Although government contracting work is often considered low risk, this industry is not without risk as many contractors experienced at the beginning of this year. December 22, 2018 marked the first of 35 days in the partial government shutdown, by far the longest government shutdown in recorded history. Nearly 800,000 federal workers and countless government contracting businesses felt the impact as payroll halted and foreclosures and evictions loomed.
Each shutdown is a little different, and the nation has experienced a few in recent years. Although the work of some contractors was insulated when the most recent shutdown went into effect, other contractors were not as fortunate. How contractors faired during the shutdown varied greatly depending on the strength of the individual business and the depth and breadth of their customer base. During the shutdown, government payments for ongoing contracts ceased, creating cash flow issues. Unproductive hours for employees increased which created uncertainty regarding how to make payroll as well as keep the impacted employees engaged. These conditions were further compounded by a lack of support from the various agencies tasked with assisting and working with these contractors.
Among the negative consequences of the shutdown was the reality that many small and mid-sized businesses bore the brunt of the hardship. In such an environment, it’s easy to question what this means for a small business and why running a small business in the government contracting space is worth the time. However, being a business owner comes with some outstanding perks, such as being your own boss, reaping the rewards of providing a premiere service or product to your customers, creating jobs and having a positive influence in your local community. The key here is balance: recognizing pitfalls of the industry and planning around them strategically.
3 Main Disruptions to the GovCon Industry Caused by the Government Shutdown
The government shutdown had three notable impacts on the government contracting community:
1. Payment disruption: At the forefront of concerns sparked by the shutdown was the issue of cash flow. Unprocessed payments to contractors for previously performed work hindered businesses’ abilities to make payroll, pay vendor bills, and cover other operating costs.
2. Productivity loss: Without approval to work on government sites or the ability to reassign workers to other billable work, many contractors ended up paying employees to wait on the bench, essentially dropping their salary costs to the bottom line.
3. Uncertainty: One of the worst terms in the business world. The furlough of numerous agencies including the Small Business Administration (SBA) and the Internal Revenue Service (IRS) produced uncertainty for small businesses. Winning new work in certain agencies or filing a timely claim or bid protest was out of the question. This added difficulties for businesses trying to navigate the system, not to mention strain on daily business decisions.
3 Simple Strategies to Counteract the Perils of a Government Shutdown
As cartoon character G.I. Joe would say, “knowing is half the battle,” which rings true when preparing your business to withstand shutdowns and recessions. Identifying the most significant issues associated with these events will allow you to design controls and procedures that give your government contracting business the flexibility and strength to handle the unpredictable aspects of contracting with the government. Consider the following three tactics to boost your business’s versatility:
1. Improve Cash Flow: There are ways to minimize the effect of delayed government payments; Establishing a line of credit can help with short term cash flow needs created by a gap in the collection of accounts receivable. Developing and adhering to a budget will allow you to forecast and plan for changes in cash flow before an emergency arises.
2. Diversify Client Base: Maintaining a more diversified client base will reduce the risk of all your current projects being placed on hold at one time, increasing the likelihood that your workers will remain productive if a contract is put on hold or terminated. This can be accomplished by generating business outside of the government, or at least outside of the agency that accounts for most of your business’s revenue.
3. Monitor Historical Trends: There will always be a level of uncertainty in owning a business. However, by watching historical trends in government contracting, you can find agencies that are less likely to be impacted by government shutdowns and identify new ways to put employees back to work and keep them engaged.
Designing a Business Model for a Government Shutdown Resistant Government Contracting Business
As the three strategies above show, there are ways to prepare your business for a profitable future amidst factors that are beyond your control. While the solutions suggested counter a handful of the problems you might face in a future shutdown, the best preparation for such an event is to improve the overall health of your business and to maintain best-in-class standards.
The five key areas that will promote healthy business growth and sustainability are also the five areas that prepare a business for hard times. These areas include a clear vision, strong values, development of core competencies, capacity (scalability/infrastructure), and effective controls and procedures, which provide the foundation for growth.
