Action Plan for Financial Leaders: Master Indirect Rates & DSO

We’ve released an eBook titled “The Financial Leader’s Monthly Action Plan.” Every month, we share excerpts from the guide on our blog. September’s theme is “Navigate the maze of indirect rates."

For government contractors, maintaining healthy cash flow is crucial. While day sales outstanding (DSO) tracks receivable efficiency, accurately managing indirect rates is equally important. Indirect rates determine how well contractors recover their costs across various contract types — cost-reimbursable, fixed-price, and time & materials.Realistic indirect rates provide an accurate picture of your company's financial health and long-term profitability. 

However, managing indirect rates can be like navigating a complex maze. These rates fluctuate over the year, making it challenging to analyze them early on. By mid-year, trends in indirect rates become clearer, and significant deviations from targets should be addressed. 

The third quarter is pivotal to making necessary adjustments to indirect rates. To achieve meaningful course corrections, cost bases must be stable and cost pools need sufficient data to identify trends. Jumping to conclusions based on early outliers can lead to poor decisions, while waiting too long may leave little room to change course

How do you master this maze? Here's a roadmap: 

Embrace predictive power

Six to seven months of data provide a solid foundation to predict year-end indirect rates. By Q3, if there are significant variances, it’s likely too late for corrective actions. 

Remember, your decision-making abilities are only as good as the data backing them. Make sure you keep your data clean, accurate, and up to date, avoiding information silos that won’t give you the whole picture. Use tools that help you sort and translate your data into actionable insights and informed predictions.

Keep it simple 

Focus on cost recovery and contract acquisition, rather than perfect cost allocation. Regulations allow for approximate indirect rates, and overly complex rate structures often provide negligible accuracy improvements while consuming more resources and introducing risks.

Overly complex structures can consume more resources, increase the risk of errors, and make it hard for clients to understand your value proposition. 

Streamline for efficiency 

A simple indirect rate structure reduces administrative burdens and improves transparency for your clients. Simplifying both input (accounts payable) and output (billing) processes makes it easier to manage and less prone to errors.

Be proactive  

Don't wait for issues to emerge. Regularly monitor your indirect rates, track trends, and address deviations early. This proactive approach helps maintain a healthy DSO and ensures profitability. 

Bottom line 

By following these guidelines and understanding the value of day sales outstanding and indirect rates, government contractors can ensure financial stability and long-term profitability. Remember, indirect rates are about more than just cost recovery they are key to making data-driven decisions and ensuring sustained growth.

Suggested Resources 

Continue developing your knowledge of indirect rates by checking out these resources: 

• Winning More Business with a Sound Indirect Rate Strategy 

• RELYANT Global Implements Unanet Financials to Drive Efficiency 

Want to learn more? Download the entire eBook here.