Does anyone have any advice regarding this? Tearing my hair out trying to think and google brings up multiple ways of doing it.
If say January sales invoices were raised for £190,000 but the projects were being worked on in October, November and December how would you account for this in the management accounts? Also, how would you account for the profit that is earned in those months but obviously not realised in the Invoice in January?
Is this a Limited Company, or a Partnership? What kind of business / projects?
Matt123
How is Work in Progress treated in the annual accounts?
How are projects managed, in terms of comparison of time spent against time budgeted, target milestones vs actual billing events?
You don't want to add yet another definition of WiP, to those already in use. If none is in use, management accounts is probably not the place to start.
Work in Progress is conceptually identical to Stock. Your raw material is employee time, instead of physical stuff you have bought in.
One key issue can be: at a period end eg monthly, do you / business owners / project managers ask "What is the value at charge-out rate of work done on this project since the last invoice?" or "What proportion of this project's value have we earned to date?" which can be similar to "If we could invoice this project today, what value would we invoice?" which can be similar to "If we closed down today, what could we bill on each project?".
It is a limited company. It is for construction projects many of which last for 2-3 months.
In the annual accounts a figure of the value of the work done so far in put it at the sales price (not the cost of work so far).
There is not a lot setup at the moment hence me trying to put something in place (I have little experience in this type of accounting - I was asked to help improve the system and this is an area I feel needs attention among other areas)
My thoughts are to calculate the progress of the project at the end of the month and use this against the total value of the project putting it in the management accounts as accrued income. What we don't want is month 1, month 2 have very little in sales then month 3 when a project is finished to show £190,000.
a) are you/they sure monthly management accounts with WiP is a realistic aim? Getting timesheets/worksheets (which are probably weekly?) up to date, and getting project managers to compare these to their assessment of project progress, is sometimes just too much to ask monthly. Plus it can generate too much noise. Often better to start with quarterly WiP.
b) in any system - not just financial - a useful principle can be to give users something they want/need, which as a by-product gives you what you/owners want/need. Otherwise users see everything as an imposition. So re WiP, I'd start with what your project managers would find useful and often that relates to tying budgets to actuals. Could be milestones ("we said we'd invoice Stage B of Project 23 this week, are we going to?"), could be budgets ("we said 23/B would cost £10k / 200 hours, what has it actually cost?"). And often the real value is perceived to be in applying past experience to future project bids ("we've been asked to bid for a new project which is most similar to Project 23, so how did that go?")
c) how accurate / reasonable are the inputs? Timesheets are notoriously unreliable, especially those from the more senior/costly staff. Thus leading to one of my favourite quotes:
"The government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the [watchman], who just puts down what he damn pleases."
d) in whatever system you design, make sure that the different views you create of the business can be shown (perhaps with just a few transparent adjustments) to be broadly in agreement. If you don't, then no-one will believe any of your reports. ("A man with two watches ..." etc). If your quarterly management reports consistently show projects broadly hitting budget targets, but the annual accounts show a loss ... this requires you to be very clear on your definitions, of which projects will be included in reports, and how WiP is calculated, and so on.
(For one single-partner 20-staff practice I dealt with, their top-five accountants produced a list of WiP on projects. I asked "Why isn't the biggest project?". Answer: "It has no WiP". Um, no. Actually it had negative WiP. To the tune of over £1,000,000. Which threw into disarray the imminent sale of the practice, and earned me the undying hatred of the selling Partner. And the thanks of the accountants - grudging though.)
e) enough generalities. Specifics: How many staff? How many active projects? Are we talking just time (eg an architectural practice, or just external costs (eg kit manufacturer/supplier), or both (eg a "builder")?
And perhaps the real starting point: what is the driver here? Who is asking for management accounts and why?
f) to answer your opening question: put all your costs through the books in the normal way, and your sales invoices. All you do at the end of each period is adjust the WiP figure in the balance sheet (*usually* an asset!) and the change in WiP you post to a nominal beside your sales, possibly departmentalised. So from a book-keeping / accounting point of view, it's very simple (and as I said, conceptually identical to Stock Valuation).
But, getting a reasonable and useful WiP valuation, that's another matter :)
