It’s official – Congress’ Paycheck Protection Program (PPP) has just been extended until August 8. While this is good news for government contractors, it is also a short-term solution that will expire just as awards season is kicking off. Cash flow could become a serious challenge for smaller contractors as we enter the fall and lenders continue to be wary of COVID-related economic uncertainties.
Successful CEOs have historically gotten around cash flow challenges by developing a financial strategy tailored to their specific goals and needs. Instead of just focusing on winning contracts and assuming everything else will fall into place, they take the time to build a durable infrastructure that will take their company from one or two good contracts to full and open competition.
Here are a few questions you might consider that will help you do the same for your business:
What will your balance sheet look like in three-to-five years?
How much will you invest in building assets over the next three-to-five years to set your company apart from the competition, such as certifications, human capital, warehousing and intellectual property?
How will you ensure sufficient cash flow at each stage of your growth?
What other lines of business do you need to open and/or what acquisitions are needed to achieve your goals?
These are challenging questions many CEOs won’t have the time to answer while building relationships, executing contracts and winning new business. We often recommend that our clients consider outsourcing to a financial expert who can answer these questions and build long-term infrastructure. This allows the CEO to focus on what he or she does best while being confident that a growth-minded financial strategist is positioning the company to meet growth and profitability targets, skillfully navigating turbulent times, and preparing for acquisitions. Many of our clients find that this approach leads to fewer taxes paid, more profits earned, and increased cash in hand. It’s also cheaper, faster, and legally safer than hiring full-time staff.
As long-term infrastructure is being built, it’s important to consider the role of debt in helping you scale. Many CEOs fear debt because of the perception that having debt indicates their company is in financial trouble, but the right kind of debt can help you secure large contracts and increase revenues. The one question all CEOs should ask when considering debt is, “What will the return on investment (or the cost of debt) be?” For the vast majority of growing contractors, the return on investment will be several hundred percent. That’s an easy go/no-go decision.
For example, a loan which costs $10,000 in interest but gains you a $1 million contract that will bring $50,000 in net income has a return on investment of 400 percent – at a debt cost of just one percent of contract revenue.
The final step to long-term financial success is determining the right partners. First, it is helpful to have a financial strategist, not just a CPA who balances the books. You need to know where your business is going and how to get there financially. A strategist must be able to break down your long-term goals into annual, monthly and weekly results to make accurate projections and build strength.
On the debt side, choose a partner which meets your short-term and long-term needs. Merchant cash advance and factoring companies will get you money fast, but their funds have limited utility and have expensive hidden fees. Banks are extremely trustworthy, but their products are not designed with contractors’ unique needs in mind. Contractors must find a partner that is flexible to their funding needs and provides cash flow that secures contracts and ensures you never miss a payroll.
From cash flow to investments in your business, the right financial strategy will get contractors through today’s challenges and into a brighter, stronger future. CEOs would be well served to take the time to ask the right questions, build the right team, and use the right tools.
Ryan Huss is Director of Operations for Parabilis. Parabilis is a veteran-operated government contractor lender which specializes in helping small businesses increase cash flow and secure contracts.