The DWWCF is intended to (1) generate sufficient resources to cover the full cost of its operations and (2) operate on a break-even basis over time—that is, neither make a gain nor incur a loss. Customers primarily use appropriated funds to finance orders placed with the DWWCF. Cash generated from the sale of goods and services, rather than annual appropriations, is the DWWCF’s primary means of maintaining an adequate level of cash to sustain its operations. The ability to operate on a break-even basis and generate cash consistent with DOD’s regulations depends on accurately (1) projecting workload, (2) estimating costs, and (3) setting prices to recover the full costs of producing goods and services. DOD policy requires the DWWCF to establish its sales prices prior to the start of each fiscal year and to apply these predetermined or “stabilized” prices to most orders received during the year—regardless of when the work is accomplished or what costs are incurred. Stabilized prices provide customers with protection during the year of execution from prices greater than those assumed in the budget and permit customers to execute their programs as authorized by Congress. Developing accurate prices is challenging because the process to determine the prices begins about 2 years in advance of when the DWWCF actually receives customers’ orders and performs the work. In essence, the DWWCF’s budget development has to coincide with the development of its customers’ budgets so that they both use the same set of assumptions. To develop prices, the DWWCF estimates labor, material, and other costs based on anticipated demand for work as projected by customers. Higher-than-expected costs or lower-than- expected customer sales for goods and services can result in lower cash balances. Conversely, lower-than-expected costs or higher-than-expected customer sales for goods and services can result in higher cash balances. Because the DWWCF must base sales prices on assumptions made as long as 2 years before the prices go into effect, some variance between expected and actual costs and sales is inevitable. If projections of cash disbursements and collections indicate that cash balances will drop below the lower cash requirement, the DWWCF may need to generate additional cash. One way this may be done is to bill customers in advance for work not yet performed. Advance billing generates cash almost immediately by billing DWWCF customers for work that has not been completed. This method is a temporary solution and is used only when cash reaches critically low balances because it requires manual intervention in the normal billing and payment processes. During fiscal year 2016, DLA, DISA, and DFAS reported total revenue of $45.7 billion through the DWWCF. DLA: During fiscal year 2016, DLA reported total revenue of $37.5 billion. In addition to centrally managing DWWCF cash, DLA operates three activity groups: Supply Chain Management, Energy Management, and Document Services. The Supply Chain Management activity group manages material from initial purchase, to distribution and storage, and finally to disposal or reutilization. This activity group fills about 36.6 million customer orders annually and manages approximately 6.2 million consumable items, including (1) 2.6 million repair parts and operating supply items to support aviation, land, and maritime weapon system platforms; (2) dress and field uniforms, field gear, and personal chemical protective items to support military servicemembers and other federal agencies; (3) 1.3 million medical items for military servicemembers and their dependents; and (4) subsistence and construction items to support our troops both at home and abroad. The Energy Management activity group provides comprehensive worldwide energy solutions to DOD as well as other authorized customers. This activity group provides goods and services, including petroleum, aviation, and natural gas products; facility and equipment maintenance on fuel infrastructure; coordination of bulk petroleum transportation; and energy-related environmental assessments and cleanup. The Document Services activity group is responsible for DOD printing, duplicating, and document automation programs. DISA: During fiscal year 2016, DISA reported total revenue of $6.8 billion. DISA is a combat support agency responsible for planning, engineering, acquiring, fielding, and supporting global information technology solutions to serve the needs of the military services and defense agencies. It operates the Information Services activity group within the DWWCF. This activity group consists of two components: Computing Services and Telecommunications Services/Enterprise Acquisition Services. The Computing Services component operates eight Defense Enterprise Computing Centers, which provide mainframe and server processing operations, data storage, production support, technical services, and end-user assistance for command and control, combat support, and enterprise service applications across DOD. The computing centers support over 4 million users through 21 mainframes and almost 14,500 servers. Among other things, these services enable DOD components to (1) provide for the command and control of operating forces; (2) ensure weapons systems availability through management and control of maintenance and supply; and (3) provide operating forces with