In Part One of this article, we explored the common KPIs Productivity and Recoverability and how to track them in Xero Practice Manager.

In this second part, we will explore the third crucial KPI that completes the picture of staff and business performance, along with Productivity and Recoverability: Closing WIP Balance.

A Crucial KPI for Timesheeting Firms

For timesheeting firms who are tracking Productivity and Recoverability as KPIs, your closing WIP balance is also a crucial KPI to complete the picture. It reveals whether our productivity and recoverability KPIs are actually meaningful and reliable. Consider the following scenario:

Sally, our accountant, posts lots of billable time to client work, because she knows she is being measured on her productivity percentage. She comes in at 92% productive for the month, meaning 92% of her available work time was spent on billable client work. When our invoicing was done at EOM, the WIP was assessed, and some of Sally’s time was carried forward rather than written off, because it couldn’t be recovered. On the recoverability reports, only the timesheets which were actually billed are reflected (including timesheets from previous periods that were billed in the month), so Sally’s recoverability looks solid (close to 100%). However, we have a real problem: a lot of WIP is just being carried forward from month to month, and the firm has little chance of recovering this WIP in the future.

In XPM, historically we’ve been able to track our closing WIP balance as at a date, using the Job WIP Balances report, or the Estimated Billings report, both on the All Reports page.

However, both reports are limited in the options for customising the layout or filtering what information is shown. For example, we can’t see the closing WIP balance for jobs grouped by Job Category.

Recently, we released some new features in XPM which provide improved visibility over your closing WIP balance for various segments of your WIP. If your firm has some segments of WIP that you expect to be negative at certain points during the year - such as annual service agreements where the client pays a fixed monthly fee - these can skew your overall closing WIP balance, and it may be better to exclude them, or consider them separately. Likewise, you may have some jobs which are invoiced in full or partially up front, so these should be segmented when managing WIP and monitored separately. We can now achieve this reporting requirement of monitoring the closing WIP balance of one or more segments of WIP, using the Filters on the WIP Dashboard, and setting an “as at” date.

The filters on this page are incredibly powerful because we can combine multiple criteria to build the filter. In order to use this to its full potential, it’s crucial to very thoughtfully design your Job Categories, and ensure jobs are all correctly assigned a Category. This is particularly important for firms using Practice Ignition, because these firms may have certain segments of WIP that are expected to be negative at certain times of the year.

In a common scenario, a firm may have some clients paying a set monthly fee. We call these Annual Service Agreements. A sample client may be paying $1000+GST per month from July 2019 through June 2020, and this $12,000 fee includes the activity statements throughout the financial year ending June 2020, and the tax planning service provided in May 2020, and the 2020 financials and tax returns for the group. Thus early in the financial year, say in October, we will have invoiced this client the monthly fee four times, but we’ve barely done any of the work included (because the 2019 tax returns were included in the prior engagement, so the client has fully paid for that by June 2019!). So, this job should be showing a net WIP less than zero, because invoiced amount is more than the time spent. (Negative WIP values can be imported directly from Xero relating to the invoices created by a repeating invoice template in Xero. For more information on setting this up, see this Linked In Article.)

Identifying your WIP Segments: the importance of Job Categories

Identifying the different segments of WIP in your firm that you need to separate can be tricky. To start with, if you have clients paying a fixed monthly fee, it’s important to categorise these using a naming convention that is familiar to your staff. We use the term “Annual Service Agreements” but you may call them Monthly FPAs, Monthly Recurring, Retainers or some other terminology.

Next up, you may have other jobs which are paid fully in advance. Both of these are also important to categorise so you can segment them.

Lastly, don’t forget that you can map your Job Categories to income accounts and tracking category options in Xero. Depending on your reporting requirements, this can be important to consider as well, when designing your Job Categories. Remember that when creating Filters on the WIP Dashboard, you can also use other fields, including Job Partner, Client Partner, Job State, Job Manager and Client Manager, among others. So take some time to design your Job Categories in a meaningful way for your firm, and then build Filters on the WIP Dashboard to segment your WIP.

In the end, you want to be able to build a filter that shows you the time posted which needs to be invoiced. We call this our “At Risk WIP”. In some firms, this is a filter that excludes our Annual Service Agreements as well as anything billed 100% up front. Of course both of these types of engagements also need to be closely monitored to ensure that we’re not going over budget! So create segments and then make sure you’re keeping an eye on each segment.

When you have identified your key segments, you should be able to monitor recoverability for each identified segment, as well as the closing WIP balance for each segment!

Seeing the full picture

Monitoring productivity gives you a great idea of how much of a staff member’s time is spent on billable client work. Adding in Recoverability keeps your team honest with their timesheets and gives you a more complete picture of their efficiency and value. Lastly, monitoring the closing WIP balance of your “at risk” WIP will help you ensure that your Productivity and Recoverability KPIs are correct and that you’re not just carrying forward time you can’t invoice. Over time you will spot trends and identify client groups, staff, and even service lines that are either over- or under-performing, using accurate data and information to make good business decisions.

If you’d like help utilising XPM to its full potential, reach out to your Xero account manager, who can arrange some time with a Xero Partner Consultant to assist you.