A cornerstone of financial management is understanding and monitoring financial results to achieve profitability goals. Key financial metrics or key performance indicators (KPIs) can be utilized to monitor a business’s health and vitality. Below are some of the essential KPI’s that often apply to federal contractors. They typically track revenue, profitability, and efficient use of resources and liquidity.
Revenue trend: One key measure of a business’s success is periodic revenue growth. Revenue growth reflects increases over time identifying revenue trends in business. Month over month revenue trend can indicate the future success of a business; however, revenue growth without profitability hinders business success.
Direct margin trend: Direct margin is simply the percentage of income minus direct costs and indicates profit generated. This should be looked at in the aggregate as well as the contract level. A higher direct margin provides capital to a business to pay for other costs including indirect costs.
Revenue per employee or consultant: Track revenue per person. A typical government contractor with highly skilled employees is expected to have higher revenue per resource. Historic revenue per employee data compared with current data can provide insight into the near future and long-term business strategy. What is the better type of work or customer to pursue?
Budget vs. actual analysis provides an overview of actual versus anticipated results. Comparing budget vs actual is a tool that management can use to better plan, monitor, and evaluate ongoing operations. A periodic review of variances helps management in taking corrective action if needed or change short and long-term business strategies to achieve financial goals.
Backlog schedule maintenance: Continual review of funding backlog is critical for a government contractor. A backlog is a listing of work for different projects waiting to be performed in near future. There are often contractual reporting requirements triggered at specific percentages.
Cash flow: A consistent positive cash flow helps maintain current operations and allows planning for future business expansion. A cash flow statement provides a quick review of aggregated cash received and disbursed over a specific period of time. Managing cash and analyzing liquidity is an important metric for planning, longevity, and making long-term borrowing or business plans.
Wrap rate: Wrap rate is the fully burdened labor rate at which a business must bill to its customers to cover direct and indirect costs and is a very important financial metric. Management can utilize wrap rate during bid and proposal preparation to not only minimize potential loss but earn its target profit margins from projects. For example, a business with 32% fringe, 8% overhead, and 9% G&A rate will have a wrap rate of 1.55. For every dollar of direct labor bid on new contracts, the business would have to add $0.55 to breakeven on the project.
Utilization analysis: Utilization is reported as a percentage of an employee’s productive and billable work out of the employee’s available time during the year. Utilization is an important measure of employee productivity and a critical metric for a government contractor indicating the operating efficiency of a business.
Indirect rates review and analysis: An indirect rate is the ratio between indirect and direct costs. Unusually higher indirect rates may be perceived as expensive by the government. Indirect rates review and analysis should be performed at least monthly to keep indirect rates reasonable and consistent in order for a business to stay competitive.
Unallowable costs: It is important that contractors minimize unallowable costs because unallowable costs directly affect the bottom line of small businesses. These costs cannot directly be billed to customers nor be factored into the prices you charge for your goods and services as indirect costs, so anything unallowable reduces overall company profits.