Deltek GovCon Clarity Report: A Closer Look at Financial Management
For Government Contractors, maintaining efficient financial management year over year is vital to business success and profitability. We can think about this process like a game of cards – although skill and an understanding of the game are required, it all starts with the hand of cards you were dealt. Similarly, while it is largely in the hands of the firm to strategically plan their financial resources and spending, they are also dependent on the Federal Government’s annual budget and spending activities.
In this year’s Deltek GovCon Clarity Report, we took a closer look at the financial state of GovCons from 2014 to 2015. We surveyed 311 firms of all sizes on their performance metrics, challenges faced and business plans. While we observed positive trends away from “survivor mode” and instead towards future growth, there are still challenges in our industry.
Growth Rate and Net Profit
We asked firms to report on their net profit and growth rate metrics. Data showed that growth remained flat for the third year in a row, which can be partly linked to a low increase in federal budget of just 1%. Profit also dropped from 10% to 6%, making it the first time that profits have declined in four years. As companies make significant business investments for future growth, this creates a short term hit on profits.
Here are two ways we observed from survey respondents around how to increase growth and profits in the coming years.
- Diversification strategies – Firms are diversifying their revenue streams away from core markets and into commercial and international markets (either organically or through M&A activity). Although currently bringing profit numbers down, these diverse work avenues should help profit numbers to recover in the long-term.
- Invest for the future – Firms are making start-up investments, causing profits to plunge. But these significant investments are long term and allow for steady growth. Now is the best time to re-invest.
Monthly Invoice Cycle
In addition to declining profits, our survey results also showed that on average invoice cycles increased by 64% to 14.8 days (an increase of about 3-5 days), the highest point we’ve seen in five years.
One reason for this could be that both increased audit pressure and a rise in partnerships have caused the invoice process to be more complex and challenging. Firms are dedicating more time and resources to the invoice process to make sure it’s done correctly the first time. Given the increased complexity of the federal business environment, we advise GovCon firms to pay close attention to their internal processes as a way to trim to their invoice-to-cash cycle.
Composite Overhead Rate
On a positive note, survey results reveal that the overall composite overhead rate continued to climb, up to 40% from 27%. Firms are making a positive investment back into their people in order to retain employees and acquire new talent.
As we can see, overhead rates rose significantly, revealing an investment for growth.
What can you do to become more profitable?
Successful companies are proving that there are concrete ways to increase profits and get back on a path of growth.
- Gaining Project Visibility – Higher visibility leads to higher profits, so your primary focus should be on gaining increased visibility into your firm’s projects and related data.
- Through the use of analytics, you can drill down into different levels of your project life cycle to look for trends compared to specific performance metrics for easy monitoring of project health. With all the important information readily available, you can quickly identify problem areas, make better decisions and get underperforming projects back on track.
- The more profitable companies in the survey have begun to perform Schedule Risk Analysis (SRA) at all project phases. Most companies analyze schedules at the proposal stage, but the most profitable companies are extending that analysis though the entire project life cycle.
Purpose built: Deltek Kona
Homegrown: Custom, SharePoint
This is the first in a series of blog posts in which we will discuss different results from the Deltek Clarity Survey. Make sure to subscribe [via Email or RSS] to the Deltek Government to Business Essentials Blog for future alerts.
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