accounting for federal contractors · • financial planning & analysis • human capital and...
TRANSCRIPT
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Accounting for Federal
Contractors
Presented By: Marty Herbert
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With SCORE, You Are Not Alone on Your
JourneyFor over 50 years, SCORE has served
as America’s premier source of free
business mentoring and education.
As a resource partner of the U.S.
Small Business Administration (SBA),
SCORE has helped more than 11
million entrepreneurs through
mentoring, workshops and educational
resources since 1964.
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SCORE Can Help You Find the Way Ahead
• Free one-on-one business
counseling and mentoring
• Business advisory services
• Low cost local workshops
• Free templates and recorded
webinars
To meet with a mentor or learn more
about SCORE’s resources, visit
washingtondc.score.org
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• Introductions
• Costs
• Contract Types
• Firm Fixed Price
• Time & Materials
• Cost Plus
• Pricing Concepts
• DCAA Introduction
• Cash Management
Workshop Agenda
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Introductions
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NeoSystems Overview
• Leading Back Office Service Provider for:
• Government Contractors
• Nonprofit and Trade Associations
• Commercial and Federal Divisions (Enterprise)
• Alliance and Partner Network
• Leading Deltek Platinum Partner
• NetSuite BPO and Solution Provider
• Citrix and VMWare Certified Solution Provider
• Comprehensive Suite of Strategic Back Office Services
• Accounting
• Association and Member Management
• Financial Planning & Analysis
• Human Capital and Recruiting Management
• IT Infrastructure, Hosting and Security
• Consulting and Training
• Systems Integration and Implementation
• Governance and Compliance
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Marty Herbert
Director, Business Process Automation
18+ years of government contracting experience including 5 years with
DCAA on financial and technical/operations audit teams
Workshop Instructor
First Tip: In addition to the Information for Contractors guide, DCAA offers targeted
information to assist with audit issues that relate to small businesses.
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Intros
ACTIVITY #1
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Pre Award Post Award
Contracting office will conduct a
preaward survey to consider the
accounting system of the prospective
contractor
DFARS defines an acceptable accounting
system and subsystems that may be
involved
Design of the accounting system is part
of the PreAward Survey (SF1408)
FAR and DFARS require:
• Segregation of direct from indirect
costs
• Total costs = Direct + Indirect
• Allowability of costs
• Reasonableness
• Allocability
You should be prepared to demonstrate
how the accounting system satisfies the
criteria of the SF1408
Compliant Accounting System
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Costs
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• Cost
• The actual costs incurred or realized in the manufacture of a product of
the providing of a service. “Cost” is the actual amounts paid for the
necessary elements of providing a good or service, such as labor, factory
overheads, cost of materials, and other relevant support costs.
• Price
• Whatever a consumer of a Good or Service is willing to pay for that
Good or Service – or conversely - whatever a provider of a Good or
Service is able to charge a consumer for that Good or Service, dictated
by the market
Cost vs. Price
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• Falsifying, concealing, or covering up via:
• Statements or representation of costs incurred
• Making or using any false writing or documentation
• Penalties
• Fines
• Imprisonment
• Ability to contract with the government
Misrepresenting Costs
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• Reimbursable Costs:
• Allowable
• Reasonable
• Allocable
• Total Costs:
• Direct Costs
• Indirect Costs
Cost and Pricing Principles
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• A cost is allowable only when it complies with the following:
• Reasonableness
• Allocability
• Terms of the Contract
• Applicable Cost Accounting Standards
• FAR 31.205
Allowability (FAR 31.201-2)
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• A cost is reasonable if:
• In its nature and amount, it does not exceed that which would be
incurred by a prudent person in the conduct of competitive
business
• It is your responsibility to establish that a cost is reasonable.
Reasonableness (FAR 31.201-3)
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• A cost is allocable to a government contract if it:
• Is incurred specifically for the contract,
• Benefits both the contract and other work, and can be
distributed to them in reasonable proportion to the benefit
received, OR
• Is necessary to the overall operation of the business, although a
direct relationship to any particular cost objective cannot be
shown.
