By Kim Koster, VP of Industry Marketing at Unanet
Fall is when many government contracting companies devise an annual operating plan, or AOP. It’s when you strategically plan for the year ahead, assessing where your business stands and plotting a course forward. Of course, circumstances often change those plans, requiring adjustments.
Now that the calendar has flipped to 2024, it’s adjustment season — time to revisit your AOP to determine if shifting circumstances necessitate a revision. Perhaps a contract you thought you might win in November 2023 finally came through in January 2024. Or maybe rent negotiations didn’t go as expected, meaning you’ll be paying more to your company’s landlord in the year ahead.
In a business as fluid as government contracting, numerous internal and external factors can change with little or no notice. Which is why you’ll want a flexible AOP that you can adapt as needed.
You’ll want to examine key performance indicators, or KPIs, related to profitability, revenue, cash flow, and pipeline to see where your firm landed in 2023, and how those actual numbers compare with the assumptions and projections you built into your 2024 AOP. If there are substantial discrepancies, you’ll need to update your plan accordingly.
Which KPIs in particular should you be analyzing for their potential impact on the AOP? Here are some of the leading candidates.
Contract types
Is your company pursuing the “right” work? Some companies only evaluate themselves on the volume of contracts they’re able to bid on and win. But while high volume can be a good thing, sometimes pursuing fewer contracts that offer a better strategic fit for your organization leads to better long-term sustainability.
Take a close look at your company’s pipeline, breaking down the specific types of contracts you are bidding on and the strategic rationale for pursuing them.
Make sure the sales team concurs with the analysis of the type of contracts you’re pursuing.
Government agency customers
Identify your current customer mix. This helps you establish a better idea of your company’s current strengths and potential gaps.
You can also use this analysis as a relationship-building opportunity, encouraging your sales and support teams to check in with and visit your customers regularly, so they gain a deeper understanding of the pain points and needs of specific customers.
Audit types
What kind of contract-specific audits (i.e., incurred cost submissions, accounting systems, provisional billing rates, etc.) has your company been subject to?
Knowing what kind of audits you underwent in the previous year — as well as the results of those audits — can help you prepare for and strengthen your company in the face of future audits.
Earnings before interest, taxes, depreciation and amortization
EBITDA is a commonly used metric that helps you get a handle on the organization’s overall profitability. Once you calculate it and understand the factors that went into the calculation, you can create a more realistic goal for it.
You can estimate this number in September or October, but until the year is complete, you can’t come up with an exact figure. That’s why you’ll want to take another look after the year wraps up.
Income statement analysis
Your income statement will highlight how much money your company has spent, and what it has spent that money on. For example, calculate your firm’s direct labor as a percentage of revenue. It’s a good idea to monitor this number regularly to know where your cash is flowing.
Subcontractors
Subcontractors are often a vital part of any government contracting company, so knowing what they’re costing you helps how you manage them. What percentage of total costs do subcontractors represent? Is your firm relying too heavily on them? Do you regularly perform make-or-buy analysis, if such an analysis applies to your company?
Full-time equivalents
Benchmark your company against others of similar size based on either total FTEs to revenue or number of FTEs that exist in various back-office roles.
If you need help getting started on how to benchmark, a great reference tool is the current GAUGE Report. It features feedback from top government contracting companies, highlighting back-office FTEs by revenue size.
To adjust your AOP, you’ll need accurate forecasting
At the core of the AOP is the discipline of forecasting. Forecasting plays a pivotal role in turning uncertainty into a strategic advantage. It also allows companies to predict resource allocation needs, revenue trajectories and potential business risks, setting the stage for informed decision-making processes.
In the case of government contracting firms, efficient forecasting can translate into successful project delivery, talent retention, competitive advantage and business growth. Despite its significance, mastering forecasting can be a daunting task. It demands a harmonious alignment across various organizational levels — from project teams to finance departments.
This alignment, however, isn’t just about having everyone on the same page. It’s about fostering a culture of open communication where insights, data and predictions are shared and discussed openly. It’s about equipping teams with the right tools to generate reliable forecasts and provide a trustworthy direction for the business. And most importantly, it’s about understanding that forecasting isn’t a one-time effort but a continuous process of adjustment and recalibration as the business landscape evolves.
Given the dynamic nature of the business world, and particularly in government contracting, forecasting shouldn’t be underestimated. Firms that leverage effective forecasting techniques will find themselves better equipped to navigate the challenges of the future and steer their business toward success.
Always ensure your AOP aligns with your overarching business strategy
Remember, your firm’s AOP should be a mirror image of your overall business strategy. Make sure that your growth plans are well-reflected in the AOP. Ask the right questions. Is our growth strategy focused on growing organically, using mergers and acquisitions, or both? How well are we managing our pipeline? Are we analyzing project and client portfolios for the best returns? Are we exploring teaming arrangements?
Finally, don’t forget that your revenue plan is a crucial component of your AOP. There are many ways you can create an effective revenue plan. Keep a close eye on your pipeline as well as EBITDA trends. Benchmark your expenditures as a percentage of your revenue. Know what your labor versus subcontractor labor costs are. Analyze your project backlog, classifying not just by contract, but by year.
I know what you’re thinking: Didn’t we do all this in the fall? Yes, you did. But remember, the closer your AOP is to reflecting your firm’s current reality and aligning with its strategic goals, the more successful you’ll be. The world is constantly changing, and our AOP should too. So start the year off strong with a resolution to revisit and revise our AOP.
