Interior design firms have complex bookkeeping and accounting processes compared to most other industries. That’s for a variety of reasons, including that projects can span over multiple accounting periods; each project can require hundreds of individual components to account for; and the interior design payment process often involves collecting partial payments from clients or collecting payments from clients that the designer then uses to purchase products from vendors.
In accounting, there are three types of inventory that will appear on a company’s balance sheet: raw materials, work in progress (WIP), and finished goods. Interior designers can make good use of the WIP designation, since work is rarely finished within a given accounting period but must be accounted for so they can have a realistic understanding of their financial health at any given moment — or at least at the regular intervals set forth by standard accounting practices.
Let’s take a closer look at WIP and why it is important for interior design accounting:
What Is a Work-in-Progress (WIP)?
- WIP includes: The cost of an unfinished product in the manufacturing process including labor, raw materials, and overhead incurred at the time of reporting. For interior design firms, this can be applied not only to actual goods in production, but also billable hours spent working on a project.
- WIP is a component of a company’s balance sheet: WIPs are categorized as current assets on a balance sheet.
- WIP reflects an intermediate stage of production: The amount for a WIP item is the value of products in an intermediate production stage or billable time not yet invoiced to the client. It can include a portion of any mark-up fee that an interior designer will charge to a client for a product procured by the designer.
- WIP is NOT computed in a standard way across companies: There is no standard way of defining a WIP. Do you break down a customized sofa by its components or in the aggregate? If by individual component, each component will be either a raw material, a WIP, or a finished good. If the components are aggregated into one line item, the line item will be a WIP until the sofa is completed. The way you choose to break out components is up to your discretion and should be discussed with an accountant. It’s also influenced by whether your company employs a process costing or job costing method of accounting. Either could be appropriate for an interior design firm depending on how you structure your pricing.
Why is Work-in-Progress (WIP) Important for Interior Design Accounting?
- It provides a more accurate snapshot of a company’s financial health: By breaking down the value of goods and billable time in their intermediate stages, interior designers and other company stakeholders (investors, for example) can better understand where a company stands in a given accounting period. Without the WIP designation, a company may show losses or gains that wouldn’t exist at the end of a project, the former being applicable if you bill at the end of a process and the latter if you bill at the beginning of the process.
- It helps to uncover billing mistakes or outstanding invoices: By using the WIP designation, you gain a more granular understanding of your billing by project. You are forced to break out components and know what you have collected payment for and what you have not received payment for.
- It uncovers a project’s budget trajectory: Having a granular breakdown of billable components that can be seen throughout the life of a project will show the trajectory of spending and whether or not a project will go over budget.
Using the WIP accounting designation takes more time and effort, but the benefits to your interior design firm are vast. Using a professional accountant well versed in the interior design business model, in addition to project management and accounting software specially created for interior designers, can make it much easier to use WIP to your advantage.
Naturally, we recommend Design Manager for that software platform. It can track all aspects of your projects’ individual components and their billing status. This not only saves you, your bookkeeper, and your accountant countless hours of tedious work, it also drastically reduces the possibility of human error. Even better, Design Manager can produce a wide range of financial reports, including “Work in Process” and “Pre-Billing” reports that can show your company’s financial status from any period and up to the present. Understanding where your company stands financially will help keep you in your clients’ and investors’ good graces and to keep your doors open for as long as you choose.