Taking a fresh look at write offs and work in progress

TAKING A FRESH LOOK AT WRITE OFFS AND WORK IN PROGRESS - September 2005

Traditionally, and despite their best intentions, the transformation of work in progress into cash has proved to be an issue for accountancy firms of all sizes. The valuation principles introduced under UTIF40 reemphasise the amount of effort still required by managing partners to motivate their colleagues to improve efficiencies in the basic business management systems that control cash flow, particularly work in progress and debtors. Perhaps the prospect of an inflated tax bill at the end of the year and less cash with which to pay it will help.

UITF40 also places write-offs in the spotlight for the first time by including partners’ time in the valuation of work in progress. How many partners reading this column find that they and their staff regularly underestimate the amount of time they will spend on a project when quoting for work? And how many then fail to bill the client for the overrun? Our experience shows that the answer to this is probably around 90%. The question now is whether those unbilled hours are going to become a liability that the firm will have to pay for in cold hard cash.

Improving fee recoveries and write-offs must therefore be a priority. In the first place partners must examine their levels of chargeable time. In many cases this is far too high – often they are not delegating appropriately or do not have the right support staff in the right places. Ensuring that all aspects of client work are undertaken by the most appropriate people will help reduce write-offs. However, if time over-runs are a regular occurrence (or, indeed, if partners are failing to book time worked on client accounts on the basis that they will not recover it) then the whole procedure for estimating fees needs to be put under the microscope and, if clients are consistently being undercharged, a system introduced that will ensure that billing accurately reflects the work undertaken.

Under UTIF40 the valuation of work in progress will be uplifted from ‘cost’ to ‘fees’ so that the income will be recognised earlier and often before the firm has actually received any benefit. For anyone who has yet to introduce interim billing then this is surely the incentive they need. Experience shows that far more projects can be stage invoiced rather than on completion. The real reason for the levels of WIP carried by most firms is a reluctance to bite the bullet and ask their clients for money up front. What might surprise them is that the vast majority are quite happy to pay.

There is no doubt that the introduction of UTIF40 is a wake-up call to firms; prompting them to look closely at their business planning and production systems, staffing levels and client communications. In the context of tougher markets for accountancy services, higher staff costs and the importance of smarter practice management, this is no bad thing..