Work in progress refers to a business’ partially finished goods or services awaiting completion and eventual sale on the value of those items. For goods work in progress can refer to items that are either in the process of being made or waiting for further processing on a production line. Examples of this include a car or a machine that have multiple components and take time to produce. For services the concept can refer to a long-term project where a lot of hours have been spent on it but it is yet to be complete. Examples of this include building a house or implementing a computer system that can take a long time to complete.
Work in progress has the potential to be a huge drain on the cash flow of a business if it is not well managed. The problems occur when time and money is spent working on the product or service without the work being completed and charged to the customer. Often there can be a significant time lag between outlaying time and money and actually getting paid by the customer.
Ideally work in progress should be kept to a minimum by using best practice production and job management. However there will be times where this is not possible.
Some tips to manage work in progress to ensure it does not cause cash flow problems are:
- Get the customer to pay a deposit before any work begins. Asking for at least a 50% payment upfront is not unreasonable. This will help to cover initial expenses in delivering the product/service.
- For long-term projects bill in milestones rather than on completion. For example you can send an invoice at each milestone such as upon signing the agreement, halfway through the job and on completion. For the bigger projects you can bill in even shorter intervals such as quarterly or monthly.
- Have a system in place to track the time and materials spent working on each job and how you are tracking against milestones/targets.
Next month we will continue our series of blog posts on cash flow where we will discuss how to manage the purchase of your assets to ensure you don’t hand over all of your cash.
What processes do you have in place to manage your work in progress and what are the issues?
Would love to hear your thoughts!