Navigating the SBA 8(a) Business Development Program - Accounting Best Practices

BRYNN MCNEIL: Welcome to Cherry Bekaert Government Contracting Podcast. My name is Brynn McNeil and I'm an audit partner with a focus on serving government contractors within our professional services industry group.

BRYNN MCNEIL: Along with me today, I have Craig Hunter, who is also an audit partner in our GovCon Professional Services Industry Group. Today we'll focus on accounting best practices for 8(a) companies as part of Cherry Bekaert's SBA 8(a) Business Development Program Series that we've been doing recently. By the end of this podcast, we hope you'll have some practical tips to take away. Craig, do you mind kicking us off by talking about what an accounting system should look like and how to set one up for companies?

CRAIG HUNTER: Absolutely. Thank you, Brynn. Good day, everyone. When you're looking at the accounting system, start with the chart of accounts and use a simple convention that groups like items together. For example, use the 1000 series for assets, 2000 for liabilities, and continue with equity, revenue, and costs.

CRAIG HUNTER: The key is to group accounts so internal financial statements—balance sheet and income statement—can be extracted with minimal manipulation, since you'll pull these regularly. When designing the chart of accounts, be mindful of indirect rates, which include fringe, overhead, and general and administrative (G&A) rates.

CRAIG HUNTER: Even if you don't need to submit indirect rate information to the DCAA or the cognizant agency, set up the chart of accounts so expense types are grouped into fringe, overhead, and G&A pools to allow calculation of indirect rates. This is important for pricing contracts across contract types—time-and-materials, cost-reimbursable, and fixed price—because you need to know your underlying cost.

CRAIG HUNTER: The concept of a wrap rate is the factor by which you multiply a dollar of direct labor or direct expense to arrive at the fully burdened cost as the provider. Set up the system to segregate direct and indirect costs, accumulate costs by contract, and allow distribution of labor between direct and indirect cost objectives. Lastly, ensure you can identify and segregate unallowable costs as defined.

BRYNN MCNEIL: Great. In general, there are some accounting software platforms we typically see clients using. We tend to be agnostic about recommending one over another, but three systems we frequently encounter are Deltek Costpoint, Unanet, and QuickBooks Online. Regardless of the system, it must generate key reports critical for audits, reviews, and strong financial hygiene.

BRYNN MCNEIL: A report that shows direct costs and indirect costs by contract—often called a contract revenue summary or job cost report—is critical. It enables project managers to track contract performance and verify profit-and-loss against expectations.

BRYNN MCNEIL: It's also important to maintain monthly bank reconciliations and balance sheet account reconciliations, including accounts receivable (AR) aging and accounts payable (AP) aging. Ensure the balance sheet reconciles to the respective summaries and reports.

BRYNN MCNEIL: A GovCon-specific item is tracking and monitoring unbilled receivables, now often called contract assets or liabilities. Unbilled balances can arise from timing differences such as milestone billings on fixed-price contracts or indirect rate adjustments on cost-type work. Maintain a true reconciliation by job of unbilled amounts.

CRAIG HUNTER: That's exactly right. One additional point when selecting an accounting system is to think beyond current needs and consider future requirements. You might need inventory tracking or other modules as the company grows. Choose a system that can scale as you progress through the 8(a) program and beyond.

CRAIG HUNTER: Accounting system conversions are large endeavors, so minimize the number of times you change systems.

BRYNN MCNEIL: Sometimes a system is fine when you're starting out, but looking ahead is important. I mentioned unbilled receivables and the terminology contract asset or liability, which is newer in recent years. Craig, can you highlight some accounting pronouncements that have impacted the industry related to revenue and leases?

CRAIG HUNTER: Absolutely. Two major pronouncements have been impactful. The first is ASC 606, Revenue from Contracts with Customers, which requires companies to apply a five-step process to determine when revenue is appropriately recognized.

CRAIG HUNTER: A common error we see among newer companies is recording revenue equal to billings. That may be correct in some cases but not in others, especially with cost-reimbursable work or fixed-price work that is not level-of-effort. ASC 606 requires identifying the contract, identifying performance obligations, determining the transaction price, allocating the price to performance obligations, and recognizing revenue when performance obligations are satisfied, either at a point in time or over time.

CRAIG HUNTER: The second pronouncement is ASC 842, Leases, which became effective for most companies for fiscal years beginning in 2022. ASC 842 requires companies to bring leases onto the balance sheet by recognizing a right-of-use (ROU) asset and a corresponding lease liability for operating leases that were previously expensed as incurred. The liability is reduced and the ROU asset is amortized over the lease term, with the primary impact on the balance sheet.

CRAIG HUNTER: There is substantial guidance and resources available; Cherry Bekaert has podcasts and webinars on ASC 606 and ASC 842 that may be helpful.

BRYNN MCNEIL: There is useful lease-adoption software available to assist with ASC 842 adoption. Hopefully many companies have implemented both pronouncements and reflected them properly in their financials. Craig, can you cover some general housekeeping best practices for the accounting department?

CRAIG HUNTER: Yes. First, for companies in the 8(a) program, be mindful of reporting requirements because deadlines can sneak up. If the company has less than $2 million in gross annual receipts, the requirement is to submit an internal statement to the SBA.

CRAIG HUNTER: If annual receipts are between $2 million and $10 million, a review is required. Over $10 million, an audit is required. These reporting requirements have specific deadlines; for example, reviews are due 90 days after year-end, and other reporting deadlines can be up to 120 days after year-end depending on the filing.

CRAIG HUNTER: Companies without a commercial line of credit should consider establishing one and building a relationship with a bank. Large, regional, and community banks operate in this market, and sharing internal statements helps bankers become comfortable with your financials.

CRAIG HUNTER: Remember that the cash cycle for a new contract often ranges from 90 to 120 days, sometimes longer. The cycle includes hiring employees, performing work, accumulating costs, billing for the work, and collecting cash.

CRAIG HUNTER: Implement controls and processes that reflect financial discipline. Perform reconciliations, hold people accountable, and maintain consistent processes to support future growth.

CRAIG HUNTER: Maintain a backlog report—both funded and unfunded—which provides visibility into future revenue and supports planning. Map out contracts with funded and unfunded amounts to enable better contract management.

BRYNN MCNEIL: Those are all great points. It is important to think ahead because companies will at some point graduate from the program and compete in the full and open market. Many of these controls can seem robust and overwhelming, and outsourcing accounting functions is a common approach.

BRYNN MCNEIL: There are firms, including Cherry Bekaert, that can assist with outsourced accounting, maintaining records, preparing balance sheet reconciliations, managing the monthly close, and producing internal financials. That can be the right fit early on, with the option to bring accounting in-house as the company grows.

BRYNN MCNEIL: In addition to accounting outsourcing, HR functions are commonly outsourced as well.

BRYNN MCNEIL: Craig, thanks again for joining me today. As I mentioned, Cherry Bekaert will be producing additional podcasts related to the SBA 8(a) Business Development Program. These are posted on cbh.com.

BRYNN MCNEIL: If you've missed a podcast or want to hear something again, they are available on the website. If you have any questions or needs, please reach out to either myself or Craig.

CRAIG HUNTER: We're available to assist. Thanks again for joining.