This template comes from our free ebook, How to give your business a strong forward outlook.
Work in progress (WIP) is one of the five key factors we consider when assessing the strength of a business’s forward outlook. The others are:
- Contracts and agreements
- Pipeline of prospects
- Client portfolio
- External market trends
Work in progress (WIP)
These are projects or jobs you have won, which are partially completed and may also be partially invoiced.
These orders might be in the form of a contracted project, or they might be products and services to be supplied. There may have been a part payment from the client, or a purchase order document may have been issued.
The upshot, though, is that there is a legal, contractual arrangement that something needs to be supplied, so there is a level of certainty around those upcoming sales.
The extent to which you have forward orders in the form of WIP is a good indication of the forward run-rate of the business.
Here’s an example:
Construction Business X has averaged EBITDA of $3.75 million per annum over the past three years.
Business X has won a $20 million project to build a block of apartments. 50% of the physical work has been completed and 70% has been invoiced.
(Note to potential buyers: if you are acquiring a business with a WIP situation like this – 50% per cent of work still to be done, but only 30% of income to collect – make sure the people doing your due diligence uncover it. Often in a sale process we will negotiate an adjustment to a purchase price at completion, where these things don’t line up. Unless your advisor has uncovered it, you won’t know until it’s too late.)
WIP also includes confirmed forward orders – the money is not guaranteed, but there is a high likelihood it will end up in the business owner’s bank account.
Of course, different types of businesses will have different profiles of WIP. For example, transactional retail businesses don’t have much WIP, while project-based businesses like construction, or manufacturing businesses with longer-term orders, will have WIP in place.
Use our template to record your list of active WIP, and get used to tracking it on a regular basis.
