So now that you have calculated your billable WIP Balance, how do we know if it's acceptable or not? We know a lower number is better but how high a balance is too high? The answer is in our WIP multiple. Our WIP multiple describes the relationship between our WIP balance to our monthly fees. Our monthly fees are the billable value of time and disbursements incurred in a month. The equation looks like this:
(Billable value of time + billable value of disbursements) / closing billable WIP balance for that month.
The answer you receive will be a whole number greater than zero.
Let’s look at an example:
Let’s say Aardvark & Aardvark CA has the below transactions for the month of April:
|Opening billable WIP Balance||$100k|
|+ Billable value of time||$125k|
|+ Billable value of disbursements||$5k|
|- Invoiced value||$90k|
|= Closing billable WIP Balance||$130k|
After completing his invoicing for April on the 5th of May, Aaron Aardvark has run his billable WIP report from XPM as at 31 March, and again on the 30th of April. He can see that his billable WIP has increased from $100k at the end of March to $130k at the end of April. Why has this increased?
We can see by breaking out the elements of our billable WIP balance, that despite generating $130k in fees for April, Aardvark & Aardvark CA were only able to invoice $90k in that month resulting in a $40k increase in their WIP Balance. We can then drill into the each of these elements of billable WIP to analyse the underlying jobs, clients, staff, time sheets, disbursements and invoices to identify further invoices we might be able to generate; or why we were unable to invoice this month the total value of the fees we earned.
The $40k increase in the billable WIP balance caused by time yet to be invoiced was off-set in April by the net write-offs of $10k. This is made up of write-on’s of +$5k and write-off’s of ($15k). Write-on’s occur on jobs where we are able to invoice greater than the value of billable time incurred on a job. Write-offs occur when the billable value of time added to a job is unable to be invoiced. Aaron Aardvark should drill into his net write-offs to analyse which jobs, clients, tasks and staff contributed to these so that he can remedy the value of the engagement, training or process issues that led to the write-offs.
Although XPM can show us that our WIP is changing over time, it is unable to show us where it is changing or why it is changing. This is because we are unable to view our write-on’s and write-offs for our practice separately. We also need to run 5 different reports to achieve 5/7th of information we need to determine why and where our WIP balance is increasing. The WIP Performance report in Link Reporting, allows you to easily view and compare your billable WIP balance over time. This report will be covered in more detail later in this section.
Let’s continue our example:
Aaron can now see why his billable WIP Balance has increased, but is it still acceptable? Should he be concerned? The answer is in his WIP Multiple.
The WIP Multiple for the month of April for Aardvark & Aardvark CA can be calculated as:
(Billable value of time $125k + billable value of disbursements $5k) / Closing billable WIP balance $130k. The answer is a WIP multiple of 1.0. This indicates that Aardvark and Aardvark have 1.0 months (30 days) worth of earnings sitting in their WIP balance.
If your WIP multiple is 2.0 or more this would indicate you have 2 months of earnings sitting in your billable WIP balance. That’s an average of 60 days from time sheet to invoice. By the time the services you have delivered are 60 days old, the memory of what you did for your customer is fading and your WIP balance is becoming increasingly un-invoiceable. This is sometimes referred to as ‘stale’ WIP. Unlike your favourite Central Otago Pinot Noir, or Kāpiti Blue Cheese, billable WIP does not improve with age.
We can compare your WIP multiple to previous periods to get an idea of the rate of change in your billable WIP Balance. By monitoring this number over time we can ensure that our WIP Balance is not creeping up (as they tend to do). By breaking out and drilling down into the various components that make up our billable WIP balance we can quickly identify the causes for any increases in WIP and remedy these. XPM does not provide the detail required to determine the causes of an increasing WIP balance or what we should do about it. The best way to view, monitor and reduce the WIP multiple in your practice is to run a WIP Performance report in Link Reporting, which will be covered in more detail at the end of this section.