Multiple WIP Wash-ups throughout the year
When invoicing clients on a fixed monthly, weekly, or quarterly fee it can be tempting to 'wash-up' these engagements each month or on the same frequency as the invoicing. The desire here is to reflect the revenue earned on these engagements in the performance of the people and services who work on them. Below we explain why in most circumstances this is a bad idea.
Why this is a bad idea
Your typically accounting engagement is characterised as 'lumpy'. We have a single job with multiple tasks, some of which are completed 'in-period' and the bulk of the work completed after the end of the financial year. When we structure our fixed monthly, weekly or quarterly invoicing arrangements for these engagements they are a flat fee throughout the year. This has the benefit of providing consistency and predictability of cashflow for both our clients and our practice. What it also does is create a mis-alignment of effort (time and billable amount) to invoiced value.
Because our fixed monthly fee carry's both the value or 'budget' of both the in-period activities like BAS returns, IAS, GST etc and the end of year activities; washing this invoiced value in any month up against the in-period activities only will almost always result in a write-up. This will be attributed to the people who worked on it and the in-period services 10 out of 12 months of the year.
On the other 2 months of the year where we're putting in the bulk of the time and effort into preparing the annual accounts, the same fixed value will be applied and will almost certainly result in a write-off attributed to the people who worked on them.
The result is that the performance of the people who typically work on in-period activities like BAS, GST, IAS etc will look amazing and people who work on end-of-year activities will look mud.
The same goes when we're analysing the pricing and profitability of our services. Our BAS returns will look exceptionally profitable and well-delivered and our end-of-year activities under-priced and over-budget. This is because the people and services incurred earlier in the year have already 'eaten' the revenue out of the engagement, leaving very little for the people and services at the end of the year to work with.
What can we do instead?
The best time of be completing WIP wash-ups on our retainer based engagements is at the completion of the job. This is when all of the time and invoices have been attributed to the engagement. The total billable value incurred will be washed up against the total invoiced value incurred and the win/loss recognised in a write up/off will be attributed across all of the people (and services) involved on the job by the weighted average value of their billable effort. This is the fairest and easiest method of recognising people and service performance on a retainer based job.
Doesn't this create a 'lag' between performance and recognition?
Yes. By washing up your retainer jobs on completion we are giving people and services the benefit of the doubt on their full billable rate in the interim until we have all the information required to fairly distribute the correct value of invoicing to them. The chickens always come home to roost eventually. Unless you are 100% time/cost invoicing with no fixed fees, write-ons/offs are inherently 'lumpy' because our effort almost always is incurred in a different period to the invoice date. Retainer based engagements are the extreme end of this.
Let's say we have a $500/month fixed fee engagement with a client, totalling $6,000 per annum.
We invoice $500 on the 1st of July. No time is incurred this month.
If were were to wash this value up at the end of the month it would forever be attributed to no-one and no-service.
We invoice another $500 on the 1st of August. Invoiced value to date is $1,000.
Mere puts 15 minutes at her standard billable rate of $200/hr into the job. The billable value of this is $50. The WIP balance on this job is -$950.
If we were to wash this up at the end of August Mere would be attributed a $950 write-up. Is this a good reflection of her performance? No. We don't yet know how the rest of the engagement is going to go and what portion of the $6k invoiced value Mere is fairly attributed.
We invoice another $500 on the 1st of September. The invoiced value to date is $1,500.
Wiremu puts 2 hours into a BAS return at his standard hourly rate of $200/hr. The billable value of the time incurred to date is $450.
The WIP balance on this job is -$1,050.
If were were to wash this job up today, Mere would be attributed $50/$450 x $1,050 = $116 write-up. Wiremu would be attributed $400/$450 x $1,050 = $933 write-up. Is this an accurate reflection of Wiremu's performance and contribution to the job to date? No.
It's June the following year and we've incurred $2k in billable effort on in-period activities to date. If we were washing up each month we would have already attributed the full $6k in invoiced value to the people and services resulting in a +$4k write-up.
Despite there being a $4k budget remaining on this job, there is no revenue left to be attributed to the people who will be working on the annual accounts so they are destined for significant write-offs.
There are few exceptions to this rule however you are more likely to be able to accurately wash-up your retainer jobs monthly if:
- You're a Bookkeeper
Bookkeepers do not suffer as much from the 'lumpy' nature of accounting work. Fixed invoiced values more closely line up with the time and effort incurred in any given month/year/quarter.
- You're a 1-3 staff practice
If you're a smaller practice where the same people typically do the in-period activities AND the end of year activities for the same client and job, you are better able to wash your retainer engagements up monthly as although we will be prematurely attributing write-ups to our people, they will be the same people lumped with the write-offs at the end of the year.
This won't work even for small practices if you change clients and jobs often between your team, have separation of tasks/duties ie 'BAS experts', or regular staff turnover.
This will also break all service-level pricing and delivery reporting you may need because your in-period activities will always look amazingly profitable.
Feel free to book a call to discuss your specific scenario using the link below: