Opportunities for Working Capital Fund organizations and their customers: six financial challenges - Financial Management

Program Manager, May-June, 2002 by David A. Breslin

"Who of us would not be glad to lift the veil behind which the future lies hidden; to cast a glance at the next advances of our science and at the secrets of its development during future centuries?"

Thus spoke Professor David Hilbert In 1900 before the International Congress of Mathematicians in Paris, as he presented 23 unsolved mathematical problems to his colleagues and the world.

Hilbert, who was a brilliant mathematician, wanted to challenge his colleagues In areas that would yield rich rewards by advancing the science of mathematics. So Hubert presented a set of problems designed specifically to accomplish that goal. He knew the problems must have solutions: he and his colleagues just didn't know what those solutions were. And he realized the enrichment of the science of mathematics did not come necessarily from the solutions themselves, but rather from the pursuit of those solutions. History proved him to be right.

But the purpose here is not to talk about mathematical problems. Rather, the purpose here is to make an attempt at applying Hilbert's approach to financial challenges facing Working Capital Fund (WCF) organizations.

Why?

Today's WCF organizations face financial challenges. These are not challenges from a perspective that such organizations are somehow financially challenged. Quite the contrary--these are challenges from a perspective that the business environment of WCF organizations continues to evolve and, therefore, the financial tools employed by these organizations must evolve, too. The evolution never ceases.

Behind these challenges lie opportunities for cost avoidance and improved efficiencies--all to the benefit of the customer and the program manager. Behind these challenges lie the best business practices being called for by the Secretary of Defense, the authors of the Quadrennial Defense Review, and countless others.

The economics of a WCF is not treated today as a science. But that doesn't mean it shouldn't be. Maybe it should be, and maybe we should follow Hilbert's example. Like Hilbert's mathematical problems, solutions to certain financial challenges currently elude us. Given enough time and effort, however, solutions can be found.

Although mathematical in nature, the financial challenges presented here are significantly different from Hilbert's 23 unsolved mathematical problems. The solutions to these challenges do not require great genius. In most cases, it's as simple as applying commercial practices to government organizations.

Nevertheless, these challenges are important and finding solutions may greatly benefit the way In which business is done. If for no other reason, solutions should be sought because public service is a public trust.

Working Capital Fund

Let's start with a brief summary on the economics of a WCF, which relies on sales revenue rather than direct appropriations to finance its continuing operations. The mechanics are really quite simple. A WCF intends to: 1) generate sufficient revenue to cover the full costs of its operations, and 2) operate on a break-even basis over time (no profit and no loss).

Customers, who generally can choose where to purchase services, use appropriated funds to finance orders placed with a WCF organization. So in a sense, a WCF organization operates very much like a private business, except for the absence of profit. In fact, it's designed to work that way, as a means of providing managers with a powerful incentive to control costs and satisfy customers.

Life, of course, does not work as perfectly as theory, and WCF organizations occasionally wind up at the end of the fiscal year with a profit or a loss. Profit at the end of the year indicates that customers paid too much for products and services, resulting in a gain to the WCF. Profits are returned to customers by a forced reduction in the future labor rates charged to customers. Loss at the end of the year means that customers paid too little, resulting In a drain to the WCF. Losses are recovered by increasing the future labor rates charged to customers. It's as simple as that.

Six Financial Challenges

So what are some of the financial challenges facing WCF organizations? The reader may recognize that all of the challenges are interrelated and should recognize that solving these challenges could yield a holistic way of managing the business of the organization.

Challenge 1-Projecting Future Revenues with High Precision

A basic necessity of any large business is to know the future business base a priori. Otherwise, meaningful and efficient planning in critical investment areas such as hiring, capital equipment. infrastructure, and so on is all but impossible. As instructed by John Kenneth Galbraith, uncertainty in the planning sector is despised.

For a WCF organization, the future business base is whatever's contained in official budget submittals. And many organizations have come to find that official budget submittals, which rely heavily on information from program managers and other customers concerning future orders, tend to reflect something quite different from reality. But if investment decisions made today are based on inaccurate revenue projections, how good are those investment decisions, and what is the impact on the organization? The answer is only too obvious.