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Financial Capability Reviews. Dale Newton Senior Functional Advisor-Pricing. Pre-Award Surveys Post-Award Surveys Contractor Alert List (CAL) Novation Agreements. Agenda. Financial Capability Reviews are performed for several reasons.

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financial capability reviews

Financial Capability Reviews

Dale Newton

Senior Functional Advisor-Pricing

agenda
Pre-Award Surveys

Post-Award Surveys

Contractor Alert List (CAL)

Novation Agreements

Agenda

Financial Capability Reviews are performed for several reasons.

This presentation provides an overview of things to consider when performing these reviews.

The financial capability of a company is not a precise determination. It relies on the judgment of the reviewer.

pre award surveys
Pre-Award Surveys

Several things should be

considered before the review

is started.

1. Prior Reviews . Do we need

updated information?

2. How Much Money is

required to finance the

anticipated contract?

prior reviews
Prior Reviews
  • If there is sufficient data on file which is current , the review can be started immediately.
  • If current data is not on file, a letter should be sent to the company requesting the most current data available. This data includes the most current interim balance sheet and profit/loss statement. Also, the balance sheet and profit/loss statement for the previous two completed fiscal years. The appropriate certifications should be made by an officer of the company or the CPA Firm. Also, information on backlogs of orders on hand and sales forecasts should be provided.
how much money is required
How Much Money Is Required?
  • Things To Consider
  • Type Of Contract (FP, CPFF, ID/IQ, etc.)
  • Delivery Schedule. Are there incremental deliveries or is there one large delivery? This can be determined by reviewing the solicitation. Also, the technical reviewer should be aware of the delivery schedule as a part of his review.
  • Will there be Progress Payments made or will Public Vouchers be submitted?
sources of financing
Sources of Financing

1. Working Capital

2. Banks / Investors

working capital
Working Capital

Current Assets

Less: Current Liabilities

Equals = Working Capital

balance sheet
Balance Sheet

ASSETS

Current Assets:

Checking / Savings Account

Cash on Hand

Accounts Receivable

Inventories

Work in Process

Prepaid Expenses

Fixed Assets:

Land

Buildings

Less: Accumulated Depreciation

Machinery and Equipment

Less: Accumulated Depreciation

balance sheet9
Balance Sheet

LIABILITIES

Current Liabilities:

Accounts Payable

Notes Payable

Long Term Liabilities:

Mortgage

balance sheet10
Balance Sheet

NET WORTH

Common Stock

Retained Earnings

balance sheet11
Balance Sheet

ASSETS = LIABILITIES + NET WORTH

ratios
Ratios

1. Current Assets / Current Liabilities :

2:1 is considered good

2. Quick Ratio : (C A less: Inventory / C L)

1:1 is considered good

3. Total Liabilities / Net Worth :

Some companies operate with large

amounts of debt. Ratio can be high.

technical default
Technical Default

All Liabilities are classified as being

current. As a result, poor ratios.

This occurs usually because certain

terms of the loan are not being met.

Analyst should review the facts.

bankruptcy
Bankruptcy
  • Not Good
  • Chapter 11, Bankruptcy -
  • Reorganization Plan approved
  • by the Court. A final decree by
  • the judge ends bankruptcy.
  • All Liabilities are classified as being
  • current. As a result, poor ratios.
  • Chapter 7, Bankruptcy -
  • Disposition of Assets
  • Analyst should review the facts.
bank investor commitment letter

Bank / Investor CommitmentLetter

Legal Wording indicating that they will loan money to company specifically for the anticipated contract if necessary. Also, letter specifies that contract award may rely on this commitment.

subordination agreements

Subordination Agreements

Agreement signed by the creditors of a company which states that they are willing to change their rights to payments in order to help the company finance the contract. They subordinate their rights to the government.

progress payments public vouchers

Progress Payments / Public Vouchers

Fixed Price / Cost Type Contracts

Acceptable Accounting System

Based on costs incurred

cash flow analysis
Cash Flow Analysis

The company should be asked for a cash flow

analysis in situations where a large contract is

contemplated and there is a concern

that they don’t have the necessary financing.

cash flow analysis19
Cash Flow Analysis

The cash flow analysis should be on a month

to month basis for the period of performance of

the anticipated contract. Also, the analysis

should reflect the anticipated contract. The

analysis reflects cash receipts and

disbursements.

cash flow analysis20
Cash Flow Analysis
  • The review of the cash flow analysis aims
  • to determine the reasonableness of the
  • projections. This is done by comparing the cash
  • receipts to sales, new loans, etc. and cash
  • disbursements to purchases, payroll,
  • operating expenses,etc. This information is on
  • the profit / loss statement.
dun bradstreet report
Dun & Bradstreet Report
  • Valuable Source Of Information:
  • Background on company
  • Credit Rating
  • History of Payments to Suppliers
  • UCC Filings, Liens, Judgments, Bankruptcy
  • Financial Statements
talk to bank
Talk To Bank
  • Determine the Overall Relationship
  • The company should make the referral to the bank and the person to talk with. If they don’t, you may not get any information.
  • Discuss account balances, loan balances, lines of credit, how payments are made on loans and the overall relationship.
  • Banks are interested in helping a company get new contracts.
final recommendation
Final Recommendation
  • Look At All The Facts
  • Is there adequate Working Capital ?
  • Are loans available if needed ?
  • What are the risks to the government and should another supplier be considered ?
  • Discuss your thoughts with other personnel working on the technical aspects. Also, discuss with supervisor.
  • Make Recommendation using your judgment.
post award reviews
Post Award Reviews
  • Associated with contracts in process that are receiving progress payments.
  • Request for review may be initiated by the ACO. However, a Price Analyst can initiate a review or do a follow-up review on his own recognizance.
  • The same information acquired during a pre-award review would be used during a post award. The final recommendation would comment on the overall financial condition of the company.
contractor alert list cal
Contractor Alert List (CAL)
  • One of the criteria for placement on the CAL is the financial condition of a company. The criteria indicates that if a company would or did have a negative pre-award review based on their financial condition there is a basis for placement on the CAL.
  • (editorial note 8/02- now RAMP- not CAL)
  • This determination requires judgment since we do not always do pre-awards for all of the contracts we administer.
novations
Novations
  • There are numerous mergers / re-organizations / acquisitions / etc. that require novations to contracts. Prior to the novation, financial statements are required to be submitted to the government.
  • A determination as to the financial capability of the new organization should be made.
  • The data already discussed in pre-awards, post awards and CAL (now RAMP) can be utilized. It is your judgment.
final thoughts
Final Thoughts
  • Gather all the facts that you can get. There may be unique circumstances.
  • Discuss your thoughts especially if you are dealing with a company having financial problems and you may have to write a negative report.
  • In writing your report, reflect the facts. Be careful, do not report on unsubstantiated matters. They can be embarrassing and are unprofessional and could do harm.
  • Express your judgment.