The term work in progress is used in the financial records of organizations. Work in progress indicates the amount of work performed for which no invoice has yet been sent to the client. The work has already been carried out but not yet billed and is therefore still in progress.
There are several reasons why it is important to gain insight into (the value of) work in progress and its development.
- Fiscal: It is a legal requirement to take your profit on a rolling basis. In other words: the profit belonging to the work in progress of a certain period must be taken in the period in which the work was done. For each year-end you must therefore at least determine your work in progress and take the difference with the position of the previous year as a profit or loss.
- As a rule, you will aim for the lowest possible work-in-progress position in order to increase your cash flow and debtor security. Gaining insight into the development of the work in progress can be an important tool in this respect.
Legalsense offers a number of tools to provide insight into work in progress (OHW).
Search time entries and matters
When searching by time entries (Timesheet » Search), it is possible to search for "Work in progress" under "Billing status". In addition, further refinement by timekeeper and/or matter and time period can be made if necessary. By clicking on "Search" you will immediately see all the time entries that are in progress. At the bottom an expected value is shown. On a matter page, the total amount of work in progress (time and amount) is also shown and you can click through to the underlying time entries.
In the reporting module (Reports » Reports), overviews can be obtained that take the value of various time entries together and group them by time unit, matter and/or timekeeper. When creating a report, choose the type "time and fee, billed and unbilled" to allow for the creation of a report for unbilled time. (The other report type is based on invoices and since work in progress is not yet billed it is not applicable here).
Filters can then be set when editing the structure of the report. For work in progress, the following filters must be set:
- Realization with the value billable
- Billed with the value false
Optionally, filters can also be set on a specific period.
In addition to setting up filters, it will be desirable to set up one or more groupings. For example, a grouping by matter, by timekeeper, by matter supervisor or by period (various options).
Legalsense offers several ways to value time entries; these ways are reflected one-on-one in the reporting module as columns. The following columns are of interest here:
- "Work in progress": the current value of work in progress.
The default valuation of work in progress in Legalsense is based on the rate set on the matter. This is exactly the same rate that is used when the invoice is actually created. Thus, Legalsense's valuation of work in progress corresponds to the value of the work in progress if all the work in progress will be billed, but excluding any office expenses. Time entries that have already been marked as "not billable", or as "zero rate" during the timekeeping process are not included in the value of work in progress. For fixed-fee matters, the total value of work in progress never exceeds the fixed fee amount. The time entries are initially individually assigned the value that would apply if worked at the standard hourly rate; once the value of the fixed fee agreement is reached, further time entries are assigned the value 0.
Time entries that are on draft invoices are shown as being in progress. Any changes in the value, for example because amounts on the invoices are adjusted, are processed as much as possible directly in the WIP position (as long as the invoice is still in draft).
Time entries that have already been (finally) billed have a "work in progress" value of 0 and will not show a value in the reports in the work in progress column.
A number of columns do not correspond to the most current value of work in progress, but to a value of time at certain conditions. These columns can be used as a basis for valuing work in progress in a way other than the "current value" built into Legalsense, or for comparing the current value of work in progress against. In contrast to the "work in progress" column, the amounts from these columns are calculated and displayed regardless of whether they are actually work in progress. By applying the above filter on WIP in the reports, the results from these columns can be used as a basis for determining the value of WIP.
- "Expected amount before write-offs": this column largely corresponds to the current value of WIP, with the exception that time entries that have been directly written off retain their value before write-offs. Here, only write-offs made at the time entry level apply (by checking the "not billable" checkbox or by "writing off" entries on a draft invoice). Time entries that have been entered at a zero rate are still worth 0 euro 'for write-offs'.
By taking the difference between this column and "work in progress", you can determine how much has been written off. Note that this only applies to time that has been 'ticked off'. By taking the difference between this column and the "billed" column (in a report that contains more than work in progress), it is possible to determine how much has been written off in various ways other than 0-rates.
- "Expected Amount Hourly Rate": this column shows the timekeeper's standard hourly rate multiplied by the amount of time. This excludes any special client/matter rates. In comparisons, it can count as an office-wide benchmark.
- "Expected client rate amount": this column shows the general client rate multiplied by the amount of time. This excludes any special matter rates. Zero lines and write-offs are not included in this. This column is primarily used as a benchmark against which to compare matter-specific rates.
- Time: in minutes (hours): this column provides information in units of time, rather than amounts. This column can be used as a reference with the other columns, as a basis for calculations for an average hourly rate (also available as a separate column), etc.
If the above filters are used, the two following "total" columns will be the same as the "work in progress" column: "Total excluding office expenses" & "Total".
