Financial Analysis Tools Reference Guide (AFLMA).doc

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<ul><li> Financial Analysis Tools Reference Guide AFLMA Final Report LC200216100 Capt Roy D. Thrailkill Team Members Lt Col Kim C. Triesler Tom W. Gage, Ph.D. August 2003 Distribution authorized to DoD and DoD contractors only for administrative purposes; 01 Aug 03. Other requests for this document shall be referred to SAF/AQCP. AIR FORCE LOGISTICS MANAGEMENT AGENCY MAXWELL AFB, GUNTER ANNEX AL 36114-3236 </li> <li> REPORT DOCUMENTATION PAGE FORM APPROVED OMB No. 0704-0188 Public reporting burden for this collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden to Department of Defense, Washington Headquarters Services. Directorate for Information Operations and Reports(0704-0188), 1215 Jefferson Davis Highway, Suite 1204 Arlington, VA 22202-4302. Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to any penalty for failing to comply with a collection of information if it does not display a currently valid OMB control number. PLEASE DO NOT RETURN YOUR FORM TO THE ABOVE ADDRESS. 1. REPORT DATE 2. REPORT TYPE 3. DATES COVERED (From - To) August 2003 Final Report June 2003 - August 2003 4. TITLE AND SUBTITLE 5a. CONTRACT NUMBER Financial Analysis Tools Reference Guide 5b. GRANT NUMBER 5c. PROGRAM ELEMENT NUMBER 6. AUTHOR(S) 5d. PROJECT NUMBER Capt Roy D. Thrailkill, AFLMA/LGC, DSN 596-4085 5e. TASK NUMBER 5f. WORK UNIT NUMBER 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) 8. PERFORMING ORGANIZATION REPORT NUMBER Air Force Logistics Management Agency/LGC 501 Ward Street LC200216100 Maxwell AFB, Gunter Annex AL 36114-3236 9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSOR/MONITORS ACRONYM(S) SAF/AQC 11. SPONSOR/MONITORS REPORT NUMBER(S) 1060 Air Force Pentagon, Washington, DC 20330-1060 12. DISTRIBUTION/AVAILABILITY STATEMENT Distribution authorized to DoD and DoD contractors only for administrative purposes; 01 Aug 03. Other requests for this document shall be referred to SAF/AQCP. DESTROY BY ANY METHOD THAT WILL PREVENT RE-ASSEMBLY OF THE PARTS. 13. SUPPLEMENTARY NOTES AFLMA Blue Cover report 14. ABSTRACT The guide is written to accommodate a broad audience of USAF contracting personnel engaged in a wide variety of financial issues. This audience includes those engaged in systems, operational, and specialized contracting. It does not attempt to capture all of the potential financial issues that personnel may encounter across these realms, but rather to provide guidance on where additional information may be obtained to facilitate addressing issues and solving problems at hand. 15. SUBJECT TERMS financial analysis, contracting 16. SECURITY CLASSIFICATION OF 17. LIMITATION OF 17. NUMBER OF 19. NAME OF RESPONSIBLE PERSON ABSTRACT PAGES a. REPORT b. ABSTRACT c. THIS PAGE Capt Roy D. Thrailkill 20. TELEPHONE NUMBER Unclassified Unclassified Unclassified DSN: 596-4085 Unlimited 20 Standard Form 298 (Rev. 8--98) Prescribed by ANSI Std. Z39.18 i </li> <li> Executive Summary PROBLEM STATEMENT: Contracting Officers (COs) and Contract Administrators (CAs) do not have a SAF/AQC- sponsored reference guide to assist them in determining the financial health of commercial firms the Air Force contracts with or intends to contract with. BACKGROUND: The shift in emphasis in Air Force contracting from sealed bidding to negotiated procurements has increased the requirement for COs to understand the financial makeup and condition of the firms competing for Air Force contract awards. COs must know where they can financial data and information on these firms and how to analyze it to determine their financial health. In conducting this analysis, a distinction should be made between publicly traded firms that provide financial information in accordance with government procedures and industry standards (to include Securities and Exchange (SEC) procedures) and private firms that do not disclose such information to the general public. This distinction highlights the need for COs to explore avenues other than those found strictly in the public domain when evaluating the financial health of private firms. Key government agencies, to include the Defense Contract Audit Agency (DCAA) and the Internal Revenue Service (IRS), may provide COs with additional information needed to make key financial analysis decisions and their potential benefit should be know by the COs. Furthermore, it is important for COs to understand how commercial firms evaluate each other when engaging in business transactions independent of the government, particularly when financing is involved. Finally, in addition to a strict quantitative analysis of available data and an understanding of commercial practices, COs should understand that other resources are available to help them recognize potential financial problems, which includes past performance evaluations. OBJECTIVE: Consolidate and organize information uncovered during the research process into a guide for COs and CAs to use for effective evaluation of the financial health of government contractors. ANALYSIS/RESULTS: There is a wide range of financial analysis-related reference material already available for use by contracting personnel. Effective consolidation of references to this material is the primary benefit of this effort as it should facilitate rapid location and access by field personnel. ii </li> <li> ASSUMPTIONS AND CONSTRAINTS: With regard to the