By Warren Linscott, Senior Vice President & Chief Product Officer at Deltek
Over my career, I’ve closely followed the growth paths of small businesses in the government contracting space. I’ve seen several behaviors and practices that contributed to successfully growing their business. The first may be a cliché but it holds true now more than ever: for small business owners, time is money, and the ones that are more successful are paying close attention to key performance indicators that drive cashflow and positively impact the bottom line. The second is investing in the tools and resources that will support their businesses’ future, like hiring skilled workers or implementing more mature systems and software to streamline and improve efficiencies. It’s important that small businesses always have an eye toward optimizing for growth and continued success.
In my discussions with small business leaders in GovCon, many of them report the same challenges that prevent them from achieving sustainable growth and higher profit margins. The most common is efficiently managing cashflow and resources, which is even more difficult with today’s economic climate and labor market. Compounding these external market challenges is the need comply with ever-increasing government regulations. Businesses have to pay an additional expense to ensure their business systems are in compliance with the Federal Acquisition Regulation and with expanding cybersecurity requirements. As a business grows, these challenges are compounded, and project and finance teams may struggle to keep their head above water if business infrastructure and systems aren’t equipped to scale with the business.
Forward-thinking small business leaders can mitigate growing pains by regularly assessing their business systems and processes to ensure they can support growth, especially in the face of additional government contracts with more complex requirements. After assessing organizational readiness, small businesses that have growth in mind often choose to upgrade or replace the systems they pieced together in their startup phase with more capable enterprise resource planning software-as-a-service solutions where some of the regulatory and cyber security compliance capabilities are built in.
ERP software is not just for large firms or manufacturers. Small businesses use ERPs to streamline front, mid and back-office processes. When small businesses can leverage a system that connects business development, contracts management, project time tracking, project accounting and corporate finances, the outcome is better visibility into how the business is running along with the traceability required during audits. Greater control and visibility over resources equates to faster billing cycles and improved cashflow. Exploring the benefits of replacing multiple business systems with an ERP will position small businesses for growth in today’s highly competitive government contracting market.
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What’s in your small business toolkit?
There are several types of business systems that small government contractors typically use. These may include:
Generic accounting software: Basic accounting or bookkeeping software is used to manage finances, process accounts payable and accounts receivable and make entries into a general ledger to “balance” or close out the books monthly and yearly. As a business takes on more government contracting work, it’s likely that some or all of their contracts will be “CAS covered,” which means that financial processes and systems will need to comply with cost accounting standards. Generic accounting systems aren’t set up to tie costs back to specific contracts, projects or task orders, which is a CAS requirement. If cost inputs are being pulled from multiple other systems, such as a labor and time-keeping system, it makes cost traceability hard to prove during audits.
Generic labor or time and expense tracking software: If you have been a government contractor for any length of time, you’ll know that the Defense Contract Audit Agency takes time tracking very seriously. Segregating and allocating direct and indirect costs and ensuring daily time entry is a requirement and can become difficult if time-tracking software and accounting software aren’t tightly coupled. In addition to the compliance aspect of labor, time and expense tracking, if costs are being collected in a separate system, it could impact cash flow and revenue recognition due to the lag in posting costs to the general ledger for billing purposes.
Customer relationship management software: CRM software manages interactions with current and potential customers, tracks sales opportunities and streamlines marketing efforts. While CRM software can help improve customer relationships and increase sales, if it is not integrated with other business systems, such as your financial system, it can necessitate workarounds to perform cost estimating, resource planning and forecasting and track bid and proposal spending, which in some cases can be an allowable indirect expense.
Human capital management system: Managing employees, payroll, benefits and performance reviews can be a full-time job. An integrated Human Capital Management system can help streamline these processes and ensure compliance with labor laws and regulations.
Forecasting, reporting and business intelligence: Although reliable forecasting and reporting are key for businesses looking to grow, many small businesses are still utilizing spreadsheets and manually aggregating data to try to predict resource needs and gain insights into costs. Relying on human-centered methods for reporting makes it difficult for businesses to analyze data to make informed decisions, identify trends and track KPIs.
