4 November, 2016
Reserving against WIP is expensive as it is generally done by the principals in the firm. Yet there is very little automation to make it faster and easier for these busy people to perform this task. Where such software exists, it seems to be an afterthought. In many firms reserves are handled at the financial accounting level rather than as a function of practice management.
How are reserves managed at your firm? We’d like to know. Leave us a comment!
We at Commercial Logic suggest that reserves tracking IS an important practice management component. PowerPM has long had a reserves component that was designed for one of our non-CPA. The operating principle is to discount the value of the WIP based on its age. For example, the firm might decide that WIP over 60 days was worth 90% of its face value, over 90 days 75%, over 120 days 50%, etc. This would produce a report that calculated reserves on this pre-agreed basis. The advantage is obvious: no work at the partner or shareholder level and overall reserve balances that proved very accurate. The disadvantage is also obvious: partners found it hard to accept the judgment of the report in specific cases. You can imagine the protests, “He always pays in full, even if it is a year later!”
At the request of one of our long-standing clients, we engaged to create an alternative approach to reserves tracking. The new (2016) reserves system tracks the date, amount, and percent of WIP for each engagement indefinitely. An option on the Aged WIP report emails each principal in charge of a book of business a list of all projects with open WIP, showing current WIP balance and the date, amount, and percent of the last reserve. Principals then enter a new reserve percent which calculates the new reserve amount.
The completed spreadsheet is then uploaded into PowerPM, which now offers a version of the Realization and Profitability report that can combine the analysis of billed work in the period with analysis of unbilled work based on the anticipated write down represented by the reserve.
This approach accomplishes a good deal:
- Partners or principals are given a worksheet with all the information needed to set new reserves
- Use of percents to set reserves helps make entry easy
- The worksheets may be uploaded directly into PowerPM – no re-keying required
- Several reports are available to review and analyze the effect of the reserves on key indicators
Would this be helpful to your process at your firm? Call us to learn how we can set this up at your company!