Work in Progress (WiP) is one of the most under-utilised balance sheet items as its primary function is to highlight future income and from this financial perspective it is a powerful tool. However, WiP, used strategically, also adds value to multiple functions within the business.

Firstly, what is Work in Progress? It is work that has been contracted BUT has not yet been invoiced i.e. it is the work that is officially in the system as a result of the business development and sales functions. Based on this definition, this article will explore how WiP can be used across the business functions.

Production / Operations – Work in Progress is the ultimate tool for measuring process flow and production efficiency because these operations are the true custodians of all work once contracted right through until the client is invoiced for the completed job. This is done by monitoring the flow of the work through the various activities of production. Some areas of monitoring include;

  • Speed of operations
  • Efficiency of changeover / hand over between activities
  • Bottle necks between or within activities
  • Level of waste and defects
  • Identification of job status to inform the business and the clients of progress Plus to identify what is nearing completion and ready for invoicing
  • Current and future resource needs i.e. materials, consumables and people
  • Facilitating the scheduled maintenance program for all plant and equipment

To add real value to this business function the WiP must become a focal point of the regular inter-departmental meetings. Production / Operations must be provided with an early indication of what work has been quoted / tendered and what the probability of conversion will be including possible time frames. This will enable the production team to schedule the new work and modify the schedule of the current work. More importantly it will enable the production function to inform the business on a range of matters that are not directly related to its prime function but the level of WiP impacts them. These include;

  • Human resource information such as
    • Individual and team performance
    • Holidays and absences
    • Training needs and schedule
  • Operational aspects of Workplace Health and Safety
  • Inventory control systems
  • Future capital requirements to improve production or to replace plant and equipment
  • Capacity of the facilities, plant and equipment, people and systems

Marketing / Business Development (including sales) – The number, type and quality of contacts that convert into business are the true indicators of how the business is positioned in the market and how it attracts its earnings. Work in Progress is one of the key measures of the success of these activities and provides this function with a range of information including;

  • The quality of the job in relation to the business’s core competencies
  • The standard of the information about the job including client expectations
  • Status of each job through production to
    • Facilitate client feedback on progress
    • Enable the marketing function to schedule their activities
  • The ability to accurately inform production as to incoming work
  • Understanding of production capacity and capability for pricing and other purposes

Administration – Work in Progress informs this function of what jobs are completed and it provides the relevant information for the client invoicing process. This also enables the administration processes to be implemented to

  • Achieve compliance in relation to accounting and record security
  • Store client and supplier documents effectively for security and retrieval
  • Accurately input data into system for production of management accounts
  • Monitor and follow up on debtors and creditors

While it is important to know how to use WiP as a business decision tool, it is critical to accurately calculate the level required so it adds value throughout the business. The process MUST be linked to the monthly income target of the business and is a multiple of this figure. The steps include calculating the individual time periods relevant to the average job;

  • Signing of the contract to start of production
  • Production to job completion
  • Invoicing to payment of account

For example

Step one                      3 weeks

Step two                     5 weeks

Step three                   5 weeks

Total                     13 weeks OR 3 months of income target

If your monthly income target is $200,000 then WiP must be a minimum of $600,000. By stating this as a minimum figure it brings into play the lead in time of business development activities such as client contact, quoting and contract negotiation. If this is an extended period then the WiP amounts needs to be higher.