Legalsense offers many possibilities to influence the value of work in progress. Examples include: adjustments to rates or the price template at the client or matter level, adjustments to the standard rate of a timekeeper, adjustments to the draft invoice, etc. For technical reasons, not all of the above revaluations of the WIP are processed immediately. In any case, the work in progress is updated nightly. See also Work in progress value is 0 or incorrect. When billing, the value of time entries is always recalculated and therefore the latest rates or settings (of the moment of creating the draft invoice) always apply.
For the "expected by..." columns also applies that they are updated every night, until the moment the time is finally billed. From that point on, the data is no longer updated for new rate settings, for example.
In addition to the various (numerical) reports, various dashboards can be used to provide an overview of the most recent work in progress per user, team or office. In practice, the dashboards will primarily be used to provide employees with a quick overview and not as the basis for an OHW report.
Reporting: always up-to-date
The various searches and reports in Legalsense always give the most up-to-date view of the state of affairs. This is part of the philosophy of Legalsense as a practice management package, and is often experienced as very pleasant by the lawyers/partners. This makes it possible, without further manual interventions, to get a daily view of how the office is doing.
Note: for people with a financial hat/look, however, this approach can sometimes be confusing. This is because Legalsense does not currently offer any means of reporting on the timing of value change. Specifically for the WIP this means: the WIP position shown in Legalsense over a certain period is always the last known WIP position of that period. From an accounting perspective, however, it is sometimes necessary to be able to answer another question, namely: what was the WIP position over a certain period, at a certain time? For example, what was the WIP position for 2021 on December 31 (the end of the year) or on April 14 (the time the financial statements were adopted).
For this reason, Legalsense offers the ability to freeze reports. When viewing a report, the "freeze" button can be clicked. At that moment a "photo" of the report is taken and stored in Legalsense. At a later time, the report can still be viewed or downloaded. To do this click on the "History" button that is visible with the report. Under that button all frozen reports are available. This makes it possible to gain insight into the changes in the WIP over a certain period.
Reports can also be automatically saved/frozen by setting a schedule for this. This option is found under "History". In the schedule, you can indicate that you would like to freeze a report, for example, weekly on a monthly basis or every last day of the year.
In this way you can use the report to gain insight into the development of the WIP.
Integration with accounting
The determination of the value of work in progress is a decision that also has a substantive aspect (is the work still actually in progress, or should it reasonably be written off). The year-end closing is a logical moment to make the actual determination of the work in progress.
For this reason, the integration between Legalsense and Twinfield or Exact Online, and the various export options to other accounting packages, do not create automatic entries for work in progress. Thus, the entries for sales invoices do not "run through work in progress": each sales entry is "accounts receivable to sales".
This is a simple, quickly understandable way of working. There is no need to work with period closures (in Legalsense), the number of bookings in the accounting system is greatly reduced and corresponds one-to-one with the sales invoices.
The manual entry that is made once per period (usually: year) is a logical conclusion in this setup.
There are two standard ways to make this entry, which are explained below.
Determination at year-end
The simplest way to determine work in progress is to have a (comprehensive) work in progress report frozen on December 31 (or any other year end). This can be done automatically, by setting the schedule mentioned above. The balance of this report can be transferred one-to-one to the accounting program as a correction entry to work in progress (by subtracting the balance as of January 1). If necessary, (motivated) valuations or provisions can be made at that time.
Sometimes it is not desirable to determine work in progress as of December 31. Reasons may include:
- Time is not written daily, so as of December 31, the balance is not yet known.
- Consistency of approach: last year a determination was also made only on April 1.
- For a fair valuation of work in progress, more information becomes available as time progresses (and it becomes clear what is actually billable).
In this case, the work in progress as of December 31 can always be determined retrospectively. For this purpose, the sum of two amounts must be taken on a certain reference date:
- The position on the reference date of the work in progress at that time. (possibly corrected with provisions, etc.). This in fact follows 'determination at year end', with the exception that it is not done at year end.
- The total billed value up to the reference date of work performed in the previous year. As a rule, this is not corrected - because it has now been billed, the 'estimate' of the value of work in progress is very precise. After all, apart from any credits, it is exactly the value for which it was ultimately billable.
Alternative: Sales ledger entries running through work in progress
The integration between Legalsense and Twinfield can also be set up with bookings through work in progress.
In this scenario, an automatic booking of sales to work in progress is made at regular intervals. The sales bookings then become work in progress to debtors.
Because this method results in a large number of automatic entries, there is a risk that it will be difficult to maintain an overview. Another disadvantage is that a possible moment of revaluation is not as clearly defined as in the case of an annual or monthly manual entry.
Nevertheless, especially for larger offices, this can be a desirable way of working. We would be happy to discuss the possibilities with you.