Government contractors spend a hefty amount of time on administrative tasks—including bookkeeping—that detract from doing the work that matters most.
Making matters worse, they may not be keeping accurate or compliant financials and may be subject to audits or loss of contracts.
General bookkeeping is NOT adequate for government contracts.
Monitoring financial data, doing system checks, and reviewing contract requirements on a monthly basis can help keep things on the right path. Key Performance Indicators (KPIs) should be compared to benchmarks and analyzed consistently to spot any issues before they turn into bookkeeping nightmares.
Monthly KPIs present a clear picture of accounting done right—or wrong
There are many financial, system, and contract KPIs that can be monitored on a monthly basis to stay on track. We’ll go over a few that every GovCon should review once a month.
Gross margin indicates the direct cost as a percent of revenue. This should be consistent month over month. Fluctuations may indicate missed cost.
Current ratio takes current assets over current liabilities and shows how quickly liabilities can be paid off. For example, if the ratio is 2.0, you can cover current liabilities two times over—a healthy ratio.
Actuals to budget show how close the project is coming along to what was initially planned. If it is off, it’s time to investigate why. It may indicate a need to reforecast the rest of the year.
Reconciliation of the general ledger to the project ledger is critical to ensure all costs are being captured and allocated properly. If these reconcile, the system is working. If not, it’s time to investigate why the two ledgers are out of sync.
Profit reviews compare the current period profit to the year-to-date profit for a contract. This should be the same month over month—a swing may indicate something is off such as missed revenue or subcontractor costs.
The difference between general accounting and GovCon accounting is significant
When it comes to accounting, math is math. But for GovCons, accounting is more about the rules that the math needs to follow.
For instance, bookkeeping would take $12 in cost and put it as one line item. For GovCons, that $12 may be split up according to federal rules into specific cost pools.
And if things aren’t reconciling, there could be major consequences.
Software helps keep monthly KPIs monitoring efficient, consistent, and compliant
The DCAA considers month-end closing of books a best practice and using KPIs to monitor compliance can be easier with specialized accounting software for GovCons.
Accounting software must meet the adequacy criteria of the Defense Federal Acquisition Regulation Supplement (DFARS) Business Systems Rules to pass a DCAA audit. There are 18 criteria for a system to be deemed adequate – which can be broken down into five major capabilities:
1. Internal control over approval, structure, access, monitoring, and policies
2. Segregation of direct and indirect costs on a monthly basis for allocation to projects
3. Reporting costs under general ledger control, subsidiary cost ledger, and transactional details
4. Timekeeping and labor distribution of direct and indirect labor costs
5. Compliance with contract terms, conditions, regulations, and other laws
How much time are you spending on accounting?
According to the National Small Business Association’s 2017 Small Business Taxation Survey, entrepreneurs spend 40 percent of their time on accounting each year.
Have you ever added up the number of hours you spend on keeping the books? The reality can be harsh. By monitoring KPIs and investing in software, you can ease the burden of time and cost. And by working with a partner like WJ Technologies, you can have peace of mind knowing your accounting is compliant and in good hands—leaving you to get back to doing what matters most.
Contact us to see how we can solve your GovCon accounting problems.