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Cash Flow Uncertain for Future for Military Contractors

Posted on September 24, 2013 in Government Contracts

The recent bout of wrangling in the U.S. political world over the national budget has left many defense contractors facing an uncertain future. This is especially true for smaller firms that provide a limited array of services in the defense sector of the economy; larger companies are still doing well for now. However, with reduced need for advanced equipment and troop protections on the ground in both Iraq and Afghanistan, some of the larger military suppliers and defense contractors are also looking to retool, regroup and reexamine their business model to allow for increased peacetime utility.

A Developing Issue for Military Firms

In April 2013, Forbes Magazine published an article by Loren Thompson that outlined some of the new challenges facing the defense industry. Firms that supply weapons to the U.S. armed forces are not yet reporting significant financial losses due to the slowdown of military activities; however, service providers and training contractors are already feeling the financial pinch in cancelled contracts and reduced demand for their services. Military service providers tend to operate on much smaller profit margins than their manufacturing and weapon-making counterparts. As a result, many defense service providers are experiencing cash flow difficulties or shortfalls that may hamper future growth and profitability.

Service Providers Looking to Other Markets

Many of the services provided by defense contracting firms are also in demand in the private and commercial sectors. Linguistics training, for instance, is often required in the commercial and industrial sector to manage communications needs and develop liaisons and mutually profitable relationships between foreign vendors and distributors and the home offices of the company. Repair services can be equally valuable in the private sector with just a little tweaking toward freight and cargo vehicles rather than military transport equipment. Cybersecurity and IT services are always in demand throughout the business marketplace and can easily be marketed to commercial concerns outside the military umbrella.

Turning Swords into Plowshares

While larger military contracting firms are expected to stay with the defense industry for the long haul, many smaller firms are dropping out of the military supply and service business and are retooling their operations to meet civilian needs and demands. One example of this is the new direction recently taken by Science Applications International Corporation, more commonly referred to as SAIC. In 2012, this major defense contractor elected to split into two entities to isolate the risks and liabilities associated with its government contracting activities. SAIC will continue to perform government contracting duties and will fulfill existing contracts. The new company formed by the split will be called Leidos and is expected to continue work on engineering and health applications at the cutting edge of technological advances.

Heated Competition in the Technology Sector

Even for companies with solid credentials in the tech sector, breaking into the commercial, industrial and consumer marketplaces can be an uphill battle. Military and government contracting firms typically lack the in-depth marketing savvy of their commercial contemporaries and may not have the name recognition necessary to grab an immediate audience. Companies like ManTech have established credentials in the cybersecurity and information technology fields; however, this powerhouse innovator is hardly a household name and may be largely unknown to private companies and consumers. Worse yet, larger firms with deeper pockets can often lure top talent away from mid-range contractors like ManTech, leaving them without the human resources necessary to compete at the highest levels of the technology marketplace. Providing top salaries and benefits for these critical links in the innovation chain can help tech firms retain their best employees and ensure a competitive entry into the commercial technologies arena.

Opportunities and Risks for Smaller Businesses

For smaller contractors in the military and government sectors of the economy, finding the right openings and marketing strategies to shift to the commercial and consumer marketplaces can be major factors in ongoing success. Cash flow problems can cause serious issues in pursuing these new markets. With banks lending only to the fortunate few businesses with sufficient cash reserves and spotless credit records, many small government contractors are finding it difficult to obtain the funding necessary to make the move away from military contracting activities. Finding new funding sources can provide real help for these companies and can boost their chances of success in the competitive commercial arena.

Alternative funding sources like 1st Commercial Credit are ideally suited to provide Military Contract Funding even for companies who have been turned down by banks and traditional lenders in the past. Because 1st Commercial Credit puts the power of unpaid invoices and pending purchase orders to work as collateral for advanced financing arrangements, contractors can obtain the funds necessary to retool their manufacturing facilities, repurpose repair equipment and to market their goods and services more effectively. The added flexibility and fast funding available from 1st Commercial Credit can ensure that government and military contractors can make the move to the commercial marketplace to ensure ongoing profitability and viability in today's challenging economy.