The importance of valuing work in progress – and how to do it

When we first start working with a new client, there’s one key accounting lesson we educate them in as soon as possible. And that’s the importance of ‘work in progress’ for measuring the performance of their creative agency.

Having a good overview on the progress of a project, alongside the spending, resourcing and billing for that project, is incredibly useful. And once our creative agency clients realise the importance of knowing the work in progress, they track it and have a far better handle on whether the project’s looking top dog, or more like a dog’s dinner – as well as seeing areas where they can improve.

So, what is work in progress?

Ok, brace yourself, we’re about to get technical on you…

The dates you see on your sales and purchase invoices determine the period in which a transaction hits your profit and loss and balance sheet. You knew that, right?

So, in the same way, the date that you pay employees determines the period that the wages transactions appear in your accounts – you won’t see it on an invoice but you will see it in your payroll reports. Sometimes, this will lead to distorted accounts, and that means you get misleading information on the performance of your agency.

Misleading accounts can cause problems

The last thing you need is accounts that give you an inaccurate view of how your agency’s performing. So, if you’re logging your hours in the right months, how come your accounts are telling you porkie pies?

Put your finance head on and we’ll explain. Ready? Ok, here we go…

Say, for example, you undertook a website build that lasted for three months, and you billed your client in month 3. All of the revenue from that website project would be reported in month 3. But you had to stump up the costs for resourcing that project in months 1, 2 and 3 (staff costs, freelancers, front-end developers etc.).

Suddenly, it looks like you’ve had two very poor months and one very good one! That’s certainly what your accounts will tell you. But the reality is that you had three months of reasonably equal output on the website build.

What’s the solution?

There’s a very simple way to solve this little conundrum. And it’s all about reporting your work in progress.

You’ll probably know by now that we think Workflow Max is the absolute bee’s knees for logging your time and managing your workflow. So we’d definitely suggest getting up to speed with the ways to log your work in progress through Workflow Max as you progress through a project.

Anyway, back to the example… (keep up!)

By making the correct accounting journals, work in progress on the website build is reported at the end of months 1, 2 and 3, instead of all at the end of month 3. And by doing this you get to see the true performance of the agency over those three months. You can also easily understand the profit margin on that website project and spot any areas for improvement where you could make changes for the next web build.

To quote that annoying meerkat: simples!

Work in progress is the way forward

As you can see, we’re big fans of proper reporting of your work in progress.

By simply recording work in progress in the right months, you come up with an overall view of the agency’s finances that’s much more on the button. And without proper reporting of work in progress, your performance will be distorted, leading you to you making ill-informed decisions about the future of the agency. And no-one wants that!

You can find out more about Workflow Max, and managing your work in progress, in our recent webinar

If you’d like to have a chat about getting your work in progress looking shipshape, just get in touch.