How is unbilled work calculated?
Take every approved billable hour that has not appeared on an invoice and multiply it by the billing rate of the person who logged it. Add any pass-through costs the agency has paid on the client's behalf and not yet recharged, such as ad spend, stock licenses or freelancer invoices. The total is the WIP balance.
For fixed-fee retainers billed in advance, WIP is usually zero or negative, because the invoice goes out before the work. For hourly and project work billed in arrears it can be a month or more of revenue. Agencies that mix billing models should report WIP by model so the hourly backlog is not diluted by retainer accounts.
Age it. WIP under 30 days is normal timing. WIP over 60 days is usually work that someone has decided not to bill and has not written off, which overstates revenue and understates the problem.
Why does unbilled work build up in agencies?
Late timesheets are the first cause. If hours are logged two weeks after the work, the invoice run misses them and they wait for the next cycle. Approval bottlenecks are the second: time sits in a review queue because an account lead is on holiday or is not sure the client will accept the hours.
The third cause is a billing calendar that does not match the work. Monthly invoicing on a project that finished on the 3rd leaves 27 days of earned revenue on the shelf. The fourth is missing rate cards, where hours cannot be priced because nobody set the rate for that person on that client.
- Time logged late or not at all
- Hours waiting for approval
- Invoice run on a fixed monthly date regardless of milestones
- Pass-through costs paid but not recharged
- Disputed or doubtful hours nobody has written off
How much unbilled work is too much?
Measure it in days of revenue. Divide the WIP balance by average daily billings. A well-run agency billing in arrears sits between 15 and 30 days. Above 45 days the agency is financing its clients, and above 60 the balance almost certainly contains work that will never be billed.
The cash effect is direct. An agency billing $180,000 per month with 40 days of WIP has $240,000 of earned revenue it cannot collect yet. Cutting that to 20 days releases $120,000 of cash without winning a single new client.
How do agencies reduce unbilled work?
Bill retainers in advance and hourly work weekly or at milestones rather than monthly. Require daily time entry and approve time weekly, not at month end. Write off doubtful hours the week they are identified so the WIP balance reflects what will actually be invoiced.
Recharge pass-through costs the day they are incurred rather than batching them with the month's fees. Verbial builds hourly invoices from approved time entries and lists uninvoiced approved hours and pass-through costs per client so that WIP is visible before the invoice run.
Worked example
At the end of September a 12-person agency has three hourly clients with approved hours not yet invoiced: 42 hours, 61 hours and 27 hours, a total of 130 hours. At the $150 blended rate that is 130 × $150 = $19,500. One retainer client used 18 hours beyond its 100-hour scope under a pre-agreed overage, another 18 × $150 = $2,700. The agency also paid $4,300 of stock and freelance costs on behalf of clients and has not recharged them. WIP is $19,500 + $2,700 + $4,300 = $26,500. The agency bills about $180,000 per month, or $6,000 per calendar day, so WIP is 26,500 ÷ 6,000 = 4.4 days of revenue on these accounts. When the same calculation is run across all clients the balance is $71,000, or 11.8 days, well inside the 15 to 30 day range.
Questions
Is unbilled work the same as accounts receivable?
No. Unbilled work is earned but not invoiced. Accounts receivable is invoiced but not paid. They are consecutive stages between doing the work and receiving cash, and an agency should report both, because a low receivables figure can hide a large WIP balance.
How is WIP treated in agency accounts?
Under accrual accounting WIP is a current asset, valued at billing rates or at cost depending on the policy. Under cash accounting it does not appear at all, which is one reason cash-basis agencies are surprised by the revenue in their timesheets. Ask an accountant which basis applies.
Should WIP include retainer hours?
Only hours beyond the retainer scope that will be billed as an overage. Hours inside the scope of a retainer billed in advance are already invoiced and belong in deferred revenue, not WIP. Hours inside scope that will never be billed are over-servicing, not WIP.