New home builders are running out of cash and going bust because they don’t understand how to correctly calculate their work in progress liability and end up paying tax on profits they don’t make.
Construction Financials Specialist and Co-founder of The Association of Professional Builders (APB), Russ Stephens, said the Work In Progress Accounting Adjustment (WIPAA) is the most important figure in a building company’s accounts.
“If it’s missing, or not calculated correctly, WIPAA can and will silently destroy building companies. Builders must accurately calculate their WIPAA each and every month in order to truly understand their financial position,” Mr Stephens said.
He noted that most builders and around 95 per cent of accountants do not understand WIPAA, they confuse the Work In Progress calculation for a construction company with the Work In Progress calculation for a manufacturing company.
He also notes that running a building company that builds new homes is cash flow positive and a builder’s WIPAA is essentially other people’s money so in order for a building company to be in a sound financial position, it must hold enough cash reserves to cover the WIPAA liability.
“Many accountants do not understand this calculation and continue to show WIPAA as an asset on a builder’s balance sheet, when it’s really a liability that grows in line with revenue,” Mr Stephens continued. “Furthermore, building companies never realise how much they really owe because the WIPAA liability is hidden away inside their accounts. It doesn’t appear on a creditors list, so when builders have cash in the bank, everything on the surface appears rosy, but in reality, builders are flying blind financially.”
Mr Stephens’ view is that every single building company needs to calculate this figure in order to produce accurate financial reports that provide them with a clear picture of the financial health of their building company, right down to the last cent, and that if builders are leaving the WIPAA calculation to their accountant, they are likely paying too much tax and will experience severe cash flow problems as soon as sales stop growing.
“A building company that does not calculate its WIPAA is nothing more than a giant Ponzi scheme, and when the music stops, and it will stop, builders will be left wondering where it all went wrong,” Mr Stephens said.
Director and Founder of Highwater Homes Toby Searle says the WIPAA calculation has been a gamechanger for his Camden based custom home building business.
“Many builders risk running their businesses blind, essentially going to their accountant with insufficient information each year and making significant business decisions without knowing all of the facts or finances,” he said.
“You frequently hear about builders growing too quickly and folding soon after – too often because they think they have money in the bank so they must be doing okay. This is the furthest thing from the truth as most of that money is not theirs” he added.
Toby is a long-term member of the Association of Professional Builders. “We started using the WIPAA calculation five years ago when working with the Association and it’s been a driving force behind the growth of our business. The calculation has enabled us to make informed decisions about how the business is traveling, allowing us to maintain a strong and steady level of growth,” he concluded.
