Thursday, July 13, 2023

What are business financial reporting requirements for small SBA 8(a) participants?

You’ve spent several months, maybe longer, applying to get into the Small Business Administration’s 8(a) Business Development Program. After a thorough SBA review, developing your business plan, getting approved (congrats!!!), and signing a bunch of paperwork you may wonder... “What are my financial reporting requirements?” or “How do I prepare financial statements for the SBA?” As a participant in the 8(a) program, you must be aware of and comply with several reporting requirements. The requirements are provided to you in your Participation Agreement and are also found in the program regulations at 13 C.F.R. § 124. If you don’t keep up with these requirements, you risk losing your 8(a) status and all of the benefits it can provide you. It’s especially important that small 8(a) participants–those with less than $2,000,000 in gross receipts–are aware of the financial reporting requirements to be successful.

General SBA 8(a) reporting requirements

Each year, 8(a) participants are required to undergo an annual review of their business operations, including its financial statements and other relevant documentation. The purpose of this review is to assess the participant's eligibility, continued participation, and overall progress in the program. It is important to note the specific financial reporting requirements may vary depending on an individual participant's circumstances, the SBA's current regulations, and any additional conditions imposed by the SBA during the participant's engagement in the 8(a) program. Generally, the following requirements apply to all participants:


Business Financial Statements

Participants are required to submit their business financial statements (balance sheet, income statement, etc.) annually. Some participants may also be required to submit quarterly financial statements as well. The financial statements provide an overview of the company's financial performance, including revenue, expenses, assets, liabilities, and cash flow. The financials may need to be reviewed or audited by an outside CPA, but that requirement varies depending on gross annual receipts (aka “revenue” or “sales”).


Gross Annual Receipts

Financial Statements Required

Prep/Assurance/Deadline

Less than $2M

Balance Sheet

Income Statement/P&L

Prepared in-house or compiled by CPA

Certified by owner/officer

Due 90 days after year end

$2M-$10M

Balance Sheet

Income Statement/P&L

Statement of Owners’ Equity

Statement of Cash Flows

Prepared/reviewed by CPA

Certified by owner/officer

Due 90 days after year end

More than $10M

Balance Sheet

Income Statement/P&L

Statement of Owners’ Equity

Statement of Cash Flows

Prepared/audited by CPA

Certified by owner/officer

Due 120 days after year end


Personal Financial Statements

In addition to the business financial statements, participants may need to provide personal financial statements for each disadvantaged owner (who holds at least 51% ownership) of the 8(a) firm. Personal financial statements typically include information about personal assets, liabilities, income, and expenses.


Personal/Business Tax Returns

Participants are typically required to submit their business and personal tax returns for the previous three years. These returns help the SBA assess the participant's compliance with tax obligations and gain insight into the financial health of the business.


Business financial reporting requirements for 8(a) participants with <$2M in gross receipts

So, as a “small” (my term for 8(a) participant with less than $2,000,000 in gross receipts), you must submit a balance sheet and income statement (also known as a profit and loss statement, or “P&L”) to the SBA within 90 days of the close of your fiscal year. The financials may be prepared in-house or compiled by an independent CPA. For most, preparing in-house financial statements is the most economical option. CPA firm compilation fees can run $1,000 or more! In-house preparation can easily be done if your bookkeeping is up-to-date and your accounting system is set up correctly. It can be as simple as printing reports from QuickBooks. But if you aren’t sure how to prepare the statements, or worry about the status of your bookkeeping, you can get help from a bookkeeper or an accounting consultant who is familiar with the 8(a) requirements. However, it’s important to note that regardless of who prepares the financial statements, you as the owner must certify them.


The following is a list of things to keep in mind when preparing your financial statements:

  • Ensure the statements represent the true condition of your business. Do the total revenues and expenses make sense? If your P&L shows a large profit or loss and that surprises you, stop and figure out why. Or, if the balance sheet shows owners’ equity as negative, be able to explain why.
  • Make sure all transactions are recorded. Reconciling your bank and credit card accounts is one way to do this.
  • Make sure your chart of accounts is set up to separate 8(a) revenue from other revenue.
  • Confirm financial statements are presented in accordance with Generally Accepted Accounting Principles (GAAP) if applicable. While SBA regulations only require this for reviewed and audited financials, GAAP is required for all government contractors. GAAP requires accrual-basis accounting, so making sure reports from your accounting software are run on this basis is an important first step.

And remember, you must also submit your personal and business income tax returns, and a personal financial statement to SBA in addition to your business financial statements.

Do you need help preparing your SBA 8(a) business financial statements? Please feel free to email me.

Disclaimer: This blog post is for general informational purposes only. Blog posts can’t substitute for accounting, tax or legal advice specific to your situation which can only be obtained from consultation with an accountant, attorney or other qualified professional. All information on the blog is provided in good faith, however, there is no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, availability, completeness, reliability, or validity of information shared via blog post, comments, etc. The views expressed on this blog are solely those of the author(s) and do not necessarily reflect the views of Acounten LLC.

