Have you ever wondered how adjusting Work in Progress (WIP) in management accounts can create a dangerous illusion of profitability?
A typical WIP Cycle:
🔹 Accrue WIP this month, which increases sales
🔹 Report a profit
🔹 Reverse WIP next month
🔹 Scramble to invoice more and accrue even more WIP
Does this sound familiar? This cycle can become a slippery slope, eerily reminiscent of a pyramid scheme’s collapse.
The Hidden Dangers
🔹 Artificial Inflation: By continually accruing larger amounts of WIP, you’re essentially borrowing from future periods to pad current results.
🔹 Pressure to Perform: This creates immense pressure to constantly increase billable work and WIP accruals just to maintain the appearance of profitability.
🔹 Risk of Collapse: Like a pyramid scheme, this practice is unsustainable. Eventually, reality catches up, and the “profit” bubble bursts.
Breaking the Cycle
It’s crucial to:
🔹 Implement robust WIP management practices
🔹 Ensure accurate and timely invoicing
🔹 Be honest with yourself. Take whatever pain you need to take in the current period’s report. Then, start the next period with a cleaner sheet.
True financial health isn’t about massaging numbers but creating sustainable, profitable habits and processes.
Have you encountered similar challenges in your business?
Maybe you have felt pressure to be ‘optimistic’ about your WIP levels when reporting figures to banks or other lenders? You know that in the medium term you build more trust and sustainable financial health by reporting accurately