Quick Guide to ‘Work In Progress’ and its Impact on Cash Flow - CFO on Call
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Quick Guide to ‘Work In Progress’ and its Impact on Cash Flow

Quick Guide to ‘Work In Progress’ and its Impact on Cash Flow

When you’re in a service business Work In Progress Days (WIP Days) is a vital number to be in control of.  WIP Days is the number of days, on average, that jobs are in progress prior to invoicing.

One way of calculating this measurement is as follows:

Days WIP = Total Current WIP/Direct Costs x Time Period

e.g. If you have Current WIP of $1,000,000 and Direct Costs for the year to date of $2,500,000 then the formula would be as follows:

$1,000,000/$2,500,000 x 365 = 146

This means that in this example, the average WIP Days equals 146.  That is 146 days, on average, that jobs are in progress prior to invoicing or cash in-flow.  In other words, your business needs to cover the cash-flow requirements for a 146-day period.

This is a very sensitive ‘Driver’ in relation to cash-flow in a business.  Any movement upwards in this ‘Driver’ can have severe impact on cash-flow.  Any improvements in the number of WIP days will reduce your cash-flow requirements.

A large part of working capital in a service business is made up of labour or wages, contractors, materials, services and equipment used on jobs, as well as any other costs incurred.

WIP and Growth – I have seen many businesses struggle to manage growth in a service-based business due to lack of understanding of WIP Days and its impact on working capital.  I recently spoke to one business owner who had massive growth in his business.  He couldn’t understand why he was having severe cash-flow problems!

It turned out that he hadn’t allowed at all for the extra costs incurred in taking on more jobs.  More jobs means more labour to service the jobs, it means more materials and other costs to get the jobs done.  If you haven’t allowed for these extra costs or extra funding to cover them until payment is received, then cash-flow issues will be the result.

The other problem with taking on more jobs is that resources get stretched.  Not just service delivery resources but also administration resources.  When the number of jobs gets bigger it’s absolutely vital to be on top of the administration.  There can be all kinds of reasons why WIP Days can blow out.  There are often material delivery delays, misunderstandings about service visits and lost records.

The smart way to manage WIP Days is by using a Job Management system.

It doesn’t matter what system you use, but if your business is growing it’s vital to have a system.  A good system provides control for management.  If you are trying to manage jobs in your head, then business growth is going to provide massive headaches.

Customers very quickly get annoyed when jobs aren’t completed properly, and this has an impact, not only on WIP Days, but on payment collection days, which further adds to cash-flow issues.

A good job management system should include:

  •   Quotes
  •   Parts and Labour tracking on jobs
  •   Job Cards
  •   Orders
  •   Delivery dockets
  •   Invoicing
  •   Scheduling
  •   WIP reporting.

It should also include the ability to compare Quotes versus Actual results on jobs and profitability on each job and type of job.  It may seem like a pain to install such a system, but once entrenched into your business the benefits far outweigh the cost.

Imagine being in a position where you have all previous job and quote information at your fingertips instead of rifling through paper all the time!

A job management system also allows you to analyse the productivity of labour by reporting on labour sold compared to labour paid for.

This can be a real eye opener once you start to track and report on it.  Many systems also allow you to calculate selling prices of materials based upon the cost price rather than being fixed, and you having to recalculate them all the time.

This can make a massive difference to your profit at the end of jobs and remove a lot of hassle, constantly having to keep an eye on cost prices.

For more information and ways to reduce WIP days – download our eBook ‘Producing Better Performance & Profit In Your Jobbing/Services Business’