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To WIP or not to WIP
It’s that time of the year when agencies compare how close (or far away) their profit figure is compared to their budget, (that is if they created a budget for 2022, but that is another topic) plus with a pending “recession”, now is the time to really obtain an accurate understanding of your numbers.
In doing so, those of you that are on an accrual basis of accounting is aware that the cash-basis of accounting is for your CPA from a tax minimization perspective and not for financial reporting for your agency. Accrual rules!!!
So, what does WIP have to do with the price of eggs or the price of bitcoin for that matter? It is part of the accrual basis of accounting.
Incidentally, WIP stands for Work-in-Process and is the accounting for:
- Unbilled time
- Unbilled production costs
- Unbilled media costs
- Unbilled miscellaneous expenses that are unrelated to time or vendor costs
Agency software programs that account for WIP have two important accounting rules right in their programming.
Firstly, the “matching principle” essentially states that in order to have proper reporting, one should be matching revenues with the related expense on the income statement. That way, revenue does not show up in one month, and the related cost of sale in another month; they show up in the same month. Agencies spend money on their clients daily so it is important to ensure the cost of sale shows up in the same month as the related billing/sale.
Secondly, the “revenue recognition principle” essentially states that in order to have revenue show up on your income statement, substantial completion of the revenue-earning process must be accomplished.
In the advertising industry, if you recorded an hour on a job, there should be a very good reason why you should not be recognizing revenue in the month that you booked the time.
In the project management and accounting for WIP, WIP IS your friend.
You should NOT be very afraid of WIP.
You do need to have the right operator to post WIP each month to your financial statements and management reporting reports such as the client profit and loss reports.
I regularly walk into agencies and when I ask whether they post WIP or not, MOST often say that they do not post it largely due to two loosely-based reasons;
- They don’t understand it and
- They don’t know how it works in the program.
These same agencies largely have their billing and payables functions running but they do not have the financial/management accounting function running optimally.
I have seen many agencies incur a production or media vendor cost posted in one month and the related billing posted in another month.
More so, I have seen agencies invoice clients for the billable time in one month for time recorded from three-plus months ago.
Does this make sense???
So, why IS WIP your friend?
When you post WIP in Workamajig, it produces a marvelous and accurate accounting posting of billable time and billable expenses onto your balance sheet (and as accountants all know, a debit must equal credit) and posts corresponding entries to unbilled revenue and also an entry to offset the previously posted cost of sales.
NOTE on the cost of sales and unbilled revenues.
Workamajig does NOT post unbilled production and media costs initially to the balance sheet. These costs are immediately posted to the cost of sales.
Any unbilled costs at the end of the month will be reallocated to the balance sheet ONLY IF WIP is posted at the month's end. You can post and un-post WIP as many times as you wish in order to post accurate amounts to WIP.
What is the biggest feature of posting WIP? In my opinion, it is the aging of “sub-ledger” balances by Client/project for each of the individual WIP categories. This permits the reader of this report to determine how long unbilled charges have been sitting around …unbilled.
No WIP. No aging of WIP.
No posting of WIP means instead, one must rely on a number of production status reports that do not provide visibility to the aging of unbilled charges.
How does WIP work? One goes to the accounting module and on the upper left-hand side of that dashboard panel, one clicks on POST WIP.
Once in the WIP screen, one uses a posting date of a particular month's end and a posting through the date of the same month's end. Posting is easy. Un-posting is just as easy but more on that later.
When posting happens, accountants jump for joy because a detailed general ledger entry is created. This entry takes the word “detailed” into another stratosphere of posting as the details are by client/project for billable time and billable costs.
In summary, the WIP entry creates the following journal entry;
Debit – WIP unbilled time (balance sheet)
Debit – WIP unbilled production costs (balance sheet)
Debit - WIP unbilled media costs (balance sheet)
Debit - WIP unbilled miscellaneous costs (balance sheet)
Credit- Unbilled Revenue (revenue)
Credit Cost of sales production (cogs)
Credit Cost of sales media (cogs)
Credit Miscellaneous income (revenue)
What I often run into when an agency posts WIP for the very first time, is that there are numerous unintended billable charges posted.
Often, I see charges stemming back 2 years with jobs still open from years ago.
This is where un-posting WIP comes in handy because the first WIP posting report serves as the “clean-up-WIP report”.
Ideally, one would print off the first WIP report and then address particularly old WIP by either billing it, holding it to another billing period, marking it as billed, or writing it off. This would go in conjunction with reversing the first WIP posting because you want to clear up the unbilled charges in the same month as you post WIP.
When the old billable charges have been addressed by marking them as billed or written off, WIP may once again be posted and reviewed for accuracy and completeness especially as the posting has a direct impact on your income statement!
WIP should be a key month-end procedure much like performing the bank reconciliation.
So…what happens when the actual billing takes place after WIP has been posted? One may ask about double-posting revenue especially as time and materials billing creates a receivable AND a revenue posting.
Workamajig takes care of that as the billing associated with the particular WIP posting reverses the original WIP posting so that revenue is NOT double-posted in the subsequent posting period.
So… what happens when we need to write billable time off after WIP has been posted? Well, that presents two accounting issues;
- Firstly, the income statement is overstated in the WIP-posted month and who will be responsible for the overstated profit for the month in question?
- Secondly, in the month that the write-off of time is posted, there will be a reduction in revenue in the month. Who will be responsible for this write-off in the period in question and why did the write-off not happen in the month of the WIP posting?
WIP is important to the financial and management reporting of an agency, particularly for client profit and loss reporting to see the timely results of income earned against labor costs for clients. This helps with labor allocation and staff resourcing.
No WIP. No accurate reporting.
So…to WIP or not to WIP. What do you think? You be the judge.
Happy to help “WIP” you into shape!