Wednesday, March 29, 2023

QuickBooks Tips for Gov Con Accounting


QuickBooks is a popular accounting software option for small businesses in many different industries, including government contractors. Whether you choose QuickBooks Online, or QuickBooks Desktop – it’s affordable, easy to use, comes in a variety of different plans, and there are many training and support resources available. However, government contractors should be aware that additional steps must be taken for QuickBooks to be “DCAA compliant”.

For QuickBooks (or any other accounting software) it’s important to select the best plan, configure settings, create a compliant chart of accounts, set up job costing, and process transactions correctly. The following tips will help you strive for an adequate accounting system, and ensure your long term success as a government contractor!

Select the best QuickBooks plan

In order to configure QuickBooks most effectively, make sure you have subscribed to QuickBooks Online Plus or QuickBooks Desktop Enterprise. These versions include job costing features required for government contract accounting.

Configure QuickBooks settings properly

In QuickBooks Online, these settings are found by navigating to the gear icon, selecting Account and settings and clicking the Advanced tab.

  • Select the accrual accounting method
  • Enable close books and set a closing date
  • Enable account numbers
  • Turn on project financial tracking

Create a compliant chart of accounts

Create account numbers according to your indirect cost pools (i.e., fringe benefits, overhead and general & administrative). Organize accounts using primary and sub-account options. A common high-level chart of accounts structure is (five-digit account numbers):

  • 1xxxx: Asset accounts
  • 2xxxx: Liability accounts
  • 3xxxx: Equity accounts
  • 4xxxx: Revenue accounts
  • 5xxxx: Direct cost accounts
  • 6xxxx: Fringe benefits (indirect costs) accounts
  • 7xxxx: Overhead (indirect costs) accounts
  • 8xxxx: G&A (indirect costs) accounts
  • 9xxxx: Unallowable expense accounts

Set up job costing

After each customer record is created, set up projects (for each contract), service items (billable amounts) and classes (to track costs by CLIN).

Process transactions correctly

Enter vendor invoices as Bills (not Checks or Expenses)

Using Check or Expense transactions will record the transaction as cash basis based on the transaction date which isn’t correct for government contractors. The Bill transaction will record an expense based on the transaction date and a payable due on a future date. When paid, the payable is cleared and the cash disbursement is recorded. This distinction is important for compliance with GAAP, and the requirement that government contractors keep their books on an accrual basis.

Example: A consultant submits an invoice for services rendered in February on March 1. The invoice states it’s due March 15. Using a Bill transaction, selecting the transaction date as February 28 records the expense properly in February. If the Check or Expense transaction was used when the payment was made on March 15, the expense would be recorded incorrectly in March (instead of February).

Allocate payroll, direct expenses and indirect expenses to jobs

For every transaction entered into QuickBooks which should be allocated to a job (Bills, Checks, Expenses, Journal Entries), select the appropriate project in the Name or Customer:Job field. This will ensure your P&L by customer report is accurate which is an important month end review task. A Class may also be assigned to transactions if desired.

Prepare adjusting journal entries

For GAAP compliant accounting, adjusting journal entries (AJE) are created at the end of a period to record accruals, deferrals and other transactions not recorded using other transaction forms. For example, in QuickBooks, revenue is not recorded until an invoice is created. However, at the end of any given month, the company has performed services and amounts are due from the customer. Recording an AJE will account for the revenue earned by the company in the correct period. The following are commonly required journal entries for government contractors:

  • Depreciation (debit depreciation expense and credit accumulated depreciation based on a depreciation schedule)
  • Prepaid expenses (debit appropriate expense account and credit prepaid expense asset, e.g., insurance premium paid in advance for one year)
  • Labor expense accrual (debit salaries/wages expense and credit payable for amounts between end of last pay period and month end date)
  • PTO expense accrual (debit PTO expense and credit payable for total of employee’s accrued hours multiplied by their pay rate as of the month end date)
  • Revenue accrual (debit unbilled receivables asset and credit revenue for amounts which will be invoiced to the customer)

Note: For most AJEs–expense and revenue accruals–it’s important to reverse them on the first day of the new month. Otherwise, expense and revenue totals may be overstated.

Reconcile accounts

Reconciling accounts is important to ensure all transactions are recorded and that balances make sense.

  • Use bank statements to reconcile checking, savings and credit card accounts.
  • Run the P&L by customer report and reconcile direct costs to the company P&L.

Finally, it’s important to note that QuickBooks is only one part of an adequate accounting system, not the adequate accounting system required for government contractors. An adequate accounting system is one that is “DCAA compliant”, or capable of passing a DCAA audit. Any accounting software can be part of an adequate accounting system if it is properly configured and operated by competent users.

Do you have questions? Please feel free to email me.