Allocable (FAR 31.201-4)
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• Any cost which is identified specifically with a particular cost
objective on a contract
• Charge directly to the contract
• Cannot have been included in any indirect cost pool
Direct Costs
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• Examples
• Direct labor
• Direct travel
• Consultants
• Subcontractors
• Materials
• Exceptions
• Some administrative duties if large workload
• Lowers G&A/Increases direct costs
Direct Costs (continued)
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• Found in FAR 31.203
• Any cost not directly identified with a single, final cost objective,
but identified with two or more final cost objectives
• After direct costs have been determined and charged directly to
the contract or other work, indirect costs are those remaining
to be allocated to the several cost objectives
Indirect Costs
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Fruits and Veggies
ACTIVITY #2
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• Fringe Benefits
• Overhead costs
• General & Administrative (G&A) costs
Rate Calculation
Indirect Cost Pool = Indirect Rate
Indirect Cost Base
Indirect Costs and Rate Calculation
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• Any employer paid payroll tax
• Employer provided insurance
• Paid Time Off (PTO)
• Other employee benefits
Fringe Benefit Costs
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• Employer portion of FICA (Social Security & Medicare)
• Federal & State Unemployment Insurance
• Worker’s Compensation Insurance
• Health and life insurance
• PTO, sick leave, & comp time
• Holidays
• 401K Match
• Bonus payouts*
Fringe Benefits Cost Pool
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• Total Productive Labor
• All wages excluding PTO, sick leave, holidays, etc.
• Includes:
• Direct, Overhead, and G&A labor
• Business Development/Bid & Proposal labor
• Material Handling labor
Fringe Benefits Cost Base
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• All costs not charged directly to a contract
• These costs are typically:
• Incurred for more than one contract
• In support of contracts
Overhead Costs
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• Indirect labor and supervision (not charged direct)
• Employee related expenses
• Training Costs
• Indirect travel
• Indirect materials
• Office supplies
• Postage and shipping
Overhead Cost Pool
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• Fixed charges
• Depreciation
• Rent
• Utilities
• Internet
• Electricity
Overhead Cost Pool (continued)
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• Direct Labor dollars PLUS Fringe Benefits
• Unless manufacturing business
• Complex
• Additional variables used as base cost
Typical Overhead Cost Base
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• Any general management, financial, administrative labor, or other
expense
• Incurred for the benefit of the Corporation as a whole
General & Administrative Costs
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• Administrative & executive expenses
• Legal, accounting, public relations, & financial services
• Business insurance
• Other taxes, e.g. BPOL
• Independent research & development*
• Bid & proposal**
• Other miscellaneous
G&A Cost Pool
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• Total Cost Input (TCI)
• Total cost excluding G&A expenses
• Examples
• All direct costs
• Total fringe and overhead costs combined
Typical G&A Cost Base
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Salary 100,000.00
• Raw Labor $48.08
• Fringe 32%= $15.39
• Overhead 24%= $15.23
• G&A 8%= $6.29
• TOTAL COST= $84.99
• Fee 10% = 8.49
• TOTAL BILL RATE = $93.48
WRAP RATE = 1.944
Rate Build Up
x Fee Percentage
(DL + FB + O/H + G&A) x Fee % = Amount
x General and Administrative (G&A) Rate
(DL + FB + O/H) x G&A = Amount
x Overhead (O/H) Rate
(DL + FB) x O/H = Amount
Direct Labor (DL) x Fringe Benefits (FB) Rate
DL x FB = Amount
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• Supporting schedules?
• Spreadsheets?
• Reports?
• Written Descriptions?
• Have a detailed explanation of:
• How costs are classified and accounted for
• How indirect rates are calculated
What is Your Basis for Support?