1. Vision: Defining a business vision may seem like a step that can be clarified as you go but having a clear vision of where you want to take the business and how you plan to get there from the start is critical. Uncertain tax laws, inconsistent government funding, shutdowns and the risk of growing too fast all affect the business’s health and ability to compete. Documenting this vision will help grow the business because it will inform your hiring decisions to recruit the right talent and to develop the necessary staff competencies and capacity needed to service your customers in the changing business environment.
2. Values: Values are an essential component to the small business culture; they are nonnegotiable in nature and will set your business apart from competitors from finding the right people to defining your business practices for your customers. If your values state that you serve government agencies by performing the mission critical services they need to run efficiently and effectively, then you have set an expectation for the type of business you run, the services you provide, and the people you hire. The vision and values set the tone for other business decisions and have a significant impact on the overall strength of the business.
3. Competency: Once the vision and values are documented and communicated to the stakeholders of the business, developing core competencies will become an integral part of growing the business. Diversifying those competencies is an important component as well. This was never more apparent than during the partial government shutdown – some contractors were unaffected, others were partially affected, and some were severely affected. Many times, small businesses focus on one department or one agency because they are familiar with that customer. However, developing other competencies and other relationships within the government is just as important as servicing your existing customer base. A client once told me that “your net worth is determined by your network.” Building a strong and healthy network will be an asset when things get tough.
4. Capacity: Increasing your business’s ability to take on more work will be dictated by the human and financial capital of the business. Building your balance sheet will enable the business to access bank loans or other investments because the business will be able to demonstrate its strength on paper. Having a strong second tier of management will perpetuate the vision and values of the business, strengthen the core competencies and grow the capacity of the business. The growth of the overall infrastructure of the business will facilitate financial investment and allow your personnel to understand and anticipate the needs of the customer. This development of the management team and the staff will also allow you to be more versatile in how you redirect workers to other projects during a disruption to the business. By keeping the staff engaged, and focused on billable work, the business will weather disruptions better and reduce the cash flow constraints created by staff sitting on the bench.
5. Controls & Procedures: Last, but certainly not least, is the development of effective controls and procedures. As noted above, this provides the foundation for the business to grow responsibly. Without adequate investment in the controls and procedures of the business, the other areas will not grow as efficiently as desired. In the government contracting world, running afoul of the many rules and regulations can cause the business to lose work or be debarred from doing work in the future. This industry is unique because the customer dictates how the business must report its financial information. Many government contractors are ahead of their commercial peers in this arena because of the rules and regulations government contractors need to comply with every day. This up-front investment will benefit a small business in the long run because the structure is scalable and will allow the business to acquire more work.
Taking the Next Steps to Enhance the Longevity of Your Business
It takes time to determine whether you are growing your business at the right pace, building enough capacity, or efficiently strengthening the controls and procedures, which is the strongest argument for building a best-in-class business now. By strengthening your balance sheet, diversifying your competencies, and developing a plan to protect your investment, your business will be more prepared to weather a government shutdown, or other business interruption. As a business owner, you don’t have to make these decisions alone; CPAs, attorneys, and bankers are all well-equipped to set your business up for success while keeping you abreast of the state of the industry and changing business environment.
Not sure where to start? Feel free to send us a message and we would be happy to help orient you to your next steps in growth.
About the author:
Jason Mills, a partner at Lanigan, Ryan, has provided services to the government contracting community for more than 16 years. He has helped clients develop indirect rates, become compliant with the regulatory requirements imposed on government contractors and has interfaced with government audit agencies on behalf of his clients. He serves on the GovConNet Council of the Montgomery County Chamber of Commerce which focuses on issues facing government contractors in the DC Metro Area, and also on the Membership Committee of the Small and Emerging Contractors Advisory Forum (SECAF).
Lanigan Ryan is a team of CPAs, senior business consultants and associates specializing in the growth and development of privately-owned companies. As a result of working with Lanigan Ryan, government contractors are better equipped to prepare for DCAA, track indirect rates, prepare reliable bids, and make more informed decisions about moving their business forward.