Work in progress as part of the working capital calculation

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by a searcher from University of Cambridge
in Windsor SL4, UK

10mos ago

Work in progress as part of the working capital calculation

Does anyone has experience of completion based on completion accounts with WIP (Work In Progress) calculation in a manufacturing business? Is WIP accounted for as Working Capital calculation i.e. normalised WIP just as normalised WC is included and anything above or below this level needs readjustment of pricing? thank you for the response. Murtaza

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reply by an investor 10mos ago
from Columbia University in Fairfax, VA, USA

Yes, you'll want to include it in your NWC calculation. Pretty common in project-based businesses. Some good responses here, but a few nuances to look out for in diligence: > Valuation - how WIP is measured can materially change the balance (e.g., standard costing, % completion, cost to cost). > Accounting Consistency - some businesses expense sooner, some later. Just make sure it's consistent. > Conversion Risk - make sure WIP reliably converts to revenue/cash. If parts are routinely written off, factor that into your normalization. And be sure to diligence both sides. WIP can appear on both the asset side (costs tied up in production) and the liability side (billings in excess / deferred revenue). So you'll need to reconcile both halves of the story for your NWC peg.

reply by an intermediary 10mos ago
from The University of Chicago in Chicago, IL, USA

1) WIP is included in the Price. 2) Details of how, how much etc. depends on many factors like the accounting method and the nature products. Most companies do not capitalize labor and OH. It is easy for products companies and high-volume component mfg. It is challenging for high-ticket custom items and construction businesses. Often WIP is valued at material cost (X), or a fixed multiple of X, or a fixed % of FG value. Happy to help think through.