viability of existing financial analysis-related material, the primary constraint is the degree to which interviews with selected individuals accurately capture the scope of available material for use by the field. CONCLUSIONS: There is a wide variety of existing material for contracting professionals to reference when conducting financial analyses. The intent, and result, of this final product is to make field personnel aware of it and facilitate its incorporation into their financial analysis activities. RECOMMENDATIONS: Publish and distribute the final report. iii </li> <li> Table of Contents Page SF 298 ..................................................................................................................................I Executive Summary...........................................................................................................III 1. Introduction.....................................................................................................................1 2. Financial Basics..............................................................................................................3 3. DFARS Guidance...........................................................................................................9 4. Defense Contract Audit Agency...................................................................................14 5. On-line Resources and Publications.............................................................................16 6. WWW Site Summary...................................................................................................17 7. Bibliography.................................................................................................................19 8. Acronyms......................................................................................................................20 iv </li> <li> 1. Introduction (by Lt Col Kim C. Triesler) The purpose of this guide is to provide contracting officers (COs) and contract administrators (CAs) with an effective reference tool for use as they encounter various contracting-related financial issues in the field. In particular, the guides intent is to help the COs and CAs determine the financial viability of any firm that they potentially may do business with before and after contract award. In order to do this, the guide is structured so that COs and CAs can quickly locate information on specific topics. Where possible, applicable text from source documents is included in the guide. In instances where the source document itself is too large for inclusion in the guide, a brief summary of the document is provided along with a hyperlink to a location where a full-text copy can be found. Furthermore, the guide is written to accommodate a broad audience of USAF contracting personnel engaged in a wide variety of financial issues. This audience includes those engaged in contracting activities at all levels: systems, operational, logistics, research and development, and specialized contracting. It does not attempt to capture all of the potential financial issues that personnel may encounter across these realms. Instead, it provides guidance on where additional information may be obtained to facilitate addressing issues and solving problems that may arise. The guide is also thoroughly referenced so users can locate the source documents used during development for further exploration of the topics covered. Users are encouraged to review the source documents at the locations provided should they have any concerns with regard to the guides currency. In general, here is a summation of the information contained within this guide so that you can readily decide which section(s) you need to focus on. Chapter 2, Financial Basics, describes the balance sheet, income statement, and statement of cash flows. These are the principal documents youd need in order to analyze any firms financial viability. Next, various ratios are provided in order to analyze any financial statement. These ratios should then be compared with other similarly-sized firms within a reasonable geographic area in order to determine if the firm being reviewed is or is not, in fact, financially viable. Next, in Chapter 3, DFARS Guidance, weve listed excerpts from DFARS 232 (Contract Financing) that provide a wealth of information about sources of financial information that the contracting officer needs to review when the contracting officer does not otherwise have sufficient information to make a positive determination of financial responsibility. Chapter 4, Defense Contract Audit Agency, deals with some of the many professional accounting and financial advisory services that can readily be tapped into. Chapter 5, On-line Resources and Publications, lists 3 items. The first is the DCAA Contract Audit Manual, and the second is the Contract Pricing Reference Guides which links to an excellent reference source that has an astounding array of financial analysis information readily available. This is, perhaps, the best reference source within this guide. It does a superb job discussing how to do a financial analysis of any sized firm and gives good descriptions of 1 </li> <li> various financial statements and financial ratios and what they are used for. In particular, the reference discusses the Altman Z-test, which is a failure-prediction model. It is very...</li></ul>

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