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• Get everything in writing
• Brief your contracts
• Exclude unallowable costs from submissions
• Provide support for all costs
• Notify CO/DCAA of policy changes
• Report any updated info prior to final negotiation
• Consistency
• Maintain files on activity after award
• Use FAR as guide
• Adequate accounting system
Keys to Cover Yourself
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Contract Types and Pricing
Concepts
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• Firm Fixed Price (FFP)
• Cost-Plus Award/Fixed Fee (CPAF/CPFF)
• Time & Materials (T&M)
Contract Types
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Government Contract Spending
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Small Business Spending
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Contract Type Risks – Govt Perspective
Fixed-Price T&M Cost-Reimbursements
FFP FPI CPAF CPFF
Seller’s(Contractor) Risk(High) (Low)
(Types of Contracts)
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• When definite performance specifications are available
• Set price for work to be done
• Found in FAR 16.202-2
Firm Fixed Price (FFP) Contracts
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• Maximum profit potential
• Incentive to
• Control costs
• Improve profits
• Deliver on-time
• Pricing is typically less complex
FFP Contract Benefits
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• Contractor assumes full cost responsibility
• Both labor and materials
• Lowest price, technically acceptable
• High performance and schedule risk
FFP Contract Risks
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• In bidding process, know the impacts of ALL contract requirements
and specifications
• Be EXACTLY sure work can be completed for proposed hours/costs
• Prevent any subcontractor overrun
FFP Contract Best Practices
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• Suitable for use when Seller cannot accurately estimate the:
• Extent of work
• Duration of work
• Or anticipate costs with any reasonable degree of confidence
• Found in FAR 16.601
Time & Materials (T&M) Contracts
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• Wide Salary variations within labor grades, salary may not cover
costs (provisional Rates)
• Internal rate changes can increase labor costs, reduce profit over
time
• Can be difficult to staff projects and quickly respond to customer
requirements
T&M Contract Risks
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• Propose higher than normal rates if highly skilled/paid talent (esp. key
personnel) is required for the task
• Ensure forward pricing rates cover average of future costs including
reasonable profit
• If hours are limited in contract, limit total hours, and not by labor
category
T&M Contracts – Neo Tips
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• Used only when uncertainties involved in contract performance do
not permit costs to be estimated with sufficient accuracy to use in
FFP type (FAR 16.301-2)
• Allowable profit limited to 2-8%
Cost-plus Fixed Fee (CPFF) Contracts
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• Recoup all allowable direct and indirect costs associated with
contract
• Some flexibility when estimating costs
CPFF Contract Benefits
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• Government not obligated to reimburse contractor for costs in
excess of estimates
• Must notify CO if cost estimates change
• Subject to:
• DCAA audits (System and financials)
• Incurred Cost Submissions
• Must ensure costs/billings are in-line with estimates
CPFF Contract Risks
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• Watch contract costs and funding VERY closely!
• Notify CO of needed funding so that there is no need for risk
funding
• Monitor contract for scope creep
• Work off of provisional rates and adjust each year
• Notify CO and DCAA of changes to indirect rate structures or
policies and procedures
• No “Fee on top of Fee”
CPFF Best Practices
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• Suitable where mission feasibility is established, but measurement of
performance/achievement is usually subjective (FAR 16.405-2)
• Allowable profit limited to 2-8%
Cost-plus Award Fee (CPAF) Contracts
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• Award Fee may be earned in whole or in part during contract
performance (FAR 16.405-2(a))
• Recoup all allowable direct and indirect costs associated with
contract
• Some flexibility when estimating costs
CPAF Contract Benefits
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• If performance is unsatisfactory or marginal, no award fee
• Award fee determination and amount are unilateral decisions made
solely at the discretion of the customer
• Not subject to appeal
• Subject to:
• DCAA audits
• Incurred Cost Submissions
CPAF Contract Risks
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• Maintain satisfactory performance throughout contract
• Could result in early award fee
• Watch contract costs and funding closely!
