What Is WIP in a Marketing Agency, and Why Does a Buyer Check It?

By Craig S. Cody, CPA, Certified Tax Coach.

Work in process (WIP) is work your agency has done and hasn't billed yet. It's real value, but only the part that will actually turn into an invoice at full price. Most agencies get it wrong one of two ways. Either they don't track it at all, so their monthly profit swings with their billing calendar, or they overstate it, so their profit looks better than it really is. A buyer checks WIP because the second mistake inflates the number they're paying a multiple of.

The fix isn't complicated. Book WIP every month, age it, and keep score on how much of it you actually bill.

What Is WIP in an Agency?

WIP is the time and costs sitting on jobs you haven't invoiced yet. A website build you bill at launch. A campaign you bill when it wraps. A project billed in arrears at the end of the month. Until the invoice goes out, the work you've done is WIP.

Accountants have a formal name for it. Under the revenue rules (ASC 606), work done but not yet billed is a contract asset, which EisnerAmper's guide describes in plain terms as unbilled receivables. The guide is written for contractors, but the idea is the same in an agency: you've earned it, you just haven't billed it.

What Happens If You Don't Book WIP?

Then your revenue is just your invoices, and your profit follows your billing calendar instead of your work.

Here's how I put it to owners. Not recording WIP, or just not making that entry monthly on multi-month projects, makes for a very lumpy, and therefore inaccurate, profit and loss statement.

Say your team spends all of March building a site you bill in April. With no WIP on the books, March shows the payroll and none of the revenue. It looks like a terrible month. April shows the revenue and less of the cost. It looks like a great one. Neither month tells you the truth.

That's annoying when you're running the agency, and it's worse when someone's buying it. A buyer looks at your monthly results to see how steady the business is. Swings caused by billing timing look like swings in the business. Why your books should be on accrual even if you file taxes on cash is covered in was it really a bad year?

How Can WIP Make Your Profit Look Better Than It Is?

By counting hours that will never be billed.

WIP is usually valued at what you'd bill for the time. But not every hour on a job gets billed at full price. The usual suspects:

• Overruns. The job was quoted at 80 hours and took 120. The extra 40 sit in WIP until someone admits they won't be billed.
• Scope creep. The client asked for "one more round," and nobody wrote a change order.
• Internal time coded to client jobs. It looks billable in the system. It isn't.
• Old WIP nobody looked at. Hours from a job that ended months ago, still sitting there.

Every one of those makes WIP bigger, and bigger WIP means bigger profit on paper. The write-down comes later, usually at year end or when the job closes, and it lands in a month that didn't earn it.

How Does a Buyer Test Your WIP?

They want to know how much of it is real. Expect three kinds of questions.

How much of past WIP turned into invoices at full value? If last year's WIP was regularly billed at 70 cents on the dollar, a buyer will assume this year's is too, and take the difference out of your profit.

How old is it? WIP from a job that wrapped three months ago is a question, not an asset. The older it gets, the less likely it is to be billed.

What got written down, and when? Write-downs that pile up at year end tell a buyer the monthly numbers ran high all year.

If you can answer those from your own records, WIP is a strength. It shows you know which jobs make money. If you can't, a buyer will make conservative assumptions for you. How a buyer rebuilds your profit more generally is covered in Clean Books Sell Agencies. Messy Ones Get Discounted.

What About Deferred Revenue?

Deferred revenue is WIP's mirror image. WIP is work done and not yet billed. Deferred revenue is money billed or collected for work not yet done, like a retainer billed at the start of the month or a deposit on a project. The same accounting guide calls it a contract liability: deferred or unearned revenue.

A project shop usually carries more WIP. A retainer shop that bills in advance usually carries more deferred revenue. Many agencies carry both. Either way, both need to be on the books every month, or your profit is really just your billing.

How Do You Keep WIP Honest?

• Book it every month. Run a WIP report by job at every month end and record it, so revenue follows the work.
• Age it. Pick a cutoff, say 60 or 90 days, and review every job with WIP older than that. Bill it, or write it down.
• Write down when you know. The day you know hours won't be billed, take them out. Don't save it for year end.
• Keep score. Each quarter, compare what you billed to the WIP you started with. That percentage is your realization rate, and it's the number a buyer will want.
• Shrink it with billing terms. Milestone billing and deposits on projects keep WIP from piling up, which also helps your cash. Where agency cash gets stuck is covered in Your Agency Made a Profit. Did It Make the Cash?

Who Is This Not For?

If you bill nearly everything as a retainer, in advance, your WIP is probably small. Your bigger question is deferred revenue, and the accrual article above covers it.

And if a sale is years away, you're not on a deadline. But monthly WIP tells you which jobs actually make money, which is reason enough to start now.

What Can You Do This Week?

Pull a WIP report by job as of last month end. Then answer three questions:

• What's the total, and how does it compare to the month before?
• How much of it is older than 90 days?
• Of the WIP you had at the start of last quarter, how much did you bill at full value?

If you can't get those answers in an afternoon, that's the first thing to fix. A buyer will ask all three.

Frequently Asked Questions

What is WIP in a marketing agency?

WIP, or work in process, is the time and costs on jobs an agency has done but hasn't billed yet. It's sometimes called unbilled revenue or unbilled receivables. It belongs on the balance sheet so that monthly revenue reflects the work done, not just the invoices sent.

Why does WIP matter when you sell an agency?

Because overstated WIP makes profit look bigger than it is. A buyer tests how much past WIP was billed at full value, how old the current WIP is, and when write-downs were taken, then adjusts profit for anything that won't be billed.

What happens if an agency doesn't track WIP?

Revenue becomes whatever was invoiced that month, so profit swings with the billing calendar. A month of heavy work billed later looks like a loss, and the month it's billed looks unusually good.

What is the difference between WIP and deferred revenue?

WIP is work done but not yet billed. Deferred revenue is money billed or collected for work not yet done. In accounting terms, WIP is a contract asset and deferred revenue is a contract liability.

How often should an agency review WIP?

Every month end. Book it, age it, write down hours that won't be billed when you know it, and track each quarter how much WIP was actually billed at full value.

Let's Talk

WIP is where your profit is either honest or hopeful. Book it every month, age it, and keep score, and it becomes one of the strongest numbers you can show a buyer.

I also wrote a book for agency owners. You can request a free copy at the link below.

Craig S. Cody is a CPA, Certified Tax Coach, and retired NYPD Lieutenant. His firm works with more than 70 marketing and advertising agency owners every month, helping them keep more of what they make through proactive tax planning.

This article is general education, not advice for your specific situation. Confirm your own facts with your advisor before acting.