Lets WIP Your Company into Shapeftp.sagesoftwareuniversity.com/lms/cre/S100C_Course... · 2013-10-25 · Let’s WIP Your Company into Shape 3 Continuing Professional Education Credits

Let’s WIP Your Company into Shape

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Presented by:Leslie ShinerOwner, The [email protected]

Copyright Notice

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Notice to Attendees

• U.S. Copyright Law protects the program you are about to attend. Multiple participants at one location are not authorized to share access provided to a single registrant.

• For each individual who attends, a single dedicated seat license must be purchased, or a group rate must have been previously negotiated with Sage Software.

• Sage reserves the right, at its discretion, to cancel or interrupt access to a web-based training class without notice, or to invoice and collect the group rate payment for the class from the single registrant if this requirement has been violated.

Introduction - Leslie Shiner

• Owner of The ShinerGroup• Financial & management consultant

for over 25 years− MBA in Accounting and Finance from

U.C. Berkeley− Sage Certified Consultant

• Author− A Simple Guide to Turning a Profit as a

Contractor− (www.MoneyMazeBooks.com)

• Contributing Columnist− Remodeling Magazine


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Continuing Professional Education Credits

This course is eligible for 1.5 CPE credits. In order to receive these credits, you must:

• Be present for the entire duration of each course session.

• Participate in all class activities.

Session Information

• Download session materials from the Resource Center.

• Set screen resolution to 1024 x 768 for optimal viewing.

• Place phone on mute to avoid excessive background noise:

− Press *6 to mute. Press *6 again to unmute.

− DO NOT put us on hold.

• Turn off email notifications, cell phones, and instant messaging. Move cell phones away from your phone and computer.

• Chat your questions to our moderator in the Chat panel.

• Due to time constraints, questions that are very specific to yourbusiness are likely to be deferred to post-session follow up.


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Our Oregon campus!

Learning Objectives

• After completing this session you will be able to:

• Recognize the need for doing a regular WIP (Work in Process) adjustment

• Truly understand the ins and outs of the Work in Process adjustment

• Use the information within Sage 100 Contractor to calculate your overbillings and underbillings

• Recognize how change orders, job costs, and budgets impact the WIP calculation


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More Learning Objectives

WSIC? Or: W(tf)SIC?

Does Accounting Bore You?


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Or Have You Given Up?

• “The three fundamental activities at the heart of all businesses are the functions of − Making or buying something− Selling something− Keeping good records”

Mastering the Rockefeller Habits- Verne Harnish

Right Things Right


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Polling Question

• How often do you analyze your Income Statement?− Monthly− Quarterly− Yearly− When we need to do our taxes− Rarely

Financial Statements

Balance Sheet

• Assets− Cash− Accounts Receivable− Fixed Assets, Equipment

• Liabilities− Accounts Payable− Other Payables− Notes Payable

• Equity− Stock (or Capital)− Retained Earnings

• Net Income

Income Statement(P&L)

• Sales− (Direct Expense - COGS)

• Gross Profit− (Operating Expenses)

• Net Income


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Income Statement Suffers from Timing

• Profit and revenue recognition issues

• When did you actually earn the money?− When you invoiced the client?− When you received the money?− When you did the work?

Two Months Into a Three Month Job

This job looks great!

| Year-EndNovember December | Total

Income 18,000 16,000 | 34,000COGS (5,000) (10,000) | (15,000)Gross Profit 13,000 6,000 | 19,000

|Gross Margin 72% 38% | 56%


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But Profit Based on Invoicing…

Can be very misleading!

| Year-End || | JobNovember December | Total || January | Total

Income 18,000 16,000 | 34,000 || 6,000 | 40,000COGS (5,000) (10,000) | (15,000) || (9,000) | (24,000)Gross Profit 13,000 6,000 | 19,000 || -3,000 | 16,000

| || |Gross Margin 72% 38% | 56% || -50% | 40%

How can you manage your business with these numbers?

WSIC?

