Like an iceberg on a foggy night in the Atlantic, your total WIP balance in your practice can be misleading. For most practices your total WIP balance contains two large numbers: A large positive billable WIP balance and a large negative WIP balance. In this section we’ll be discussing the submerged side of your WIP so you can steer clear of the hidden dangers practices run into.
Negative WIP represents the value of work you’ve invoiced that you’ve yet to do. This is a current liability to your practice as you have a present obligation to deliver future services to your customers arising from a past transaction (the invoice).
The most common reason for a large negative WIP balance is fixed-price agreements. These were covered in Chapter 7: Setting Up Engagements. Fixed-price agreements typically involve a monthly recurring invoice that spreads the invoiced value of the work across the year. Each of these invoices causes a decrease in the WIP balance for a job.
Some of our in-period tasks like GST, payroll services etc occur throughout the year and may off-set this decrease in a job’s WIP balance. The lion’s share of the work in an annual engagement however is completed in a single month meaning that for most of the year our fixed-price agreement jobs will have a negative WIP balance. The billable value of time added to these jobs for 11 out of 12 months of the year will not offset the monthly invoiced value.
Why do we care? Due to the nature of a fixed-price agreement engagement, the time added to these jobs (although billable) is not used to determine the invoiced value of these jobs. We therefore want to exclude our fixed-price agreement jobs from our invoicing decisions. The invoicing for these jobs is independent of the time being put to them each month, and independent of their WIP balance. The aim of the game for our negative WIP balance is not to reduce it but to ensure we are able to meet our obligations on these jobs as they fall due. We are wearing the risk of the total annual billable time incurred in delivering this work being over and above the total annual invoiced value of the engagement. This makes budgets, time estimates and anticipated write-offs especially important for these jobs. Reducing our risk from fixed-price agreement jobs also relies on pricing our services accurately. If we undervalue our services, we are in for a world of pain as we are unable to invoice for any additional time required to deliver these services.
The best way to view the negative WIP balance as at the end of last month in XPM is to go to Business > WIP.
- Select the little blue triangle and ‘New filter’
- Give this filter a name such as ‘Negative WIP balance’
- Add the condition ‘Job Category’ = ‘Fixed-price Agreement’ or similar. Select all of your fixed-price agreement job categories where you may have more than one.
- Edit the date to be ‘As at’ the end of the previous month
Note: If you do not have your job categories set up to match your engagement types you are unable to filter your negative WIP from your Total WIP. See Chapter 4 - Reviewing your Practice Settings on how to set these up.
The overview tab will show you the total negative WIP balance for your practice as at the date selected. You will notice this negative balance creep closer to zero throughout the month as we add time to in-period tasks such as GST etc and jump suddenly into a deeper negative when our monthly fixed-price agreement invoices are generated.
There is no way to easily compare this value over time without re-running the report for multiple dates. This makes it difficult to monitor and ensure that this balance is remaining stable and not becoming increasingly negative. The best way to monitor your negative WIP balance in your practice is by using the WIP Performance report in Link Reporting which we will cover later in this section.