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Doing Business With Big Brother
Are Government Contracts Worth The Cash Flow Headaches?
By Don Sadler
Thousands of micro-business owners and self-employed professionals rely on contracts with government entities for a significant portion of their annual revenue.
But some of these owners received an unpleasant surprise last summer when the state of California announced that instead of paying vendors in cash, they would be issuing IOUs with promises to make payments at a later date.
The cash flow problems of the Golden State have been well documented, and only time will tell if other states and municipalities, not to mention the federal government, will experience similar financial challenges.
In the meantime, many companies that do business with government entities are wondering whether they might open their mailboxes to find a stack of IOUs instead of checks—and if so, what this might mean to their businesses.
Safe Credit Risk
The good news is that despite the financial challenges many government entities are facing, they remain the safest credit risk for micro-business owners, says Scott Orbach, the president of EZGSA, a Washington, D.C.-based firm that specializes in helping clients obtain and maximize government contracts.
“The fact is, California will pay its bills, and the federal government will also pay its bills,” he says. “States like California and cities like New York and Detroit have been on the financial brink before, but a U.S. government entity has not defaulted on a receivable since the Civil War.”
The challenge for companies doing business with government entities is not so much collections, Orbach says, but rather cash flow.
“You don’t have to chase after government entities to collect your money, but you do have to plan for a cash flow lag between when you deliver a product or service and when you get paid.”
This holds true during normal economic times, but especially during challenging times like many government entities are facing now, says Jason Morrison, the executive director of Capitol Media Solutions, an advertising and media agency in Atlanta that works almost exclusively with government entities.
“Compared to nongovernment clients, our government clients pay us much further out,” he says. “Normally it’s about 60 days, but lately it has been closer to 90 or even 120 days.”
Guard Yourself
California redeemed its IOUs in October, but the cash flow delay hit some small businesses hard.
One owner of a staffing firm, who was already facing a six-month payment delay from the state when she received an IOU last summer, had to lay off several employees due to the reduced cash flow.
Here are seven practical steps you can take to help guard against financial problems if a government entity you do business with starts delaying payments or issuing IOUs.
1. Follow the news closely
This is rule No.1, says Morrison, especially for companies doing business with cities and municipalities.
“Spotting warning signs should be as easy as following your local news on a daily basis to get a feel for how financially healthy your local government is.”
2. Review the minutes of local government and city council meetings
Mike Knox is president of Bidders Guide Publications, a Rochester, N.Y., firm that helps small businesses find municipal contract opportunities. He says that these local meeting minutes can offer valuable clues to financial or cash flow problems at the city government level.
“These minutes are usually available online or by request,” he says. “They can be a little boring, but they might help give you a feel for how a local government entity is going to deal with potential cash shortfalls, like by delaying payments to vendors.”
3. Diversify your client base
Don’t put all of your receivable eggs in one client basket.
In the case of the staffing firm mentioned above, contracts with the state of California account for 80 percent its annual revenue, so when those funds were delayed, it made an already risky situation worse.
4. Manage cash flow judiciously
Your business expenses don’t slow down just because your receivables do.
“If cash you’re counting on from a government entity doesn’t come in when you expect it to, you may have some problems,” says Orbach. “Maybe you can push your vendor payments out a few days, but your employees aren’t going to stick around if payroll is late.”
5. Contact government entities
Knox, who helps small businesses find municipal contract opportunities, suggests talking directly to the purchasing department if you’re having trouble getting payment from a government office.
“If a payment is late, you can ask them why and when they expect payment to be made. I’ve found them to be very honest and helpful,” he explains. “Many purchasing departments also list their payment terms online. You can also request fiscal financial reports prepared by outside CPAs if you want to check on the financial stability of a municipality. This information is available to the public.”
6. Read requests for proposals (RFPs) and contracts carefully
Morrison says being proactive on the front-end can help guard against unpleasant surprises later.
“Pay close attention to the payment details in RFPs, and try to negotiate contracts so that you receive payments throughout the course of a project, rather than in one lump sum at the end.”
7. Secure credit
The time to secure access to a bank loan or line of credit is before you find yourself in a cash flow crunch.
“You want to have a good credit facility in place now,” Orbach says, “so that if payments from a government entity are delayed, you can remain liquid. Government receivables and IOUs represent strong collateral that most banks are willing to lend against.”
The key to securing financing, he adds, is “keeping your financial statements clean.”
If you can’t qualify for bank financing, you could go to a factor, which will purchase your outstanding receivables at a discount. But a factor will cost you more. “This is why being creditworthy is so important,” Orbach says.
Don’t Be Discouraged
While news about the financial difficulties facing many government entities can be frightening to business owners doing (or considering doing) business with them, the experts say this shouldn’t dissuade you from seeking government contracting opportunities.
“Don’t be discouraged by the headlines. Not every state or municipality is in the same financial situation,” says Morrison. “Government entities are more likely to pay you than any other type of client, even if it takes a little longer.”
Orbach agrees.
“The federal government never buys just one of anything, and they never buy anything just once. Most people and businesses have less revenue and are spending less money now, except for the federal government. It will be the last segment standing.”
Don Sadler is a freelance writer based in Atlanta. Undeterred by the headlines about governments’ financial woes, he’s seeking new business opportunities with local government entities.