This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
Get a copy for your desk at www.linkedpractice.com
Billable WIP represents the positive element of your practice’s WIP balance. It is the value of work done that is yet to be invoiced. Your billable WIP balance is the sum of the individual WIP balances for all the jobs with a positive WIP balance in your practice at any given time.
The objective of this large positive number that exists within your practice is to keep it as low as possible. We can decrease the balance of our billable WIP by generating invoices or by applying write-offs. This allows us to prepare pre-billing reports to accurately anticipate the value of upcoming invoices and inform our short-term cash-flow forecasts. By converting time sheets to invoices and invoices to cash in our bank account faster, we are increasing the velocity of money in our practice.
Our billable WIP balance is calculated in the same way as our total WIP balance.
Opening WIP Balance
+ Billable value of time
+ Billable value of disbursements
- Invoiced value
= Closing WIP Balance
Here we exclude the negative balances on any fixed-price agreement jobs. The invoicing frequency and value for these is determined by the contract, not by us. The billable WIP balance in our practice represents the uninvoiced value of work done that we have the potential to invoice.
Referencing the equation above, we can see that we can reduce our billable WIP balance in two ways:
- Creating invoices for jobs
- Applying write-offs to jobs.
To create invoices or apply write-offs to jobs, we need to be talking to our job managers or partners to ensure we are creating invoices for the correct value for the correct jobs. Which jobs we can invoice and which we cannot is determined by:
- The terms and nature of the engagement we have with our customer
- The current job state
- The job budget or expected fee
- The job task progress or completion
- The billable value of time incurred to date
- Any invoiced values to date
- Any write-ups or write-offs applied to date
- The current WIP balance on the job.
The same set of information is required by a job manager or partner to choose when or how much of a write-on or write-off to apply to a job. We’d prepare this information ‘as at’ a specific date being our suggested invoice date which is typically the end of each month. So let’s look at how we can pull this information together using XPM.
The best way to view the billable 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 ‘Billable WIP Balance’
- Add the condition ‘Job Category = Billable Fees’ or similar. Select all of your billable fees job categories where you may have more than one
- Hit ‘Save’
- 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 billable WIP from your total WIP. See Chapter 4: Practice Settings for how to set these up.
The ‘Overview’ tab will show you the total billable WIP balance for your practice as at the date selected. This is the number you want to get as small as possible. If we’re on a monthly invoicing cycle, it will naturally grow throughout the month as we add billable time to the job, and reduce as we generate invoices at the end of each month.
There is no way to easily compare this value over time without rerunning the report for multiple dates. This makes it difficult to check that this balance isn’t creeping upward over time or to compare a current balance to the same time last year. The best way to monitor and reduce your billable WIP balance in your practice is by using the WIP Performance report in Link Reporting, which will be covered in more detail at the end of this section.
So now that we have our 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 and 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.......................... $100,000
Billable value of time￫....................................... $125,000
Billable value of disbursements￫.......................... $5,000
Invoiced value￫................................................... $90,000
= Closing billable WIP balance￫....................... $130,000
After completing his invoicing for April on 5th May, Aaron Aardvark has run his billable WIP report from XPM as at 31st March, and again on 30th April. He can see that his billable WIP has increased from $100,000 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 $130,000 in fees for April, Aardvark & Aardvark CA were only able to invoice $90,000 in that month, resulting in a $40,000 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 the total value of the fees we earned this month.
The $40,000 increase in the billable WIP balance caused by time yet to be invoiced was offset in April by the net write-offs of $10,000k. This is made up of write-ons of +$5,000 and write-offs of ($15,000). Write-ons 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-ons and write-offs for our practice separately. We also need to run five different reports to achieve 5/7th of the 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 $125,000 + billable value of disbursements $5k)
/ closing billable WIP balance $130,000
The answer is a WIP multiple of 1.0. This indicates that Aardvark & 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 two 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 uninvoiceable. 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.
Now that we have analysed your billable WIP balance, let’s take a look at how we can reduce it.
Using the same billable WIP filter you prepared earlier in XPM, go to ‘Business > WIP’ and select the ‘List’ tab. This will hide your subtotal for the billable WIP balance in your practice but provide more detail into the jobs that make up this balance.