information on the location, movement, status, and identity of units and supplies. The Telecommunications Services/Enterprise Acquisition Services component provides telecommunications services to meet DOD’s command and control requirements. One element of this component is the Defense Information System Network. The Defense Information System Network is a collection of telecommunication networks that provides secure and interoperable connectivity of voice, data, text, imagery, and bandwidth services for DOD, coalition partners, combatant commands, and other federal agencies. Another element of this component is the Enterprise Acquisition Services, which provides contracting services for information technology and telecommunications acquisitions from the commercial sector and provides contracting support to the Defense Information System Network programs as well as to other DISA, DOD, and authorized non-Defense customers. DFAS: During fiscal year 2016, DFAS reported total revenue of $1.4 billion. DFAS pays all DOD military and civilian personnel, military retirees and annuitants, and DOD contractors and vendors. In fiscal year 2016, DFAS processed about 122 million pay transactions, paid 12 million commercial invoices, accounted for 1,359 active DOD appropriations while maintaining 152 million general ledger accounts, and made $535 billion in disbursements to about 6.4 million customers. DOD requires each of its working capital funds to maintain a minimum cash balance sufficient to pay bills, which, for the DWWCF, includes payments for (1) consumable items (spare parts) and petroleum products from vendors; (2) employees’ salaries to perform material management, information services, and finance and accounting functions; and (3) expenses associated with the maintenance and operations of DLA, DISA, and DFAS facilities. The provisions of the DOD Financial Management Regulation that provides guidance on the calculation of DOD working capital funds’ upper and lower cash requirements, have changed several times over the past 10 years—the period covered by our audit—as discussed below. Prior to June 2010, DOD’s Financial Management Regulation stated that “cash levels should be maintained at 7 to 10 days of operational cost and cash adequate to meet six months of capital disbursements.” Thus, the minimum cash requirement consisted of 6 months of capital requirements plus 7 days of operational cost, and the maximum cash requirement consisted of 6 months of capital requirements plus 10 days of operational cost. The regulation further provided that a goal of DOD working capital funds was to minimize the use of advance billing of customers to maintain cash solvency, unless advance billing is required to avoid Antideficiency Act violations. The DOD Financial Management Regulation was amended in June 2010. As a result, from June 2010 through June 2015, DOD working capital funds were allowed—with the approval of the Office of the Under Secretary of Defense (Comptroller), Director of Revolving Funds—to incorporate three new adjustments into the formula for calculating the minimum and maximum cash requirements. These adjustments would increase the minimum and maximum cash requirements. First, a working capital fund could increase the cash requirements by the amount of accumulated profits planned for return to customer accounts. A working capital fund returns accumulated profits to its customers by reducing future prices so it can operate on a break-even basis over time. The second adjustment allowed by the revised DOD Financial Management Regulation was for funds appropriated to the working capital fund that were obligated in the year received but not fully spent until future years. The adjustment allowed the working capital fund to retain these amounts as an addition to their normal operational costs. Finally, a working capital fund could increase the minimum and maximum cash requirements by the marginal cash required to purchase goods and services from the commodity or business market at a higher price than that submitted in the President’s Budget. The adjustment reflected the cash impact of the specified market fluctuation. Beginning in July 2015, DOD revised its cash management policy to maintain a positive cash balance throughout the year and an adequate ending balance to support continuing operations into the subsequent year. In setting the upper and lower cash requirements, DOD working capital funds are to consider the following four elements: Rate of disbursement. The rate of disbursement is the average amount disbursed between collection cycles. It is calculated by dividing the total amount of disbursements planned for the year by the number of collection cycles planned for the year. The rate describes the average amount of cash needed to cover disbursements from one collection cycle to the next. Range of operation. The range of operation is the difference between the highest and lowest expected cash levels based on budget assumptions and past experience. The DOD Financial Management Regulation noted that cash balances are not static and volatility can be expected because of annual, quarterly, and more frequent seasonal trends and significant onetime events. Risk mitigation. Some amount of cash is required, beyond the range of operation discussed above, to mitigate the inherent risk of unplanned and uncontrollable events.