Work In Progress in a Professional Services context can be described at the value of work DONE that is yet to be INVOICED. We measure this as the value of billable time yet to be invoiced. It is a balance that exists in your practice and changes with every timesheet, disbursement, invoice, write on and write off.
Why is it important? Unlike your Accounts Receivable balance your Work In Progress balance does not feature on your balance sheet. For many professional services this is a large positive number and a current asset as the value of work DONE that is yet to be INVOICED is greater than zero. It is your account balance before it hits your receivables and your bank and should form part of every cashflow forecast for your practice. If you stopped work today this balance is the best idea of the value you could invoice today. The faster your can take billable value from your WIP balance to your Accounts Receivable balance to your bank balance the higher your bank balance will be as you have increased the velocity of money in your business.
For other professional services your WIP balance will be a large negative number representing the value of work INVOICED that has yet to be DONE. This commonly occurs in industries with large fixed-price or progress based invoicing as well as retainer billing methods of invoicing. This large negative balance is a current liability to you as if you stopped work today you'd have a present obligation from a past transaction (the invoice) to deliver these services or refund the remaining amount of work undelivered.
Chances are you have both of these numbers in your business existing simultaneously hidden underneath a single WIP balance.
Once identified and understood, your WIP balance can be broken down in a number of ways to show you the health of your clients, jobs and team and allow you to have real-life conversations with people, clients, managers and team members that will improve the performance of your practice. Below I have outlined thirteen practical ways you can use your WIP balance to improve the performance of your practice.
- Work you have INVOICED that you've yet to DO - your large negative number
We'll start with the hardest one. If in your practice you have some jobs, engagements or contracts which you invoice IN ADVANCE it is important that you separately identify these when calculating your WIP in order to make quality decisions from your WIP balance. These may be fixed monthly price agreements, retainer billing or any other contract where your customer pays you first and you deliver the services later. This creates a large negative number in your practice that can be frequently swallowed up by the large positive 'Billable WIP' balance below making both measures less useful. This large negative WIP balance represents a current liability to you as you have a present obligation resulting from a past transaction (the invoice) to deliver the services you've been contracted for or to refund them.
Despite being a large negative number this is a good number to see in a practice as it represents money already sitting in your receivables or bank account that you would otherwise have had to borrow from a bank. Your customers are financing the wages of your team prior to or while they are delivering services to them. Great!
The objective with this large negative number is to keep it level. When this number grows rapidly it typically indicates that the equivalent value of timesheets are not being done to offset the value of the invoices being generated on a monthly recurring or retainer basis. Practices that incentivise invoiced value by staff member will unintentionally prioritise jobs that are invoiced in arrears (as the recurring invoice has already been generated last period). This can put a squeeze on the delivery and quality of the services for these retainer based clients. Ideally we want more of these clients as the work is easier to schedule and the invoicing is less admin. A slow growth of this large negative number is a good sign as you bring more clients onto this more predictable retainer based model.
- 'Billable WIP' - your large positive number
For many professional businesses they invoice their services in arrears. This means that the services are delivered and invoiced either throughout the delivery of the service or on completion of some deliverable. These can be invoiced on either the time/cost basis (ie hourly) or on a fixed fee quote or estimated basis which has been agreed with the client in advance.
This creates a large positive number in your practice which does not sit on your balance sheet and escapes most people's attention. This number is your 'Billable WIP' and is the best estimate of what you could invoice today if you stopped working. It represents the billable value of work DONE yet to be INVOICED and is a current asset to you.
The objective of this large positive number is to get it as low as possible. The lower you can get this number in your business, the higher your bank balance will be as timesheets are quickly converted to invoices and customer payments. There are only two methods of reducing this large positive number, that is by generating invoices for work you have delivered or by recognising billable time your are unable to invoice (a write-off).
Invoicing is the easy part, most people get that. In later sections we'll cover methods to identify what needs invoicing faster so you can convert timesheets to money quicker. What people struggle with is when/how to recognise write-offs. The reluctance to recognise a write-off is universal. Nobody want's to do it, which leads to growing WIP balances and decreasing reliance on the performance measures we'll cover later. Keeping on top of your WIP by recognising write-offs regularly is essential for accurate job, client, team, manager, office and practice performance reporting.
Your practice will be much better off recognising write-offs sooner so you can focus on the areas of your business you can control like jobs in progress, team performance and client profitability.
