What is Work In Progress (WIP)? How to implement WIP in your marine business with marine management software.
By Stephen Bullard, Marine Consultant and Sales Director at PierVantage
This post is dedicated to the topic of Work in Progress or WIP for boat businesses.
In my site visits to boat builders, ship yards, boat yards and marine service companies across the country, I realized how many professionals in the marine industry don’t know what work in progress (WIP) is, why they should track it, and what this valuable reporting metric can do for their shipyard, boatyard, shipbuilding company or marine service company with marine management software.
So ~ let’s start from the Top.
What is Work in Progress (WIP) for marine business?
Work in Progress (WIP) is billable labor, materials, subcontractors and expenses on a build, refit or service project that have not yet been billed on a customer invoice. It is work that is already completed, partially completed or expenses already incurred, but it is in the process of being billed from your company.
This could be a partially built marine vessel, a complete refit, or preventive maintenance that a marine customer has ordered.
How Do We Calculate WIP in Marine Businesses?
We calculate Labor WIP using the employee’s current hourly rate plus the cost of benefits for that employee.
We calculate Material WIP using the actual cost and amount of materials used on the project. An example of this is a boat technician that uses a half a gallon of Epoxy Resin that cost the company $60.00/gallon generates $30.00 WIP.
Swap out this example with any boat part, boat accessory, boat service or anything your shipyard, boatyard, marine services or shipbuilding enterprise would usually bill.
Accounting & Work in Progress (WIP) for the Marine Industry
WIP is recognized as an asset on the balance sheet. I have worked with many marine businesses that handle WIP in different ways from an accounting perspective and that is fine as long as they are tracking it with an accounting solution for the marine industry.
Some marine organizations adjust journal entries to report the change in their WIP balance after each billing cycle. This is a manually calculated entry and may be subject to estimating and/or calculating errors.
Depending on the marine accounting software used, WIP can be accrued and reported on financial statements automatically. This will eliminate the need for the manual journal entry and reduce the chance of errors. Some marine management software calculate WIP at retail and others at cost.
Marine Management Software, Marine Project Management & WIP for Your Boatyard, Shipyard, Boatbuilder and Marine Service Business
WIP provides an additional piece of information for marine project managers to evaluate the progress of their projects.
To effectively manage a project’s budget/estimate, marine project managers must know what has been billed and what is available to bill (WIP). Marine project managers can utilize this information to proactively manage a project’s budget, help guide billing, and help identify any potential overruns.
I have worked with a couple of marine oriented companies that routinely evaluates the aging of their WIP. Projects with WIP that are 15 or 30 days or older, for example will prompt the questions of “why have these marine projects not been billed?”, “is it billable?”, and “is it collectable?”
Often, this can indicate a potential red flag in either the project estimate, project management, or project billing procedures. The important thing is to have an eye on it and have the opportunity to proactively manage the WIP balance. Marine Management Software can help with this.
Do I have to track WIP in my Marine Business?
No, you don’t have to track WIP in your marine business, but it’s smart to.
What I warn my clients who choose not to track WIP with boatyard management software is that they are opening their company up to susceptibility on two primary fronts:
1. Cash Flow (i.e. not limiting WIP)
2. Job Overruns (i.e. lose your shirt)
Additionally, choosing to not report WIP on financial statements understates the current assets and overstates the Costs of Goods Sold on a company’s financial statements. This can impact a marine company’s opportunities when applying for loans, line of credits or other investment options.
In Summary for shipyard, boatyard, boatbuilder or marine business owner
Like any other cost, the data that goes into calculating WIP must make sense and must be managed accurately and efficiently with boat management software. Many, but not all marine Accounting Software Solutions will help you and your team track WIP automatically and provide relevant, accurate and timely reports so you know where you are at any given point in time.
WIP, in my opinion, is an additional piece of valuable information that no boat yard, ship yard, boat builder or marine services company should be without. Make sure you have a marine management & accounting solution in place to maximize your profits.
Need marine management software for your boat business? PierVantage is the best accounting solution for boatyards, shipyards, marinas, and boatbuilding companies. Find out more – Contact PierVantage.