Work in Progress gone wrong for builders

 

 

Work in Progress (WIP) gone wrong: hidden dangers waiting for builders

 

Keeping your Work In Progress (WIP) up to date might seem more paperwork than business perk, but it can be the biggest financial weapon up a builder’s or tradie’s sleeve. And the benefits are two fold, giving you both business and profit payoffs.

But, what could happen if your WIP is wrong?

As building and construction business advisors, we’ve seen how inaccurate or out-of-date WIP reporting can go wrong and the major impacts that come with it.

Here are 11 ways it could impact your business and how to ensure your WIP is driving benefit and not multipling risks.

 

11 hidden dangers of inaccurate Work In Progress (WIP) reporting

 

Profit shown too early (or too late)

The project appears great on paper, showing high performance and profitability. But come end of year, your profit has been overstated and you’re left with gaps you hadn’t planned for.

By not keeping your WIP reporting up to date and monitoring it each month, your profitability could be inflated or understated. The result? Big profit swings year to year that don’t reflect reality.

 

Misleading gross margins

Your gross margin (Cost of Goods Sold [COGS]) gives you great insight into your business’ operational efficiency and profitability.

But for your gross margin to be accurate, you need your WIP reporting to be up to date. Without it, you’re managing projects blind and working on inaccurate gross margins. The result? You can’t see problem projects and profitable ones look like write offs.

 

Bad pricing decisions

It’s hard to make informed decisions on pricing when you’re don’t have cost and profit information on hand. That ‘great price’ might have been influenced by miscalculated margins, and suddenly you realise you’ve severely under quoted.

Work in Progress (WIP) reporting is a great way to ensure you’re accurately tracking all project-related expenses, enabling the most up-to-date information on hand for future estimates.

 

Cashflow blind spots

Ever wondered why suddenly cashflow is a problem when you’re Profit and Loss looked so strong?

This is a question we get asked frequently by builders and tradies. On paper, it looks like you’re making money. But without up-to-date project information, it can be impossible to create accurate cashflow forecasts or put proactive strategies in place to recoup profits.

 

Bank and financier issues

Unreliable numbers aren’t just frustrating for building and construction business owners. It can create perceived unreliability for lenders and banks, impacting everything from your borrowing capability and credibility to potential breaches of bank covenants.

Why? Those little WIP gaps can generate big financial holes in your business picture. For lenders, banks and creditors, you might be too big of a risk to take on.

 

Warranty insurance premiums

Incorrect Work in Progress (WIP) reporting can also impact your warranty insurance. Your WIP is used to access your financial performance, determining your eligibilty, insurance capacity limits and premiums.

Under or overstating your project exposure can lead to mismatches between recorded risks and actual warranty obligations. In turn, making it harder to justify limits and premiums to insurers.

 

Wrong calls on overheads, staffing and resourcing

The project seems profitability, so you hire a few more hands or scale overheads. But sadly your profits were inflated, with those ‘profits’ plummeting when all the project numbers are added up.

By keeping your WIP up to date, you can have an accurate view of every open project. Leading to more informed decisions when it comes to overheads, staffing and resourcing.

 

Poor project management signals

Not sure what projects are slipping or bleeding margin until it’s too late?

Linking your WIP to real site progress, you can see the signs early and proactively manage projects back to profitability. The more sporadic your WIP reporting, the less opportunities you have to get your project back on track.

 

Distorted KPIs and valuation

Looking to sell or need a business valuation? Your WIP plays a vital role in the accuracy of your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) and return on capital.

An inaccurate WIP can over or understate both your EBITDA and return on capital, distorting your true profitability, working capital and performance. For investors and lenders, this could be seen as deceiving and heavily impact it’s perceived value.

 

Higher taxation risks

An inaccurate financial position impacts more than your decision making or profitbility. Your WIP can directly impact your taxable income.

When applying profit averaging, inconsistent WIP methods and big year-to-year swings could be seen as a higher risk to the ATO. This brings with it additional scrutiny, making it harder to defend your position if audited and could be seen as a taxation red flag.

 

Continued decreased trust

Overtime, inaccuracies can have a bigger impact to your business: you and your stakeholders lose confidence.

As building and construction business advisor experts, this is one of the most common things we see. Consist inaccuracy erodes confidence, with directors, banks and lender never trusting the numbers – making it harder to grow, raise funds, or sell your business.

 

How to avoid bad reporting WIP lash

Keeping your WIP up to date starts by creating clear processes and procedures for each and every project. We recommend your WIP should be recorded at the end of each month, broken down to each active project. This will give you an accurate picture of each project’s profitability and performance.

Not sure how to get started? Use our handy WIP calculator and reporting guide. Specifically designed for builders and project management, this guide comes with step-by-step audio instructions to simplify the process.

> Learn how to accurately record your Work in Progress
> Download our free Work In Progress calculator