• Notify CO of needed funding so that there is no need for risk
funding
• Work off of provisional rates and adjust each year
• Notify CO and DCAA of changes to indirect rate structures or
policies and procedures
CPAF Contract Best Practices
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Contract Scenario Illustration
ACTIVITY #3
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The U.S. Army wishes to procure a WIDGET from ECDC, Inc. on a Firm Fixed Price Basis ECDC charges
$103,500 (Price) and the Army agrees to pay $103,500
Comparative Illustration
Total Cost
Profit
Price
Profit as % of Cost =
Profit as % of Price =
Army Pays
ECDC Makes (Looses)
85,000
18,500
$ 103,500
21.7%
17.87%
$ 103,500
$ 18,500
$ 98,000
5,500
$ 103,500
5.6%
5.3%
$ 103,500
$ 5,500
$ 118,000
(14,500)
$ 103,500
(-12.2%)
(-14.0%)
$ 103,500
($14,500)
$ 90,000
13,500
$ 103,500
15%
13.1%
$ 103,500
$ 13,500
ECDC Estimate
@ ProposalScenario 1
Actual Performance
Scenario 2 Scenario 3
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Estimated Cost
FCCM
Fixed Fee
Total CPFF (Price)
Profit as % of Cost =
Profit as % of Price =
Army Pays
ECDC Makes (Looses)
85,000
900
9,000
$ 94,900
10.59%
9.53%
$ 94,900
$ 9,000
$ 98,000
1,100
9,000
$ 108,100
9.1%
8.32%
$ 108,100
$ 9,000
$ 118,000
1,300
9,000
$ 128,300
7.6%
7.0%
$ 128,300
$9,000
$ 90,000
1,000
9,000
$ 100,000
10%
9%
$ 100,000
$ 9,000
ECDC Estimate
@ ProposalScenario 1 Actual Performance
Scenario 2Scenario 3
Although the Cost of Performance (Price) Increases, Fee Remains the same
(Fixed), as Cost of Performance Increases, Fee as Margin Decreases
The U.S. Army wishes to procure a WIDGET from ECDC, Inc. on a Cost Reimbursable Basis ECDC has an estimated Cost Plus Fixed Fee of $100,000
Comparative Illustration
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GOALS• Cash Flow
• Profits
• Growth
• Past Performance
• Market Share
Pricing Principles – Why We Price
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• Clear identification of task(s)
• Broad participation in pricing preparation
• Availability of valid data
• Standardized structure for estimating
• Recognition of inflation
• Recognition of excluded costs/burdens
• Revision of pricing estimates for significant program changes
Credible Characteristics of Pricing
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Pricing Sources
ACTIVITY #4
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Basic Primary and Secondary Data Sources
DATA Primary SecondaryAccounting Records XCost Reports XHistorical Databases X XLabor Distribution Reports X XIndirect Cost Reports X XContract Briefs X XContract Backlog X XSubject Matter Experts X XRecruiting X XTechnical Databases X XContract Estimates XCost Proposals XFocus Groups XResearch Papers XCompetitor Intel XSurveys X
Sources for Pricing
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Uncertainty and risk in contract pricing arise from the following
sources:
• Lack of buyer understanding in RFP requirements
• Different interpretation of language
• Haste
• Deception
• Poor cost estimating and pricing practices
Major Risks in Contract Pricing
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Salary 100,000.00
• Raw Labor $48.08
• Fringe 32%= $15.39
• Overhead 24%= $15.23
• G&A 8%= $6.29
• TOTAL COST= $84.99
• Fee 10% = 8.49
• TOTAL BILL RATE = $93.48
WRAP RATE = 1.767
Rate Build Up
x Fee Percentage
(DL + FB + O/H + G&A) x Fee % = Amount
x General and Administrative (G&A) Rate
(DL + FB + O/H) x G&A = Amount
x Overhead (O/H) Rate
(DL + FB) x O/H = Amount
Direct Labor (DL) x Fringe Benefits (FB) Rate
DL x FB = Amount
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Pricing Build Up MatrixEscalation: 3.5%
Labor Cost Build-up Matrix
