Tuesday, February 23, 2010

What To Do When Your Finances Aren't Too Great

A couple of days ago, we discussed the Government's interest in assuring that its contractors (and potential contractors) have the financial resources necessary to see the contract through to fruition. Go here to read that post. The key here is to have plenty of cash on hand and/or a revenue stream from other work to finance the Government work. The amount of money needed will vary depending upon the size of the contract of course. The duration of the financing will depend on the type of contract. For the typical cost-reimbursable contract where contractors can bill monthly, three months of working capital is necessary. In the first month, contractors incurr the cost. After month end, its takes a week or two to post the accounting records and prepare billings. The Government takes up to 30 days to pay. Allowing time for requisite approvals by the auditor and contracting officer, a contractor is looking at about three months from contract start to when payments begin coming in. For fixed price contracts, the time will depend upon payment methods - cost, milestones, or deliveries. For fixed price, three months is also a minimum but it could be significantly more.

So how is a contractor with limited cash and backlog going to demonstrate financial capability to skeptical financial analysts from Defense Contract Management Agency or auditors from Defense Contract Audit Agency? Here are some ideas.

  • Go to your bank and secure a line of credit. Even if you do not use it, having one increase the analyst/auditor's confidence that you have sufficient financial resources to perform under the contract.
  • Secure personal loans or promises/commitments from Stockholders. The downside to this is that the Stockholder will need to be prepared to open his/her personal finances to the Government to prove the existence of those resources.
  • Secure equity financing. Usually a last resort.
  • Liquidate assests - especially those that are idle, underutilized or obsolete. 
  • Defer or reduce discretionary expenses.
  • Defer salaries to owner(s). Don't forget the payroll tax implications on deferred compensation.
  • Consider leasing over buying. This is sometimes more costly in the long-run but it does even out cash flow.
  • Restructure your debt to reduce debt service cost.  

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