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In this lesson, you will learn:
- What do I need to know about finance and accounting systems to get started?
- What are some “best practices” for setting up my finance and accounting systems?
- What do I need to know about job cost accounting?
- What should the cost proposal portion of my proposal contain?
- What do I need to do to prepare a cost proposal?
FINANCE AND ACCOUNTING
While you must have innovative technology to win an SBIR/STTR contract or grant, you must understand basic finance and accounting to prepare the cost proposal portion of your proposal. When you win your contract or grant, you must understand finance and accounting in order to track your cost, correctly bill the government and receive payment.
Finance and accounting issues, such as intellectual property issues, require appropriate attention, know-how and a proactive approach. The questions the government will ask you may be confusing – e.g., “Do you have the financial capability to perform.” The government wants to know if you can be trusted with managing $150,000 over a six-month period even though you are (more often than not) a new venture with little or no revenue and no track record of performance. The government must ensure that the small business has adequate financial resources to perform work proposed or the ability to obtain such resources. There are two major risk considerations: (1) whether the company’s liabilities are manageable and therefore government funds will not be used for purposes other than the proposed research and development; and (2) the company’s liabilities do not endanger the best practices of the organization as an on-going concern. It is very common for a start-up company’s financial statements to reflect considerable liabilities, such as net losses. Their concerns are even more evident for Phase II SBIR pre-award considerations.
The best way to prove that your company is a viable concern is to establish adequate financial management systems and accounting practices (the government provides many guides and references to assist you). When you are successful in doing this, the government is able to pay you in a timely fashion. Adequate financial systems will also prepare you for performing on Phase II Awards. Remember, there is significantly more money involved in Phase II projects. Therefore, the government is even more concerned about discerning the financial health and viability of your company. You simply cannot use “shoebox accounting” and naive or shoddy record-keeping practices.
GETTING STARTED WITH FINANCE AND ACCOUNTING
Start by retaining a Certified Public Accountant (CPA) that understands government cost accounting and government financial management systems. The CPA will assist you in creating a chart of accounts suitable for your business project budgets and the time charging procedures necessary for job cost accounting.
Find a Good CPA
While there are many good CPAs, not all CPAs understand government cost accounting and the nuances and special requirements of doing business with the government. Ask the following questions of any potential CPA that you are considering for your business:
- Do they understand job cost accounting and do they know how to set up and generate reports from such an accounting system?
- Do they understand how to calculate all the indirect rates – fringe, overhead, general and administrative, taking into account the unallowable expenses?
- Can they explain to you with clarity their method of calculating each indirect rate and how to generate a complete project cost proposal?
- Do they understand the subtle dangers of uncompensated overtime and can they help you set up a practice to prevent future problems with Phase II awards?
- Can they help you establish an acceptable time charging system and practice?
Hint: Try to find retired government auditors. They are excellent resources for helping new ventures in all aspects of financial management and accounting. They understand the issues in dealing with the government and will often structure their rates and practices to suit the needs of a new venture.
Establish a Chart of Accounts
A chart of accounts is a list of specific categories of expense and revenue types that you use to collect financial information. Examples include assets, liabilities, equity, revenues, and direct and indirect (operating) expenses. Use your chart of accounts to record expenses or revenue by each project for both internally funded and externally funded projects. For example, one account number can be used to track the financial expenses associated with writing your proposal. A different project account number can then be used to track the actual research effort you are contracted to perform.
Create both Company and Project Budgets
A budget is simply a list of planned expenses and revenues – it is your plan stated in monetary terms. It should also be used to measure your progress on performing on a contract or grant against your original (proposed) plan. You should regularly compile and compare your project budgets to actual project performance and compare both budgeted time and dollars vs. actual time and dollars expended. The government wants your financial management and accounting system practices to segregate costs by each project and to see that you can allocate and explain all allowable direct and indirect expenses in accordance with acceptable government practices.
Establish a Time Charging Procedure
From the point of view of the government, the best way to track the incurred direct labor costs of an SBIR or STTR project is to have each person working on a project prepare a time card documenting their daily activities on each project. All employees should fill out time cards daily, even if they are not always working on a funded research or development project. If you want to win more than one Phase I or Phase II SBIR/STTR, you will need to have a system for properly assigning the correct costs to each project. Phase II awards will eventually trigger a government audit. If you have an effective time-charging system in place, audits will go much more smoothly. The government will not only be able to trust you with more awards, but you will get paid more quickly. And more importantly, you can be sure of being paid all you are owed and you won't have to worry about not being fully reimbursed for your expenses or worry about some future audit requiring you return funds to the government because of improperly charging costs.