As discussed in previous entries of the 7 Key Metrics of a WIP Series, the work-in-process (WIP) schedule is used to determine revenues and gross profit numbers that need to be in your standard monthly reports. The WIP provides an overview of the profitability of each job and can offer reassurance that your contract revenue, costs, under-billings, and over-billings reconcile to your P&L statement and balance sheet.
Knowing your revenue earned to date is key to determining if you’re under-billing or over-billing your customers.
REVENUE EARNED TO DATE AND OVER/UNDER-BILLING
Over-billing is when you submit a bill that would make the total amount billed higher than the revenue earned on the job. While somewhat dishonest, this practice can financially benefit your company; for example, getting more cash up front may allow you to hold more liquid assets without giving up work, helping you increase your bond limits without having to pass up a job. This only applies to bid jobs, however, as customers can view the costs of previously negotiated projects.
Over-billing appears as a liability on the balance sheet. When you over-bill, you increase your cash (an asset), which means you must either decrease another asset or increase a liability/equity to keep things balanced. Over-billed amounts are not assets and cannot be added to equity because it is unearned. Once you over-bill, you are obligated to complete that amount of work for the customer, making it a liability.
Under-billing refers to billing for less than the amount of revenue earned – a practice never good for your business. For example, under-billing might occur as a result of forgetting to submit a bill or making a billing mistake, which can negatively affect your profitability.
At the start of each billing period, your contracts in progress and balance sheet will show a large number of projects as under-billed because there will be no bills submitted for that period yet. However, if these reports still show amounts as under-billed after bills have been submitted, you’ll want to rework your bills to make sure you’ve billed for all revenue earned. Typically, revenue is considered earned when the earning process has been completed; for example, the completion of a service or project phase.
Implementing the right systems and tools can help you make adjustments when necessary to avoid over- and under-billing instances that can affect your profitability. For more information on Cabbage’s solutions and services, contact us today.