WIP is very important to service based organisations and horrendously under-reported and misunderstood. This could be due to differing interpretations of WIP. The objective of is article is to demystify what we mean when we talk about work in progress in order to allow the reader to informatively improve management reporting.
What Most people refer to as WIP is the value of billable time incurred on a project that has yet to be invoiced. In some organisations with monthly billing cycles WIP mostly resets itself magically around the 1st of every month to something at or near zero. The difference which could be negative or positive is any time incurred we’ve delayed or preempted the invoicing of. This is a valuable measure throughout the month because it attempts to answer the question ‘how much are we going to invoice this month?’ Which should inform resource allocation, job planning and cashflow forecasting.
The second use of the term WIP we come across more frequently at higher levels of management. This refers to the total quoted value of all current jobs won yet to be completed. This is also an important measure that I’ll call ‘Runway WIP’ as it attempts to answer the question: ‘What is the value of the work left to do?’. From this a management team might use heuristics to estimate a runway of work before the organisation, how long this runway will last with the current number of staff and again inform medium-term cashflow forecasts, debt and investment levels.
For the two forms of WIP there are four main methods of measurement.
Financial WIP is measured differently depending on what you’re using it for. If the purpose of your report is to answer the question ‘What is the value of time and/or materials for a particular job/job category/task/staff member for a particular period in order to measure performance then you’ll want to use the billable rate for time worked yet to be invoiced. If you’re your question is more like ‘What can I expect to invoice is month’ for the purpose of forecasting the reporting becomes a little more complex as you shouldn’t measure fixed price or milestone based invoiced at a billable rate. For help creating the custom reports you’ll need for this talk to an expert.
If you’re an accountant however and want to journal monthly the value of work completed yet to be invoiced you’ll need to measure the billable hours but at the cost rate for both fixed and charge-up type jobs. This is as per the revenue recognition principles of GAAP and must be measured at the cost rate in our financial reports. For help creating the custom reports you’ll need for this talk to an expert.
What we’ve called Runway WIP is measured in WorkflowMax for you provided you have selected the ‘Measure Quoted value remaining when calculating Estimated Billings’ in the Organisational settings. This is helpful as it calculates for you both the value remaining to be invoiced on quoted jobs and the billable value of time and costs yet to be invoiced on unquoted work. This should be used to answer the question ‘What work have we Won that is yet to be Invoiced’. If you’d like to exclude the completed time and costs from this report and instead answer the question ‘What work have we Won that is yet to be Done’ you’ll need to modify your estimated billings report. For help with this ask an expert.
These are two similar and equally important types of WIP that should be reported separately. We also believe the terms should not be used interchangeably so a better understanding is shared within and between management about what these mean to your organisation.
If you’d like to discuss how you should be measuring the work in progress in your business I’d recommend booking a quick session with us using this link.