Fluctuating Profits and the Importance of Tracking Stock and WIP
Do your profits fluctuate widely every month for seemingly no good reason? If they do, then you might want to consider your stock and work in progress (WIP). Many businesses only calculate their stock and WIP at year-end, however doing that could be driving inaccuracies in your financial reports…therefore reducing your ability to make well-informed decisions.
First, what is Work In Progress (WIP)?
Work in Progress (WIP for short) is an accounting term that refers to any unfinished projects, services or goods you have during your production process. WIP keeps track of how much money and time you’ve spent on a project before it’s finished. You should use WIP to track the progress of production, monitor its costs and manage your stock.
The Problem with Only Calculating Stock and WIP at Year-end
Fluctuating gross profit percentages happen when a business doesn’t have an accurate view of its stock and WIP. This is a common issue I see with businesses time and again.
It leads to discrepancies in your financial reports that make it difficult to know the true state of your business.
The Solution: Track Your Stock and Work In Progress Monthly
The solution is pretty simple and we cover this more deeply in our KYN Mastery Group. Take as accurate a view as possible of your stock and WIP at the end of every month. It doesn’t have to be precise, but it should be accurate enough to give you a good grasp of your finances.
The Impact of Inaccurate Stock and WIP.
Remember, management accounts are not the same as an audit. They exist for you! They are the vital information and knowledge you need to allow you to make well-informed decisions…not to be presented to Companies House or auditors.
So, if you want your monthly management accounts to be as accurate as possible, it’s important to make sure that your stock and WIP are calculated accurately, allowing you to make the necessary course correction in your business.
The Bottom Line: Making Better Decisions
By understanding your numbers, you’ll have a better understanding of your business. Having an accurate view of your stock and WIP at the end of each month is a great way to ensure that your management accounts reflect the true state of your business.
This in turn helps you make informed decisions and understand where your business is heading.
Action: monitor your stock and WIP on a monthly basis so you can understand why your profits are fluctuating and be able to do something about it.
