Edition 317 – Work In Progress
Let’s talk numbers today!
Whether your business is in construction, manufacturing or professional services, Work in Progress (WIP) is a number that most owners and managers of small and family business groan about – for all the wrong reasons!
It’s been my experience over 30 plus years that most businesses have a very poor handle on recording this number – and perhaps that’s because they don’t understand it, nor its importance.
In a recent meeting with a client to try and explain Work in Progress, I merely opened my wallet up and proceeded to throw notes around on the floor. First a $50, then a couple of $20 notes. As he giggled away, I explained to him that by not recording Work in Progress correctly in his business, that’s essentially what he was doing with a significant aspect of his business – throwing money away. He got the point.
There are plenty of businesses that start a job in the middle of a month, but don’t get that job to a point where it is finished, and thus billable, by the end of the month. Whilst they’re not showing the revenue in that month, the costs of:
- Labour.
- Materials.
- Subcontractors.
are all embedded in the costs of the business for that month.
To gain a true picture of your business’ financial performance in any given month, you need to account for this – work you’ve done, but not yet billed.
The poor understanding of Work in Progress is down to at least one, if not all of the following:
- Poor Recording.
- Poor Management.
- Poor Invoicing.
Poor recording often comes down to not having a system in place to capture all the data. In 2022, with the myriad of software options available to business, that’s simply inexcusable. If you don’t like any of the job costing systems that you can purchase, then heavens above, start a spreadsheet!
In businesses where there is a software option in place, it’s often the process that’s failing. No one is trained into what makes up WIP and therefore, why it’s important for the business. That lack of training leads to a lack of understanding, which ultimately leads to a shiny, bright software programme that lays dormant.
Poor management of WIP comes down to the management tier in your business. They’re not watching WIP regularly and, invariably, it’s not until a job gets to the end of the month when someone in management dials into the job costing system and gets the shock of their life when they see just how much labour and materials are tied up in a job that won’t be invoiced by month’s end.
The stupidity behind the poor management of WIP is that it’s a perfect opportunity to assess “budget vs. actual” on a job – which should be an ongoing process in business. If you’re not doing that, you’re not only leaving money on the table, you’re actually relying on old methodology and old numbers to quote new work. Your source data is well out of date.
Poor invoicing really comes down to not identifying an opportunity to invoice out (or part bill) a component of work that has been completed. By not reviewing the WIP at month end, you’re pushing invoicing into next month. Automatically, you’ve just given your clients an additional 30 days to pay the bill and, potentially, smashed your cashflow in the process.
It’s my firm belief that if your business operates in the construction, manufacturing or professional services sectors, the poor recording, management and invoicing of Work in Progress costs between 5% and 20% of your annual revenues. 5% might seem a low number. In a business with $2 million in revenues, that’s $100K that’s literally being torn up and thrown away. More than small beans!
This Week’s Tip
“In a $2m business, $100K additional revenue would drop straight to the bottom line
– and potentially double the annual profit of the business. Imagine that?.”