- WIP on Completed Jobs
When a job is completed your Work In Progress balance on that job should be zero. All invoiced values should be invoiced and anything remaining should be written off. Having WIP on completed jobs distorts your WIP balance by including jobs we no longer have control over.
- WIP on Internal Jobs
There should be no WIP balances on any internal jobs. All internal time, training, leave etc should be marked as a non-billable activity and should not accrue a WIP Balance. Update those jobs settings before writing any balance that is there off.
- Aged WIP
Once you're measuring your Billable WIP correctly (after filtering out your fixed price recurring/retaining based jobs) you now have a better chance of identifying 'stale WIP' and invoicing this time out before your client forgets the amazing work you did for them. Similar to your Aged Receivables Aged WIP shows uses the timesheet date against today's date to show you how old that uninvoiced time is so you can either invoice it out or write it off.
- WIP Multiple
Now you have a WIP balance but is it good or bad? That depends on the nature of your industry. We discussed how a lower number is better but how low is low enough? One method we use to calculate this is the WIP Multiple. It presents your WIP balance as multiple of your average monthly earnings. If you have average monthly revenue from jobs of $200k (excluding retainer/FPA jobs) and your WIP balance is $300k you'd have a WIP Multiple of 1.5. This is to say that you have 1.5 months of revenue sitting in your WIP. This is a great way for comparing business in the same industry and seeing the results of your WIP reduction efforts over time despite variations in you revenue and WIP balance.
- WIP Days
Similar to the WIP Multiple, WIP Days is representation of your WIP balance presented in relation to the average number of days from timesheet to invoice. Lower WIP days is better. For more on how to calculate this see 'Calculating and Interpreting WIP Lock Up Days'.
- Lockup Days
Lockup Days is a unique measure for a professional services practice as it combines WIP Days and Debtor Days to measure the total average days from timesheet to money arriving in your bank account. The lower your Lockup Days the faster you are converting time into dollars and the higher your bank balance will be. By viewing Lockup Days as two parts this will allow you to see if the problem is sitting in your WIP balance or your Accounts Receivable.
- WIP by Job Manager
Now we're in the business of reducing your Billable WIP balance. Let's start with the 'who' part of that equation by talking to the people responsible. By grouping your WIP Balance by Job Manager or similar you can see the WIP balance attributed to specific job managers, have real conversations about their clients and the jobs they are responsible for and when invoices or write offs will be occurring. You can then track the change in WIP balance by job manager and focus on the managers with high and/or stagnant WIP balances.
- WIP by Client/Client Group
WIP is also risk. The longer your WIP sits the less likely you are to invoice it. High WIP on jobs in progress can also indicate job or task over-runs. If you monitor these balances you can ensure there is a fair and timely exchange of value for dollars with your clients. By grouping your WIP balance in your practice by Client or Client Group you can see which clients represent the greatest write-off risk to you and can step in to discuss this with the job manager responsible, the team members involved or the client themselves. In an accounting practice viewing WIP by Client Group is a good way of finding instances where jobs for smaller entities might be holding up invoicing larger projects.
- WIP by Job Status
Now that we've covered 'who' is responsible for your WIP balance, let's look at 'where' this WIP is sitting in your practice by organising your Billable WIP by your Job Status. Depending on how you manage the status of jobs from winning the work through to delivery this can be an enlightening way to see where the bottlenecks are in your business. Having more than one job state for 'In Progress' is also preferable as it provides you more information as to just how 'in-progress' a job is. You can then talk to the people responsible for moving that job out of that job state an into a 'completed' state so that you can send a final invoice and reduce your WIP.
- WIP by Office
If your business has multiple offices or physical locations viewing WIP by office can help you see where your WIP balance is and allow you to talk to the practice manager or partners involved in that office. WIP balances are relative to the number of staff (hours) and the billable rate they are charged out at so be mindful of this by comparing WIP Multiples across offices for a fairer picture.
- WIP by Partner
If you have business partners or people responsible for multiple teams, similar to WIP by Job Manager WIP by Partner can show you who is carrying more than their fair share of WIP. Organising your Billable WIP balance in this way is also a good way of preparing a 'To Invoice' list at month end for each partner. This will show them their clients, the billable value of time incurred to date and any invoiced values to date across the jobs for that client in order to allow them to prepare or draft an invoice.
WIP is a powerful metric for performance in professional services and is not well understood. For the few that do understand it they often struggle to translate it to practical conversations or actions. By applying the above methods of interpreting WIP you will now be in a better position to have those conversations with your team, managers and customers and take the steps necessary to reduce your WIP balance and increase your bank balance.