In the accounting industry, WIP is the centre of all things. By understanding the WIP Equation you will understand how your practice turns time into money.
Opening WIP + Time Added + Disbursements Added - Invoiced +/- Net Write-ups = Closing WIP
Within the WIP equation are all the metrics required to run a high performing practice including:
- Productivity: Do you have the right mix of people, focussed on the right things?
- Recoverability (Pricing, Processes, People): Are are our engagements and services priced appropriately? Are they delivered well? Are our people effective at what they do?
- WIP Balance: What is the value of engagements we have invoiced in advance? How long does it take our team to turn time into money?
The beauty of this equation is that it can be applied to all levels: Practice, Partner, Client/Group, Job, People and Service. Mastering this equation at each level will ensure that you are making the most amount of money you can make with the clients and team you currently have.
But how do we know what the upper limit of our current team is? For this, we need to look outside the WIP equation, upstream toward practice capacity.
Practice capacity starts with the sum of the individual capacities of the people within our practice and is adjusted by a long list of factors including leave, time over/under runs, clients coming/going, people coming/going, roles/responsibilities changing, productivity variations to name a few.
Leave exists outside of the WIP equation but impacts the total available time an individual has and therefore the value of 'time added'.
Time Over/under runs
You will notice that unlike the WIP equation, practice capacity and the factors that effect it is not measured in dollars but in time. When a job takes longer than expected (allocated time), this eats into an individual, team and practices' capacity. In the WIP equation we see this present itself in the form of a write off. The time overrun inflates the value of time added but does not change the invoiced value. Practices with high write-offs are not achieving their practices available capacity or reaching the upper limit of their revenue.
New clients reduce your practices available capacity and increase its invoiced value. New clients with engagements invoiced in advance reduce your practices WIP balance because you get paid first. Your practice capacity (time) remains the same regardless of the method of invoicing.
New Team Members
New Team Members increase your practices available and its potential invoiced value by allowing you to allocate existing or new clients to new team members. Time Added increases as we add more people. Productivity % remains much the same. Because invoiced value also increases, your WIP balance will only increase slightly by the average job turn-around (as decimals of a month) multiplied by the monthly time added of the new team member.
Productivity increases will increase our practice WIP balance. This is because the value of Time Added will increase for the same number of total hours. More hours as a percentage of total hours are spent on clients. You can expect an increase in practice WIP balance when you increase your practice productivity. Productivity increases will also increase your practices available capacity. You have just as many available hours, but a greater proportion of them are spent on client work.
Outsourced services via the Indian Model present themselves as disbursements. The cost value of our outsourced services does not effect the WIP equation (it effects the profit equation). The billable value of our outsourced services will increase our practice WIP balance at roughly the same value as a corresponding increase in Time Added if we had a local team member do the work. A markup of 2x-3x is used to allocate the jobs budget (also not part of the WIP equation) to the outsourced services leaving a fraction for our local team. Outsourced services via the Indian Model will temporarily increase your practice WIP balance on the date we recognise the cost (not over time like local timesheets would). Any write on/off on the job will be recognised shortly thereafter and the WIP balance returned to normal. For this reason practice using the Indian Model of outsourced services typically do not see inflated practice WIP balances.
If a practice is not applying a markup to the outsourced services value they may have a deflated practice WIP balance. They will also not be providing meaningful job budgets to their team so are more likely to see write-offs on jobs as their local team eat more than their share of the job-budget.
Outsourced services via the Indian Model increase a practices available capacity because it reduces the total time required for local team members to deliver work. More clients can be sustained with a smaller team. These practices will have double or triple average hourly rates and average recovered rates on clients/jobs due to the high invoiced value to time relationship.
If there is an underreported downside to outsourced services via the Indian Model it is it's affect on your practice margins. Little is known or reliably measured in this area.
Outsourced services via the Philippine model increases your practices available capacity as you have more team members (who happen to be offshore). These additional team members increase your practices Time Added and Invoiced value as you can sustain a higher volume of clients. Depending on the down-time of your offshore team you may see reductions in practice productivity. Depending on the level of skill/experience of your offshore team you may also see higher write-offs which also presents itself as a reduction in practice capacity.