• Stop the roller coaster!

• You need to know how much moneyyou are really making!− The ‘gut’ isn’t always the best source

of accurate financial data

• How can you make good business decisions based on false profits?

• You need to convert accrual Income Statement to percentage of completion Income Statement


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Measure True Profit

• Timing is everything!− Accounting uses arbitrary time frames

• Use percentage of completion!− Also called WIP – Work in Progress− Measure gross margin and gross profit as the job

progresses, not just at the end of the job

• Make sure your numbers “match”− The Matching Principal− Measure gross margin using revenue and costs based

on the same percentage of completion

Percentage of Completion Method

• Utilizes over or underbillings

• Uses Work In Process (WIP) methodology with under/over billings

Let’s WIP your company into shape


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Percentage of Completion

Income statement should reflect earnings not billings

Income and expenses for same activity during same period

Recognizes true profit during course of project

Smooths out fluctuations from trended financial statements

The key to usable financial statements

Only way to track real profit

Formula for Percentage Completion

• Step 1 – determine percent complete− Costs divided by budget = % complete

• Step 2 – determine the actual earnings− % complete times contract = earnings

• Step 3 – determine overbillings or underbillings− Earnings minus billings = under/(over) billings− Positive number = underbillings (increase income)− Negative number = overbillings (decrease income)


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Exercise

Mathematical Example

• Budget = $140,000

• Contract = $200,000

• Cost to date = $49,000

• Billings to date = $90,000


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Polling Question

• Given this information, are you overbilled or underbilled and if so by how much?

− $20,000 Underbilled− $20,000 Overbilled− $41,000 Underbilled− $41,000 Overbilled− No idea

Determine Adjustment – Overbilled

• Costs / budget = % complete− $49,000 / $140,000 = 35% complete

• % complete x contract = earnings− 35% x $200,000 = $70,000

• Earnings – billings = under/(over) billings− $70,000 – $90,000 = $20,000 overbilled

• Job is overbilled, therefore it is a liability− Reduce income by $20,000


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What if…

• Same numbers:

• Budget = $140,000

• Contract = $200,000

• Cost to date = $49,000____________________

• Except Billings to date = $55,000

Polling Question

• Given this new information, are you overbilled or underbilled and if so by how much?

− $15,000 Underbilled− $15,000 Overbilled− $41,000 Underbilled− $41,000 Overbilled− No idea


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Determine Adjustment – Underbilled

Same:• Costs / budget = % complete− $49,000 / $140,000 = 35% complete

• % complete x contract = earnings− 35% x $200,000 = $70,000

Different• Earnings – billings = under/(over) billings− $70,000 – $55,000 = $15,000 overbilled

• Job is underbilled, therefore it is an asset− Increase income by $15,000

Adjustment

• Last step – make adjusting journal entry

• Balance Sheet:− Increase/decrease Underbillings - Asset− Increase/decrease Overbillings - Liability

• Income Statement:− Net difference as adjustment to Income account

(Increase/decrease Income)

• Suggestion: Reverse in next month


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Results of WIP Formula

Overbilled Job

Cost to Date

Estimated Costs

$49,000

$140,000

= % Complete x Billings =(Over)/Under

BillingsContract Price = Earnings -

= ($20,000)= 35% x $200,000 = $70,000 - $90,000

Underbilled Job

Cost to Date

Estimated Costs

$49,000

$140,000

= % Complete x Contract Price

- $55,000

= Earnings - Billings

= $15,000

=(Over)/Under

Billings

= 35% x $200,000 = $70,000

Without the WIP Adjustment

• Which number is correct?− Neither!

Invoiced $90,000 $55,000COGS -$49,000 -$49,000Unadjusted Gross Profit $41,000 $6,000

Unadjusted Gross Margin 46% 11%

Overbilled Underbilled


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After the Adjustment – Same Income

Invoiced $90,000 $55,000WIP Adjustment -$20,000 $15,000Total Income $70,000 $70,000COGS -$49,000 -$49,000

Correct Gross Profit $21,000 $21,000

Gross Margin 30% 30%

Overbillings Underbillings

Consistent Gross Margin Across Time!

