139. WIP Reporting Essentials for Fractional CFOs

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Depending on what industries you serve, the WIP Report is one of the most important tools that a fractional CFO has at their disposal. If your clients don't have a WIP report or if it isn't up to par, their financial statements are going to be wrong, which means your forecast, projections and strategies, they're going to be off as well. If your WIP skills need to be whipped into shape, you, you're definitely gonna wanna check out this episode and make sure you stick around until the end because we're gonna show you some real examples of a WIP Report and how to use it. Hey there, my name is Michael King and welcome to the CFO Report. I've been a fractional CFO firm owner for about 9 years now and I help other fractional CFOs learn how to scale their own firms. Today I'm joined by the COO of my firm, Greg Archer. He recently did a training for our Inner Circle program on the WIP Report and I wanted to share that with you today. Now, if you're listening to this episode on the podcast, you you're going to learn a ton from the training, but you may want to go back and check out the YouTube video so that you can see all the visuals that go along with it. We've included a link in the description below so you can check that out at your convenience. What did Greg have to say about the WIP Report? Let's find out. So I'm going to turn it over to Greg for WIP Report training. And then just like normal, Greg's going to do his thing, he's going to talk. We're going to come back and break out into some networking groups. We've got some important questions for you guys to share with each other. And then as soon as the networking period is over, we're going to come back and take questions live for office hours. So without further ado, Greg, can you give us some training on WIP reports?

Thank you so much, Michael, for allowing me to be a part of this today and give this training. So I absolutely love WIP Reports. I'm super excited to give this training. WIP Reports have been a key factor, factor in my life for the last decade weekly and so I get super, super excited. Okay, so let me go ahead and share my screen and I'm going to share my desktop for just a moment and you'll see a little sneak peek. We got a little sample WIP report here in the back, but before we do that, let's look at the presentation. All right, so as I said, I'm super excited. I love WIP reporting. It has been a key component in my success over the last decade. So I want to start with a CFO challenge. And I want you to think about this. If you were a CFO and you walked into a company and found out that there was $500,000 due, you had 30 days to come up with that 500 grand, there was no cash reserves in the company and the business owner had no idea that it was coming, what would you do as a cfo? Right. So that's the challenge. Well, this is exactly what happened to me and this is my story. So about nine years ago, I had stepped into a company and eight business. So this was not a company that was just starting out. This was an eight figure company. They'd never had a prior cfo. The budgeting was pretty shoddy and they had multimillion dollar projects that would span over several months. They had no forecasting put in place. And more importantly, they had no WIP reporting and they had no idea what was coming. So I sat down with the CEO at the time and showed him the number and I boiled the company down into one number and that was a negative $500,000. And we looked at the projects that were on the plate that was coming up and he looked at me and he said, what are we going to do? Because they were facing imminent destruction, like imminent bankruptcy. But what if you had a crystal ball? What if as a CFO you had a crystal ball? And a WIP report is just that, it is a crystal ball. It is a key component. As Mike said, it is absolutely critical. We use it as a key componen for forecasting and projections. And it's a piece that without the WIP report, forecasting and projections and financial statements are actually pretty much useless in certain industries. So I'm going to go through the basics of WIP report and I'm going to boil this down and assume that nobody on the call has any knowledge about WIP reporting at all. And as some of you are in a construction accounting and some of you have a high level accounting. So we're gonna get to the CFO stuff at the end, but we're gonna back it down and just talk about from a fundamental level, what is a WIP report?

If you find content like this helpful, then I'd like to invite you to join my Inner Circle program. Inside the Inner Circle, you'll find a highly engaged and highly supportive community of 300 other fractional CFOs many of them are just getting started, but many of them have been in the industry for years. You'll find a great mix of all experience levels. It's super collaborative and super supportive. I also go live on Zoom every month and share the latest lessons, insights and best practices that I've learned over the last nine years of running my own fractional CFO firm, KFE Solutions. Just click the link below to try the inner circle. 100% risk free for 30 days. I hope to see you inside.

