Bookkeeping for professional services firms

Work in progress: the invisible asset

Work in progress, WIP, is time your team's spent on client work that hasn't been billed yet. It's real value the firm has created, but it shows up nowhere in a standard profit and loss until the invoice actually goes out. A firm can feel flat out for two months while revenue looks terrible, simply because the work's piling up as WIP instead of converting to invoices. Tracking WIP by client and matter makes that pipeline visible.

WIP ages too, and old WIP behaves a lot like old debtors: the longer time sits unbilled, the harder it gets to bill in full. Clients query invoices for work done months ago, and partners quietly write numbers down before the invoice's even drafted. A monthly WIP review, billing promptly and confronting stale balances head on, protects revenue that's already been earned in every sense except the paperwork.

Utilisation and recovery: the two honesty metrics

Utilisation measures how much of available time gets spent on client work. Recovery, sometimes called realisation, measures how much of the time recorded actually gets billed and collected at full value. Together the two explain most of a firm's financial performance. As an illustration only: a consultant employed for 40 hours a week who records 26 client hours has 65 percent utilisation; if discounting and write offs mean only 22 of those hours get effectively invoiced, recovery of the recorded time sits around 85 percent, and the combined effect is that barely half the employment week converts to revenue.

Neither metric needs fancy systems, but both need honest timesheets. Time recorded vaguely, reconstructed at the end of the week from memory, produces flattering nonsense. Time recorded daily against real matters produces actual management information.

The rest of the professional services file

• Recoverable expenses and disbursements: costs incurred on a client's behalf need tracking to the matter and on billing, with GST treatment handled correctly; unbilled disbursements are pure margin leakage.
• Fixed fee engagements: track time against them anyway, because a fixed fee with untracked effort is a margin mystery, and quoting the next one accurately depends on knowing what the last one really took.
• Leave liabilities: in a business whose costs are overwhelmingly salaries, accrued leave is a significant and growing liability that belongs on the monthly report, not something discovered annually.
• Trust accounts: firms holding client money, legal practices especially, face strict and audited trust accounting obligations under state rules; trust money must never mix with office money, and the specific requirements come from the relevant regulator.
• Revenue timing: when revenue gets recognised on longer engagements affects both reporting and tax, and it's worth a conversation with your accountant.

What the monthly report should show

Alongside the standard profit and loss, a professional services management report earns its keep with a small set of specifics: WIP balance and ageing, utilisation by fee earner, recovery of recorded time, debtor days, and profitability by client or matter for the significant engagements. Together they answer the question the profit and loss alone can't: which work and which clients are actually worth the hours.

Reporting built for time based businesses

NextEra builds these firm specific measures, WIP, utilisation, recovery, client profitability, into the monthly management reporting for professional services clients. Reports currently stopping at revenue and expenses? A Strategic Finance Review can establish which clients and engagements genuinely pay for the time they consume.