Percentage of Completion

• Cost driven− Dates and amounts of invoices become irrelevant for

financial statements, not for cash flow

• Requires accurate job costing and budgeting− Reason why keeping budgets up to date is so important

• Requires monthly WIP adjustment

• Only way to create accurate financials to measure true profitability


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WSIC?

• Why should you care about WIP?

• Tired of the one good year followed by the bad year? − Was that the case or was it a case of timing?

• With rollercoaster profits…− Owners tend to make poor decisions

• True benefit to have accurate financial statements that you can understand and use to make good decisions

Over/Under Billings Report (6-1-7-21)

• System will do the math for you• Only as accurate as the information entered into

the system


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Over/Under Billing Report Columns

• Costs− All costs entered into system− Reconciles to job cost summary report

• Budget− Reads total budget entered in 6-2 screen− Adds approved Change Orders

• Budget and Sub Change tab• Budget Amount Column

• Contract− Reads from original contract amount in 3-5 screen− Adds approved Change Orders

• Prime Change Details tab• Approved Column

Over/Under Billing Report Columns

• Earned− Follows formula (Cost / Budget * Contract)

• Billed− Reads all open and paid invoices created in Accounts

Receivable− Will not include invoices with “Memo” Type

• Over/Under− Follows formula (Earned – Billed)


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• Run the Over/Under Billing Report (6-1-7-21)• Only include Current Jobs (Job Status 4 to 5)• What’s wrong with this as it stands?• What does the asterisk mean?• What does this tell you about your process?

Now It’s Your Turn

Enter the Adjustment

• First run the report

• Report shows we need to reduce income by $68,217


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Create a Journal Entry

Once Completed:

• Balance in Asset and Liability Accounts− Equal the Over Under Billing Report Total

• Balance in Income Statement− Equals the net change from last period


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What Can Go Wrong?

• What if you knew the job will be $15,000 over budget?

• You are only 30% complete instead of 35%• $20,000 overbilled is really $30,606 overbilled

Cost to Date

Budgeted Costs

49,000

140,000

49,000

165,000

= % Complete X Contract =

= X = ‐ =

‐ Billings =(Over)/Under

BillingsEarnings

35% 200,000 70,000 90,000 (20,000)

What if costs include $10,000 for change order not entered (Budget = $10,000, Price = $14,000)

Adjust numbers to reflect change order

= 30% X 200,000 = 59,394 ‐ 90,000 = (30,606)

Consider Entering Change Orders

• Internal Change Orders− Adjust the budget to include true cost to complete− No Prime Contract change− Make sure it has an approved status

• Then the over/under report will be more accurate


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• Need accurate Income Statement to analyze company activity

• Need to base income on earnings, not invoicing

• Need to create WIP adjustment to reflect true earnings

• Need to understand the formula

• Now your statements are accurate!

Summary

Your feedback is important!

• Please complete the evaluation for this session. We use your feedback to improve future sessions and presentation techniques.

• Conference and Session Evaluations are located on the Feedback tab in the Networking lounge.

• You must complete your overall conference evaluation to qualify for prizes.

• Thank you for your participation.


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Additional Learning Opportunities

Visit Sage University for more training options:

• Anytime Learning subscriptions.

• Realtime Learning courses.

• Anytime Replay recordings of live, online sessions.

www.sageu.com

Leslie C. Shiner, MBASage Certified Consultant

[email protected](415) 383-6255

www.ShinerGroup.com

www.facebook.com/TheShinerGroup

Twitter: @TheShinerGroup

Questions and Thank You

Documents

Lets WIP Your Company into Shapeftp.sagesoftwareuniversity.com/lms/cre/S100C_Course... · 2013-10-25 · Let’s WIP Your Company into Shape 3 Continuing Professional Education Credits