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Valuing Work In Progress
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There is one key accounting lesson that clients should be educated on as soon as possible. This is the importance of ‘work in progress’ for measuring the performance of their business.
When working on a project you need to have a good overview on its progress, alongside the spending, resourcing and billing. Any business needs to realise the importance of ‘work in progress’, and then track it, so that they can see if a project is looking good or not. It will also highlight any areas in which they can improve.
Work in progress
The period in which a transaction hits the profit and loss and balance sheet is determined by the dates you see on your sales and purchase invoices. This can lead to distorted accounts sometimes, and that means you can get misleading information on the performance of your business.
For example, you are a Landscaper working on a project that will last for four months, being billed at month 4. Meaning that all the revenue will be reported in month 4. However the costs of the project will be across months 1-4. This will look like you’ve had one really good month with 3 poor months, where as in reality you had 4 reasonably equal months working on the project.
To solve this you need to report your work in progress.
One way to do this is a Xero product ‘Workflow Max’ which lets you log your time and manage your workflow.
By making the correct accounting journals, the work in progress on the project will be reported at the end of each month. So you will see the true performance of the project. This will help identify any areas for improvement for the next project.
Simply by recording work in progress in the right months, you come up with an overall view of the businesses finances that’s much more accurate.
If you would like to get your work in progress looking good, then get in touch with us.