Company – Labor Categories Salary Hourly Rate Fringe @35.39% OH @ 10.32% G&A @ 16.80% Fee @ 6% Fully Loaded
Project Manager $150,000 $72.12 $25.52 $10.08 $18.10 $7.55 $133.36
Senior Application Architect $155,000 $74.52 $26.37 $10.41 $18.70 $7.80 $137.80
Senior Sharepoint Developer $145,000 $69.71 $24.67 $9.74 $17.49 $7.30 $128.91
Intermediate Application Developer $120,000 $57.69 $20.42 $8.06 $14.48 $6.04 $106.69
Senior Application Developer $145,000 $69.71 $24.67 $9.74 $17.49 $7.30 $128.91
Infopath Developer $115,000 $55.29 $19.57 $7.73 $13.87 $5.79 $102.24
Web Developer $100,000 $48.08 $17.01 $6.72 $12.06 $5.03 $88.91
Business Analyst $100,000 $48.08 $17.01 $6.72 $12.06 $5.03 $88.91
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Pricing Matrix - Burdened
Company – Labor Categories Company Base PeriodOption
YR1Option
YR2Option
YR3Option
Y4
Project Manager ABC COMPANY $133.36 $138.03 $142.86 $147.86 $153.03
Senior Application Architect ABC COMPANY $137.80 $142.63 $147.62 $152.78 $158.13
Senior Sharepoint Developer ABC COMPANY $128.91 $133.42 $138.09 $142.93 $147.93
Intermediate Application Developer ABC COMPANY $106.69 $110.42 $114.28 $118.28 $122.42
Senior Application Developer ABC COMPANY $128.91 $133.42 $138.09 $142.93 $147.93
Infopath Developer ABC COMPANY $102.24 $105.82 $109.52 $113.36 $117.32
Web Developer ABC COMPANY $88.91 $92.02 $95.24 $98.57 $ 102.02
Business Analyst ABC COMPANY $88.91 $92.02 $95.24 $98.57 $102.02
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• Utilized for both pricing and billing
• Must be reconciled to actual rates at contract closeout for Cost-plus contracts
• Audited by DCAA
• Baseline frame of reference for auditors reviewing proposals and billings
• Used for billing existing contracts and for pricing new work
• Any change must be supported by data regarding actual running rate experience
• May start a series of questions by DCAA
Provisional Rate Pricing
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Actuals:
SALARY = $100,000
Hourly Rate= $48.07
Fringe Rate 30%= $14.42
OH Rate 25%= $15.62
G&A Rate 9%= $7.03
Fully Burdened Rate= $85.14
Wrap rate of 1.77
Provisional Rate Pricing (continued)
Provisional Rate:
SALARY = $100,000
Hourly Rate= $48.07
Fringe Rate 28%= $13.46
OH Rate 15%= $9.23
G&A Rate 8%= $5.66
Fully Burdened Rate= $76.42
Wrap rate of 1.59
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• More competitive pricing
• Advanced capabilities in estimating and forecasting
• Being able to compare Actuals vs. Target rates
• Ability to monitor and control costs
• DCAA interaction
Advantages
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• Follow directions!
• Follow directions!
• Follow directions!
Best Practices – Cost Volume
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Audit Types and Tips on Staying Ahead
DCAA Introduction
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• All activities related to proposed or incurred costs
• Indirect Rate Structures
• Contract and Invoicing Files
• Provisional Rate Submittals
• Financial Policies, Procedures, and Internal Controls
• Opportunities to reduce or avoid costs
General Areas of Interest for DCAA Audits
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• Request a list of items to prepare
• Request an estimated time frame/length
• Know your basis of support
• Document audit log
• Contract terms & Conditions
• Ability to provide supporting schedules and other documentation in
detail
• Request a copy of audit report
Tips on Staying Ahead
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Cash Management, Cash
Forecasting
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Cash in (Inflow)
• Cash from credit card sales
• Receivables
• Interest Income
• Rebates/Refunds
• Line of Credit
• Other Financing
What is Cash Flow?