So a WIP report is called a work in progress and it is just that. It is a report that shows us all the work that is being done in a particular project or in a set of projects. From a fundamental standpoint, all its really measuring is project profit versus a timeline. And so that, that's just a key factor to remember. We're just looking at project profits over the course of time. So here's, here's how I visualize WIP reports. You've got multiple projects happening and they all have different start dates. And then all of those projects, they all have different end dates. And so what a WIP report does is that it actually pulls all that information and it takes it as a snapshot today. So what we'll do is we'll take a, at the WIP report we've got an estimated profit and then we've got actual profit and we're pulling it into today. So there's another financial statement that sounds very, very similar to this, right? That is your balance sheet out of this WIP report. What we end up coming up with is an asset or a liability. Now these are oftentimes called over billings and under billings. And that's just a general term that we use. And we'll see that whenever we get onto the actual WIP report itself. But if a project is overbilled, it's a liability on your balance sheet. If a project is underbuilt, that's actually an asset on your balance sheet. It's not revenue. And out of that we can then proceed into building this into our forecast. So a couple of key elements before we take a look at the report is the first section is we've got to know what our estimates are. So what are our contract totals and what are our estimated costs? The output of that is we can get an estimated gross margin and also our gross margin percentage. So where do we see those show up? We see those show up on our P and L. The second piece of it is actuals. So now we're Looking at what's actually billed and our actual costs. And then this one really, really important key factor, and that is percentage complete. And we'll look at that when we look at the report. But the percentage complete is where we are in the project. So as we're moving through this timeline of a start date and an end date, we need to how much has been completed versus what our actual costs are versus what our estimated costs are. And out of that the output is, we're going to know what revenue we have actually earned and whether or not that project is overbilled or underbuilt. Now, some of the bonus add ons is whenever I build out WIP reports and when we integrate these reports into the CFO report, we also build in a billing schedule, a payable schedule, as well as a WIP cash issues schedule so that we can forecast whether or not we're going to have those cash issues on any particular project. And out of this you can get a myriad of reports. And I know how much people like us as numbers nerds, we love to build data and analytics and pull all kinds of reports so we can look at, you know, which clients are regularly slow payers and which clients do we always have cash issues on. And so there's a whole bunch of information that you can get out of just this one simple report. All right, so let's walk through a sample WIP report and I'm going to keep this really simple. So WIP reports can get really complex, that you can build all kinds of rows and all kinds of different data on those rows. But for the purposes of this training, we're going to look at a really simple WIP report that you can use in any business. So let me open this up here. So here is our sample WIP report and if I need to make this, maybe I'll make this a little bit bigger. So we can see here. All right, so here's our sample WIP report. Some of the key elements that I always like to bring into a WIP report is, you know, you've got to have a date and then a target gross margin. Now as a cfo, we should be talking to our clients about what are the target gross margins that we want on average across all projects in order to hit their financial goals. And so I always start with that of what our target margin is going to be across all projects. Then we have a project number you can add a client. But a project number like this is really important for the rest of it because this is our key, a start Date and end date, the contracted total, and then the estimated amount that we think that that project is going to cost. And then from there we can do some simple formulas. Get our estimated gross profit, our gross profit percentages. Okay, so this is the first section. Then the second section is how much have we billed that client or on that project to date and how much actual costs have we paid on that project to date. And then the ever important percentage complete. So this is our actual section. And then finally we have our days to complete. And then there's some formulas in here that you can check. We're going to give everybody a link to this spreadsheet so you can have this as a template. If you've never worked with reports, there's a couple of formulas in here that will show us what the revenue earned is and what the cost completes are. And then from there we get our over billing and our under billing. And this is the journal entry that gets made on the financial statements so that we're recognizing revenue correctly. So as you can see, as we go through this, there's a couple of variables that change. So let's say for example, this person or this project, they know that they're going to have some overruns on that project and all of a sudden their estimated cost went from 40,000 to 65,000. Well, all of a sudden this project now became in danger. Well, you're losing revenue and so margins all change. And now this is going to be highlighted. So and project managers are sitting down and talking about their project reports they can get in front of this early. Okay, so I'm not going to go through the details of all of this. I just wanted to show you a couple of key components or a couple pieces functionality that is in a swift report. So this is all great, but this is not CFO work, right? This is project manager work. This is the responsibility of operations in a business. So how does this play into cfo? Well, what we can do from there is we can teach our clients to build out their billing schedules so they can start forecasting when all of these billing schedules are going to be. And as you can see, it starts calculating what our cash inflows are going to be and as well as our payables. So when we start looking at our payables, we can start seeing what our cash outflows are going to be. Now, as you can see, this is very, very helpful as a CFO to know what these cash inflows and cash outflows are going to be in the projects. So as Projects change. You can see we've got these unforecasted cash sections here. And so it forces business owners and project managers to address these situations. When are we going to pay these cash amounts? Like maybe they're going to be paid in April. And so it forces us to make sure that this is actually actual. Now this is the really powerful part about these add ons over and above a regular WIP report, which I normally see just regular WIP reports and there's no other pieces and that is showing us where is our cash flow going to be. So as you can see from here, this is going to be really helpful for a CFO in conversations as we're guiding our clients towards decision making and getting ahead of cash flow issues. This also helps with conversation. When cash flow gets really tight, what's the first thing that they always want to do? They want to look at expenses and they start going, well, you got guys are, you know, you're three, four or five thousand dollars a month. I don't know if I can afford that cash flow. You can have that conversation with them upfront to say, remember, cash flow is going to get really tight come April, May. And so that it's not a surprise conversation for them, they know that this is going to happen. So it helps mitigate and helps with client retention. So those are the basics of this particular web report. And like I said, we're going to go ahead and give you the link to this so that you can play around with this, you can build it into your CFO reports that you're giving to your CL and build these into the revenue line items and their gross margin line items and also cash.

All right, my friends, I hope you found this episode helpful. If you did, it would mean the world to me if you would leave a five star review on Apple Podcasts, Google Podcasts, Spotify, wherever you're listening to this episode. In the meantime, I can't wait to see you back right here next week. I'll see you then.