Powering sustainable growth with a project-based ERP
Generic accounting solutions and ERPs can satisfy the needs of a small business, but over time there will be challenges requiring additional systems and efforts to tie direct costs to contracts and to spread indirect but allowable costs across multiple contracts in the correct way. Project-based ERPs that incorporate project accounting and generic ERP capabilities into a single integrated system can streamline operations, provide greater visibility into the health of your business and trace the direct and indirect activity of your contracts. Project ERPs bring together business support elements across the project and contract lifecycle, such as CRM, contract management, project management, general accounting, project accounting, project billing, supply chain, procurement, manufacturing and human capital management. Having all these business systems under one umbrella ensures that all project costs and records are tied back to project financials. In my experience, businesses that can show this cost traceability, including how costs are segregated and allocated, are likely to have fewer findings during DCAA audits because there are fewer systems to inspect and fewer integrations to trace how data moves around.
Automation is key to maximizing employee productivity and minimizing costs across the project lifecycle. With all your data housed in the same system, the opportunities to automate processes and everyday tasks grow exponentially. Automation can come in many forms, such as:
- Utilizing novel technologies like intelligent character recognition, or ICR, to scan and auto-populate data. This can streamline manual tasks like entering expenses and processing invoices, leading to significant cost savings over time.
- Automating workflows, standard in most ERPs, resulting in faster processing times, reduced errors, improved data accuracy and increased productivity. By automating repetitive tasks like payroll processing or purchase order approvals, employees can focus on more strategic activities that drive growth and profitability.
- Optimizing audit preparation with traceability and real-time reporting capabilities. An ERP can provide a comprehensive audit trail, making it easier to track changes, monitor access to sensitive data and ensure compliance with industry regulations.
Choosing the right systems
When selecting the tools or systems to use, more specifically an ERP system, it is essential to consider your organization’s specific needs and goals. Whether you’re seeking an ERP for the first time or re-evaluating ERP vendors for an upgrade, you can determine the right ERP for your business by considering these criteria:
- Industry expertise. Does the ERP have built-in functionality for your industry, including controls for industry specific regulatory and compliance requirements? As a government contractor, your ERP solution needs to support FAR or DFARS, without you having to customize the software or create complicated workarounds.
- Project accounting. How are costs and revenue accounted for at the project level? Is this an inherent part of the design or a separate module or component that has been placed tangentially to the general ledger? Having an integrated project accounting and general ledger will cut down on reconciliation of cost allocation and allow for better traceability of direct project expenses.
- Security.Security. With increasing cybersecurity attacks on government networks, the federal government has responded with mandatory cybersecurity assessment requirements from the proposed Cybersecurity Maturity Model Certification rule, to ensure that contractor software is not leaving government data vulnerable to exploitation. Readiness for programs like CMMC should be a top consideration for any software purchase, in particular an ERP that houses federal contract information, a.k.a. FCI, and controlled unclassified information, or CUI. How do the vendors you are considering support your cybersecurity compliance requirements now and into the future? If they are a SaaS provider, can they demonstrate a commitment to cybersecurity best practices through independent assessment, and are they listed on the FedRAMP Marketplace? Often companies may lay claim to meeting these requirements as a cloud service provider because their solution is hosted on AWS or Azure FedRAMP Moderate or High offerings, but Infrastructure-as-a-Service is likely only a portion of the controls needed to satisfy your mode compliance requirements. Make sure to ask about how their cloud operations teams comply as well as their software and development practices.
- Mobile accessibility. An ERP should be secure yet easy to access from anywhere, especially now that many companies have remote and hybrid workplaces. Ensure your ERP has mobile accessibility and flexible deployment options such as Cloud or SaaS, as well as a robust and easy to understand API for integrations.
- Scalability. Look for a solution that can easily accommodate your company’s needs now but has the flexibility and depth for your growth strategy, especially if that includes the need for additional functionality like human capital management, procurement or manufacturing.
- Cost. The total cost of ownership should be transparent from the beginning, including all recurring costs and other relevant details.
- Customer service. Find a vendor with a reputation for exceptional customer service and flexible communication options post-implementation. This will make the onboarding process much smoother and enable you and your team to more efficiently and effectively leverage the ERP’s full capabilities.
Leveraging an ERP system can drive growth and maturity for small businesses by automating processes to create efficiencies, while improving cashflow and providing the financial controls to meet compliance requirements. When choosing an ERP system, it is important to consider industry-specific requirements, security, accessibility, scalability, total cost of ownership and the vendor’s reputation for customer support. By deploying a fit-for-purpose ERP that will meet your needs now and in the future, you can ensure your growth won’t be stifled by business systems that can’t keep up. Now is the time to make the move; delaying the implementation of a new system until you’re in the midst of executing larger and more complex projects could impact your performance and slow your growth.
