into your ability to obtain external financing when you need it:
Days Sales Outstanding | How long it takes you to collect on average from your customers.
Current Ratio | The proportion of your current assets to current debts.
Net Working Capital | The difference between your current assets (cash and accounts receivables) and current liabilities (accounts payable and salaries payable).
For a government contractor, there are additional measurements that are equally important:
Labor Utilization | This is the simplest one to track. This is percentage of time you and your employees spend on direct (billable) work vs. indirect (non-billable) work. The smaller your company, the higher this number should be in order to cover necessary costs.
Backlog | These are the remaining funds left on each contract. If you exceed the limit on the contract and continue to perform without a formal increase, you are working at risk. There is no requirement to pay you beyond the stated ceiling. Additionally, many contracts require you to notify them when you reach 75% of the funded value.
Wrap Rate | This can be complicated, but it’s utterly critical to get it right. You need to properly segregate your direct vs. indirect costs, know the costs of labor (both present and potential), and understand the nature of your indirect rates (fringe/overhead/G&A). This multiple of a dollar enables you to see how much you should charge for an hour of labor to cover your costs and allow profit. For example, if your wrap rate is $1.85 and your employee makes $50 per hour, you need to charge $92.50 per hour for their services.
In this new era of Lowest Price Technically Acceptable (LPTA) contracting, you need to know this number exactly. You may elect to bid at a lower rate to gain entry to a particular company or agency, as long as you know that doing so erodes your profits and you might be committed to that rate for a long time. The other important reason to get this right is that you may be asked to submit your rate calculations to justify certain proposals. Demonstrating that you are knowledgeable may generate additional confidence in your company’s capabilities.
Pipeline | What is the potential for future sales? How many proposals are pending? How much is it costing you to prepare these proposals, in both time and expense vs. what you are winning? Are you spending enough time generating new business?
A properly configured accounting system and an automated time recording system can help you track all of these KPIs with greater reliability and clarity. Invest some of your time in understanding the drivers in your indirect business costs. Develop a budget – even a rudimentary one gives you something to measure against to see if you are meeting your goals. When you need it, get some professional advice and invest in compliant software tools that will start you on the right path.
About the Author: Barbara Morgan serves as a Director in the Outsourcing practice of Aronson’s Government Contract Services Group. She is responsible for implementing and integrating new software clients and managing the outsourcing staff. She has over 25 years of experience in both public and private accounting.