Cash out (Outflow)
• Payroll
• Benefits
• SUBKs/Consultants
• Rent
• Utilities
• Office Expenses
• Asset Purchases
• Debt Payments including
interest
Common Question:
Why is my cash balance
negative when my income
statement shows profit?
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Benefits
• Short and long-term visibility to demands
• Forecast alerts you when you will potentially have a cash shortfall
• Ability to manage your business more effectively
Best Practices
• Living document - maintain and update regularly short term & long term
forecasts
• Weekly, semi-monthly, monthly, and annually
• Daily monitoring
Cash Flow Forecast Benefits and Best Practices
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Projecting revenue and expenses
• Use historical trends
• Take a conservative approach when projecting cash inflow
• Utilize your AR to determine how often receivables are
paid(e.g., 65% paid within 30 days, 30% paid within 60 days, 5%
paid 75+ days)
Cash Flow Forecast Methods
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• Take less conservative approach for projecting cash outflows
• Review Check Register
• Review Budgets and cost proposals
• Review Payroll and Taxes
• Capitalized purchases require a cash outlay
• LOC repayment (plus interest payments)
Cash Flow Forecast Methods (continued)
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Sample Cash Forecast
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Cutting Expenses is a tough thing to do!
• When/What to cut expenses
- Cash outflow is consistently higher than cash inflow
- Loss of Revenue/Sales
- Discretionary spending
Cost Cutting
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• “Am I next” concerns
• Employee Recruiting/Retention
• Less generous benefits package
• Same work level - less hands
• Company morale issues
• Business runs more efficiently
• Company can survive
Impacts of Cost Cutting
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• Know your Key metrics/data
• Proactive collection process
• Don’t wait until day 31.
• Control spending
• Accounts Payable terms (net 30)
• Utilize your banking relationships
• Know Tax Payment deadlines (i.e. BPOL, Payroll, Other)
• Avoid penalties & fines – nothing but a drain on your cash.
Managing Your Cash
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• Accounts Receivables
• Invoicing top priority at end of month
• Understand definition of a “proper Invoice”
• Monitor AR - paid within 30 days, 60 days, 70+ days, etc.
• Review receivables for issues on a regular basis
• Accounts Payable
• Use vendor discounts to your financial advantage
• Develop purchasing policies within the company
• Utilize company credit cards when practical
• AVOID OVERLEVERAGING!!!
Cash Flow Tips
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• Still applies to this day and age
• Trusted financial advisors can provide valuable:
• Insight to business owners
• Creative financing options
• Minimize financial obstacles and road blocks
• Basis for your solid financial decisions process
• Solid business systems & internal controls provided a great basis cash
management
Cash is KING!
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• Business Growth
• Investments in resources(employees, infrastructure, technology,
etc… )
• Invest in new business markets (verticals)
• Improved employee morale
• Stronger vendor relations
• Less Financial Stress
Successful Cash Flow Management
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Important Business Metrics
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Important Business Metrics - DSO
Acme Corp – Monthly DSO
DSO (Day Sales Outstanding) gives insight into the timing of cash collection
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Important Business Metrics - Utilization
Higher utilization → higher receivables
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Important Business Metrics - Revenue
Revenue trends are valuable because revenue leads to receivables.
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Important Business Metrics – Indirect Rates
Monitor Indirect Rates
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• SBA – www.sba.gov
• DCAA – www.dcaa.mil
• FAR – www.acquisition.gov/far
• FBO – www.fedbizopps.gov
• Gov Store – http://bookstore.gpo.gov
Resources
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• Deltek Costpoint Training Courses
• NeoSystems Blog center
Resources (continued)
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Q&A
Marty HerbertManager of Business Process Automation
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