If you have multiple partners or job managers in your practice, add an additional criteria to this report for ‘Job Manager =’ or ‘Job Partner =’ and create a WIP filter by ‘Job Manager’ or ‘Partner’. This will allow you to see which job managers or partners are carrying the most WIP and prioritise your invoice preparation accordingly.
Tip: First ensure that all jobs are allocated a job manager and partner. This is covered in Chapter 7: Setting Up Engagements under the general guidelines, and again in Chapter 8: Project Management under the setting up jobs section.
XPM does not subtotal this report for us, so we are unable to quickly identify the job managers or partners most requiring invoices or write-offs to be applied. The only way to see who in your practice needs to create invoices is to use the WIP Comparison report in Link Reporting grouped by job manager or partner, which will be covered in more detail at the end of this section.
Inside your XPM, you should now have a list of just your billable jobs (excluding your fixed-price agreements). You can sort this high to low by clicking on any of the column headers. Sorting by WIP is a good option here. This will allow you to prioritise your invoicing to the jobs with the highest WIP balance.
Despite filtering out fixed-price agreements, you may still have some negative values in this list. These will be from billable fees jobs that have a quoted value for which we have raised a deposit invoice. These jobs are typically one-offs such as cash-flow forecasts. As we add time to these jobs, the negative WIP balance created by our deposit invoice will be reduced. Eventually we will have a positive WIP balance again on these jobs, that we should consider sending a final invoice for.
Now that we can see our billable WIP for our jobs in our practice, and prioritised these on those jobs most needing invoices. How do we go about creating these?
It is important to firstly note that in XPM the values shown for time, costs and deposits in this report do not represent the total values of time, disbursements or invoices to date on these jobs; only the uninvoiced portion of these. To see the total billable and invoiced values to date, we will need to drill into each of the jobs in this list.
Holding down the ‘Ctrl’ key if you’re using a PC or ‘Command’ if you’re using a Mac, open up each job in a new tab by clicking on the job number. Review the financial status of these jobs by going to the ‘Financial’ tab and viewing the ‘Job Financial Summary’ (on the lower left).
This will provide the job manager and partner with some of the remaining information they will need to determine what jobs can be invoiced and what value those invoices should be.
Your job managers and partners may still be missing some key information required:
- Job budgeted value or expected fee
- Task progress and completion
- Any write-ons or write-offs incurred to date.
It is also important to note that unlike the billable WIP report you have prepared, the job financial summary cannot be run retrospectively. It always shows the current financial state of a job as at the date and time you run it. This means the time, task progress, billable and invoiced values shown in this report may not match the values shown in the WIP report.
The only place your job managers and partners can see all the information they need to create invoices and apply write-offs in one place is in Link Reporting. Link Reporting has been designed to plug all the reporting holes in XPM, and to deliver insights the accounting industry has never had access to in the past. It uses a clever set of calculations on your XPM data to generate reports that are much easier to interpret, allowing you to see the areas of your practice that require your attention. Measuring and reducing your billable WIP balance in Link Reporting is easy, and provides you with all the information your partners need to make informed invoicing and write-off decisions.
The WIP Performance report in Link Reporting is the only report that allows you to identify the billable WIP balance in your practice broken out into each of the elements of WIP. You can drill all the way down to a time sheet level to see how and why your WIP balance is increasing. The WIP Performance report also provides you a WIP multiple which you can compare over time to ensure your billable WIP balance remains low.
The WIP Comparison report in Link Reporting allows you to group, subtotal and drill into the individual WIP balances on each of your jobs. This lets you prioritise and complete invoicing for job managers and partners faster, and apply write-ons/offs more regularly. This reduces your WIP balance, identifies process bottlenecks, and prevents hold-ups on invoices where there are multiple entities involved.
Now that we’ve covered measuring, monitoring and reducing the billable WIP balance in your practice, let’s look at its brother: Negative WIP. You can help your team succeed by providing them the information they need at www.linkreporting.com
Enjoy this article? Buy the book.
Need help setting up, fixing up, or getting up to speed on Xero Practice Manager?
We can help at www.linkedpractice.com