Top Three Accounting Challenges Paining Small Businesses
Time for some honest answers. How long could your business operate without receiving contract payments? What if you couldn’t generate an invoice because your timekeeping solution is non-government compliant? Could you make payroll if a payment suspension froze your line of credit?
These questions are an example of day-to-day worries faced by many small companies with government contracts. It’s no secret that software solutions purpose-built for the specialized needs of government contractors have long enabled them to enhance regulatory compliance and increase cash flow, but for many smaller firms, the cost and information technology (IT) resources necessary for these solutions can be prohibitive. As a result, smaller businesses frequently use low-cost, generic accounting solutions, spreadsheets or disparate project management systems to manage and report on project performance.
While these out-of-the-box solutions, like QuickBooks®, may hold small government contracting firms together initially, in the long run, vulnerabilities within these solutions can put government contractors at significant risk. Potential pitfalls include increased days sales outstanding (DSO), failed audits, suspended payments, and unnecessary personnel/consulting costs, to name a few. Even more cumbersome, adapting generic systems to specialized requirements can be a huge time vampire, which could negatively impact a company’s health and growth for months, possibly even years, to come.
Review the three top challenges experienced by government contracting accounting departments, and why these challenges make it necessary for small businesses to adopt specialized solutions to better manage projects, improve cash flow and comply with regulations.
Challenge #1: Compliance Regulations
One of the most important aspects of becoming a government contractor is complying with a host of federal rules and regulations. From Federal Acquisition Regulation (FAR) to the Generally Accepted Government Auditing Standards (GAGAS), contractors are expected to know, and comply with, all of them. A key aspect of compliance for contractors is building business systems that are compliant with the Defense Contract Audit Agency (DCAA), which primarily performs contract audits for the Department of Defense (DoD), as well as other agencies.
Cost accounting in government contracting is uniquely difficult. Because generic accounting solutions and spreadsheets are not designed to specifically meet government requirements, contractors run the risk of system disapproval, ineligibility for new awards, costly and time-consuming audits, or suspended payments until deficiencies are corrected.
Critical cost elements of contractor accounting include:
- Classifying costs as either direct or indirect
- Classifying costs as allowable or unallowable
- Accounting for costs by project AND at the lowest work breakdown structure (WBS) level
- Managing and pooling indirect costs
- Supporting government-mandated billing formats (e.g., DD250, 1034, 1035).
Challenge #2: Disparate Systems
Many small government contractors today use siloed costing and scheduling systems to manage their finances, projects and compliance – specialized needs that a disparate mix of products can’t solve. Products like QuickBooks require contractors to “bolt on” specialized features; these add-ons can create implementation delays and cost extra. Alternatively, you may face unpredictable costs for third-party supplemental services to achieve acceptable levels of compliance. With unaligned systems, contractors need to be able to devote internal time and resources to maintain, support, update or secure their financial and project information systems themselves, which prohibits them from focusing on what they do best.
Solving this challenge includes recognizing the long-term benefits of an all-in-one system:
- Comprehensive Accounting: Contractors can manage books and solve complex project accounting challenges, including indirect rates, cost pool management, automated contract billings and revenue recognition. With a deep work breakdown structure (WBS), it’s easier to “roll up” projects to a summary level or view detailed information by contract and task with key information pertaining to a project’s profitability.
- Advanced Timekeeping: You can more easily track labor, payroll and billing activities by project, department or other categories and fully integrate timekeeping with the general ledger.
- Complete Payroll: Manage your company’s payroll functions in-house or integrate with leading payroll providers.
Challenge #3: Project-Based Reporting
If projects are the core of your small business, a system built to handle them is absolutely essential. But, a challenge that is often overlooked in the quest for project success is proper reporting, which can include job costs (job summary, time/materials sales worksheets, cost/contract revenue, labor utilization) for a detailed summary view of every operational and project aspect. As you execute contracts, your cost data will be continually updated and will need to be accessible. A project-based solution that forces the collection of data in a project-centric way will go a long way in getting you the right data at the right time.
Generic solutions provide a solely two-dimensional view of a business: the general ledger accounts and organization. Project and manufacturing data are not integral to the system, but bolted on to the rest. In these systems, data is hard to collect and maintain, and accuracy cannot be guaranteed. The general ledger and project ledger do not tie together, so a business stays in a constant state of reconciliation. In contrast, project-based solutions, like Deltek Costpoint, tie inventory, material, travel, labor, and other direct costs (ODCs) comprehensively to each project. This capability allows you to see which organizations, product lines and portfolios are incurring expenses. You can see vital information not only for each project, but for programs and portfolios as well.
Relief from the Strain & Pain
With such unique demands on their time and resources, government contractors cannot be constantly fighting disparate systems. Getting by with generic solutions will only get a firm so far. Understanding that purpose-built enterprise resource planning (ERP) solutions like Costpoint not only exist, but exist solely for the management and advancement needs of government businesses can be the first step toward future success.
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