Navigating GASB 100: Accounting Changes and Error Corrections

HOST: MIKE SIPPLE: Welcome to Cherry Bekaert's Government Contractors Podcast, where we discuss current Government Contracting trends, compliance matters, and best practices to guide federal contractors forward.

HOST: MIKE SIPPLE: My name is Mike Sipple. I'm a Managing Director at Cherry Bekaert's Outsourced Accounting Advisory practice, and with me today is Irwin Kaplan, a Director in our Outsourced Accounting group.

HOST: MIKE SIPPLE: Today we are talking about year-end considerations for government contractors — planning for the next year.

HOST: MIKE SIPPLE: Around this time of year people start asking what they need to do to close out the year and what considerations they must address. Many start looking at their calendars around Thanksgiving, but if you're starting year-end planning around Thanksgiving, you're probably late.

HOST: MIKE SIPPLE: You should begin a bit earlier, as the third quarter winds down. That's when you normally look at year-end planning for final tax considerations, comparing actual rates versus provisional rates, and deciding what you can change.

HOST: MIKE SIPPLE: Many companies have audits that perform some work in the fourth quarter and resume in the first quarter. You should also look at balance sheet items to avoid carrying forward old data, which becomes harder to resolve as it ages.

HOST: MIKE SIPPLE: Prepare for close and tax items such as Form 1099. If you start year-end planning right after the third quarter, you'll avoid missing levers you could pull in the fourth quarter to help final taxes, net income, and getting the books in order for the new year.

IRWIN KAPLAN: That's exactly right. The considerations Mike mentioned should have been addressed in September or October. You should be talking to your tax accountant about tax goals.

IRWIN KAPLAN: If you're being audited, you're likely already in interim. In Government Contracting, with cost-type contracts or sensitivity to your indirect rate structure, you're past the point where you can make large impacts on your rates.

IRWIN KAPLAN: If rates are low, you might be able to add a year-end bonus, but many levers—such as staff reductions—are things you would have implemented earlier in the year.

IRWIN KAPLAN: Mike and I wanted to talk about next-year planning. We both spent time at larger and smaller companies, and one trend with smaller companies is skipping the budgeting process once operations are running. They focus on keeping the wheels on rather than doing a real year-end look at next year's budget.

IRWIN KAPLAN: I want to discuss approaches to budgeting and give some practical thoughts.

HOST: MIKE SIPPLE: Go ahead, Irwin. Share your thoughts on budgets.

IRWIN KAPLAN: With larger companies we often used a top-down budget, where we were given a goal or we reviewed active contracts to estimate revenue and profit for those contracts.

IRWIN KAPLAN: That approach shows what you already have in hand, which contracts have funding, which are in option years, and which are ending. It's also useful to anticipate costs for proposals if you're in a recompete.

IRWIN KAPLAN: On the back end I always performed a bottoms-up budget. That means scheduling all personnel — direct and indirect — based on expected work, identifying shortfalls in FTEs, and estimating how many people might be lost if work drops midyear.

IRWIN KAPLAN: The bottoms-up provides a reality check on the top-down, which can be optimistic. For example, a top-down might assume a T&M contract starting in February with an 8% profit, but bottoms-up reveals you need five new FTEs and may only be able to hire two in February and two in March.

IRWIN KAPLAN: Doing the bottoms-up helps you see how much more work is needed to hit that top-down goal. It also helps you build and project your indirect rates.

IRWIN KAPLAN: This is the time of year to solve for current-year indirect rates and to model what rates might look like for the next year given new work or work going away. You may aim to maintain current rates or reduce rates to be more competitive.

HOST: MIKE SIPPLE: The bottoms-up also helps determine what you can afford going into the next year and how that will impact profitability.

IRWIN KAPLAN: Exactly. The main driver should be what you can afford to maintain expected profitability. Budgeting indirect rates is useful, but plans rarely unfold exactly as expected.

IRWIN KAPLAN: There will always be margin pressure, issues with time-and-materials and fixed-price work, and the risk of depleting cost-plus funding if indirect rates vary from original bids.

IRWIN KAPLAN: Developing indirect rates quantifies what you can afford to add into your rates and what you assume you'll win. Wins tend to lower rates by adding base; adding G&A and overhead tends to raise rates, which creates pressure.

IRWIN KAPLAN: The top-down versus bottoms-up approach helps you have this discussion with management. But remember: cash is king.

HOST: MIKE SIPPLE: Revenue, gross margin, net income, and indirect rates matter, but cash is paramount.

