Step 1 in Successfully Competing for Contracts

By sbdceditor,
Do you have sufficient cash flow to be able to complete a contract?  
In much the same way as business and marketing plans are key elements for a successful business, having a well thought out plan for competing for government and corporate contracts is a must. The plan focuses on many aspects including targbig-bills-money.jpget markets/agencies/corporations, marketing techniques, strategic partnerships, certifications, and building capacity.

One often overlooked area is “Do you have the cash flow capacity to successfully perform on the contract should you win the award?” The time to review your financial statements, update cash flow projections, and review financial options is before you start marketing to any agency or corporation.

Your financial statements will provide you with historical data about your past performance and show how much of a profit or loss you are making. Consider the following points when determining if your business is ready to step into the contracting arena:
  1. Are you currently making a profit each year or at a minimum, breaking even?
  2. Do you have a cash surplus at the end of each month?
  3. If you do, is it sufficient to cover all of your employee expenses and material costs associated with taking on a new contract?
  4. Do you have access to an additional cash resources, such as a business line of credit, should you need it to cover your expenses?

Your business needs to be stable and financially secure. As you apply for many of the certification programs, you will be required to provide financial statements and tax returns to the entity conducting the certification evaluation. Government agencies and corporations want to do business with companies that are financially solid. They want to know that the business they are awarding a contract to will have the financial resources to successfully perform on the contract. They want you to succeed. Many corporations won’t award a contract to a small business if the award exceeds a specific percentage of the small businesses total revenue. For example, if you want to do business with Costco, they will not award any contracts that exceed 20% of your total revenue.

If you aren’t seeing a cash surplus at the end of each month, you need to reconsider or delay your plan to look for government and corporate contracts. The longer standard payment terms of a government agency can stress the cash flow capacity of a business. For example, the State of California’s standard terms are 45 days. You still need to pay your employees and material suppliers even while you are waiting to get paid. If you take on a new contract, will you need to add employees? Can you get terms from your suppliers that will better fit the payment schedule of your contract? Will you be able to negotiate progress payments into the contract? Have you considered the potential for higher operating expenses for items such as higher insurance coverage, which is often required?

Before you venture off bidding on new contracts, you should consider whether or not you have some form of emergency fund that you can tap into if the need arises. A business line of credit can be a good safety net for you should the cash flow get tight. You should use it only to cover the necessities and be diligent about paying it back once you receive payment. If you don’t currently have a line, start to shop around to see if you qualify and if you do, how much of a line can you expect to get. Credit and collateral will be keys in helping you secure a line. If your credit is a challenge, then you need to begin right away to understand what the problems are and how you might begin to repair your credit.
The Orange County SBDC is a great way to find help in developing your plan for successfully competing, winning, and completing for government and corporate contracts. Visit our website or call 714.564.5200 to determine if the SBDC is a good resource for you.