Disclaimer: This blog post is for general informational purposes only. Blog posts cannot substitute for useful accounting, tax or legal advice, which can only be obtained from consultation with an accountant, attorney or other qualified professional considering the specifics of your business/situation. All information on the blog is provided in good faith, however, there is no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, availability, completeness, reliability, or validity of information shared via blog post, comments, etc. The views expressed on this blog are solely those of the author(s) and do not necessarily reflect the views of JAS MAS LLC dba Acounten.

Thursday, March 9, 2023

What is DCAA compliance?

If you ask me, "DCAA compliance" is just a buzz word. The term is meant to describe the requirement for government contractors to have an accounting system which is compliant with GAAP, the FAR, DFARS (if you are a defense contractor), CAS and other applicable regulations. Compliance is determined following an audit by the DCAA, or the Defense Contract Audit Agency. As a government contractor, you must have an adequate accounting system to be awarded a cost-type contract and should have one for all other contract types. You must be DCAA compliant to be successful as a government contractor.

When a client asks the question, "What is DCAA compliance?" I encourage them to read the DCAA publication Information for Contractors (DCAA Manual No. 7641.90, June 26, 2012). I do this for a couple of reasons. First, it's sort of required reading for government contractors. DCAA auditors will want to know if you have read it. Second, clients quickly realize they will want professional guidance on their journey. Soon though, I'll just refer them to ChatGPT 👍

DCAA stands for Defense Contract Audit Agency, which is a United States government agency responsible for performing contract audits for the Department of Defense and other federal agencies. DCAA compliance refers to the set of rules and regulations that companies doing business with the US government must follow to ensure that their financial and accounting practices are in accordance with the DCAA's requirements.
 
DCAA compliance involves ensuring that a company's financial and accounting systems are properly designed, documented, and maintained, and that they comply with generally accepted accounting principles (GAAP) and other applicable regulations. This includes ensuring that the company's books and records are accurate and complete, that costs are properly allocated and accounted for, that timekeeping and labor reporting systems are accurate, and that the company's internal controls are sufficient to prevent fraud, waste, and abuse.
 

Companies that are awarded contracts with the US government are typically subject to audits by the DCAA to ensure that they are in compliance with these requirements. Failure to comply with DCAA regulations can result in penalties, fines, and even loss of government contracts.

As the owner of a small business who is concerned with DCAA compliance, you should answer "yes" to these questions:

  1. Is my accounting system designed correctly?
  2. Is my accounting system documented?
  3. Is my accounting system maintained?

Your accounting system design should be based on the criteria in SF-1408: Financial reporting should be in accordance with GAAP. Direct and indirect costs should be properly accounted for (by CLIN if necessary), and unallowable costs should be segregated from allowable. Indirect cost rates should be calculated and costs allocated. Timekeeping and labor distribution should track employee efforts by the project/task they work on. The books should be closed monthly and reviewed by management. Of course, there may be more to consider for your business -- but these areas are key.

Your documentation should be in the form of an accounting system manual with appropriate policies and useful procedures which are tailored to your operation. Your accounting manual cannot be a fill in the blanks template. It should describe your general accounting policies, chart of accounts, indirect rate model, the software/tools you use for accounting, timekeeping, and payroll and the procedures followed using those. There should also be an attempt to provide for segregation of duties, as well. The bookkeeper, for example, should not be approving vendor bills, entering them into the accounting software, deciding which bills to pay and then sending bill payments to vendors. The bookkeeper should enter bills into the accounting system and may send bill payments. But the owner should approve vendors bills and decide which ones should be paid.

Finally, your accounting system must be maintained. This requires the regular review of reports, updates when rules or standards change and other ongoing activities. The accounting manual is a good example of maintenance. It must be updated for changes in accounting standards, e.g., ASC 606 (Revenue Recognition) and ASC 842 (Leases). Your accounting manual should be the basis for DCAA compliance as it relates to your business. It should make compliance easier and be somewhat of a living document. It cannot be something that is created but then put away in a drawer and hardly consulted.

DCAA compliance is a process. It should be thought of as any other strategic goal and resources need to be dedicated toward its accomplishment and ongoing maintenance. Without an adequate accounting system, receiving federal awards will be nearly impossible. Even if you get an award, one day the auditors will come and you must be prepared. The best time to start with DCAA compliance is before you get your first contract, but any time is better than not at all.

Do you have questions? Please feel free to email me.

Disclaimer: This blog post is for general informational purposes only. Blog posts cannot substitute for useful accounting, tax or legal advice, which can only be obtained from consultation with an accountant, attorney or other qualified professional considering the specifics of your business/situation. All information on the blog is provided in good faith, however, there is no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, availability, completeness, reliability, or validity of information shared via blog post, comments, etc. The views expressed on this blog are solely those of the author(s) and do not necessarily reflect the views of JAS MAS LLC dba Acounten.

What are business financial reporting requirements for small SBA 8(a) participants?

You’ve spent several months, maybe longer, applying to get into the Small Business Administration’s 8(a) Business Development Program . Afte...