IRWIN KAPLAN: In budgeting you'll identify high and low points, months that are not consistent month to month. New wins may require hiring and paying staff for months before you see revenue from the customer due to billing approval or process delays, especially with DoD customers.

IRWIN KAPLAN: You must plan for those stumbles. Conversely, when work falls off you might incur severance or try to retain people during protest periods. This is the time to forecast for those scenarios.

IRWIN KAPLAN: We recommend a rolling three-month forecast, reviewing accounts payable and accounts receivable each month. Look at prior-year highs and lows to identify cash pressure points, such as months when bills aren't getting approved or holidays that reduce billable time on T&M contracts.

IRWIN KAPLAN: That helps you plan for the ups and downs.

HOST: MIKE SIPPLE: If you're expecting changes in 2024 and planning for 2025, you might win a large contract requiring many people who get paid immediately while customer payment may lag 60 to 90 days. In that case, arranging a line of credit now is easier than waiting until the contract starts.

IRWIN KAPLAN: Banks typically want to lend when you don't need it. Establish banking relationships and lines of credit ahead of time so you don't scramble at the last minute. Lead times vary, and applying when you need it is often too late.

HOST: MIKE SIPPLE: When building the budget, it's important to consider your contract waterfall. Walk us through your thoughts on that.

IRWIN KAPLAN: Contract waterfall analysis is more common in larger businesses, but it's a good practice for companies of all sizes. It looks at revenue and cost under contract now, what is funded, where falloff may occur, and where new work is expected.

IRWIN KAPLAN: Smaller companies sometimes assume growth without planning. A waterfall shows what you have in hand and what you need based on proposals outstanding or anticipated in Q1, providing a measure of potential revenue for the year.

IRWIN KAPLAN: Companies often fail to plan for contract falloff when option years don't come through. At this time of year we also see continuing resolutions, where you might get the next option year but new rates are delayed.

IRWIN KAPLAN: Expect slippage. An expected award in February might be delayed to May or June due to protests or other delays. Factor in contingency months for slippage, and plan phased hiring rather than assuming full staffing on a target start date.

HOST: MIKE SIPPLE: This ties back to the budget: realistic timing for wins, revenue, and direct costs affects rates, pricing, and cash flow.

IRWIN KAPLAN: Correct. There's a difference between revenue and cash. The waterfall must account for when revenue is earned and when cash is collected.

HOST: MIKE SIPPLE: As part of the waterfall, companies should talk with clients about pipeline opportunities, potential new tasks, and expanding work on existing contracts.

IRWIN KAPLAN: Small businesses should not lose sight of what brought them their current work. It's often easier to retain and expand existing work than to win entirely new work. Reach out to clients to understand future opportunities.

IRWIN KAPLAN: With continuing resolutions, understand agency funding and potential budget cuts. We have seen agencies considering reductions that will impact contractors, and it's prudent to stay ahead of those developments.

HOST: MIKE SIPPLE: Program managers play a central role. Should their responsibilities be defined in this process?

IRWIN KAPLAN: Yes. Program managers must manage funding and people. They can most directly impact gross margin because gross margin is driven by direct costs. They may have limited control over fringe, overhead, and G&A, but they can influence direct labor efficiency.

IRWIN KAPLAN: Gross margin supports the rest of the company. Program managers should track funding, and if they don't know funding status, they should reach out to their accountant.

IRWIN KAPLAN: This is also a time to ensure project managers have tools to monitor profitability. Systems like Deltek Costpoint and Unanet have project dashboards, and many companies use Excel tracking for budgets.

IRWIN KAPLAN: Provide project managers with the ability to review profitability metrics so they can manage jobs efficiently, not just manage the customer and personnel.

HOST: MIKE SIPPLE: Key measurables include overall gross margin, revenue, net income, funding status, and cash. Forecasting is continuous and must be revisited when new work is added.

IRWIN KAPLAN: Forecasting is ongoing. New work, such as ODCs or value-added resale activities, or significant hires can materially change the budget, rates, and bottom-line metrics.

IRWIN KAPLAN: Continual forecasting helps you adjust rates and expectations based on wins and losses.

HOST: MIKE SIPPLE: This has been a useful discussion. Irwin and I have been friends for years and could talk about this all day. If listeners have questions, feel free to reach out to Irwin or myself.

HOST: MIKE SIPPLE: This is Mike Sipple. We want to thank everybody for tuning in. Please follow us and the rest of the Cherry Bekaert podcast, particularly episodes related to Government Contracting accounting.