Cash, Accrual or Work-in-Progress Accounting: Which Is Best for Your AEC Firm?

Recognizing Project Revenue: Which Accounting Method to Choose? 

It’s an important question: which accounting method is most effective at providing insight into your firm’s revenue? Some say accrual accounting is more effective than cash accounting. However, many times, when architecture, engineering and consulting (AEC) firms only use accrual accounting, they miss out on an even deeper level of insight into revenue that can only be achieved with the accrual-based work-in-progress (WIP) method.

While each method provides a snapshot of an AEC firm’s income, the WIP method produces the most accurate representation. What’s the impact? Stakeholders get a clearer picture of the company’s revenue journey, and the firm achieves the level of revenue insight it needs to be successful.

Three Accounting Methods: What’s the Difference? 

Let’s explore the three accounting methods most commonly used among AEC firms:

1. Cash Accounting: A critical objective for any profitable business is to monitor cash flow. With the cash method of accounting, a company books income when it receives money and expenses when it spends money. In other words, items are booked when money changes hands. 
   
   While cash accounting represents a firm’s revenue value extremely accurately, the story it tells can be misleading. For example, if a firm receives a large payment from a customer and records it before paying the bills, it may appear more profitable than it is because, at that moment in time, assets are greater than liabilities. Of course, the reverse is also true. If a firm pays expenses before receiving and recording revenue, it can seem like the company is less profitable. In this case, the firm’s balance sheet would show the value of its liabilities as being greater than the value of its assets.
2. Accrual Accounting: While cash accounting represents the actual movement of cash, accrual accounting predicts revenue. With this method, when a firm receives a bill from a contractor (expense) or submits an invoice to a customer (revenue), it books them right away, even though no actual money has been paid or received. Essentially, with the accrual method of accounting, a sum is booked when an invoice is sent or a bill is received.
   
   Since the accrual method entails booking expenses when a firm receives an invoice or timesheet, it will have a clear picture of costs for a given month. No matter which accrual method a firm uses (accrual or accrual-based WIP), expenses will always be booked in the month they occur. However, with WIP, there’s an additional option for booking revenue: An AEC firm can book revenue in the month work is completed.
3. Accrual-Based Work-in-Progress Accounting: Accrual-based WIP represents the value of work completed but not yet billed. Since there are parameters that determine the contractual amount a firm can bill, those parameters can be used to figure out the value of work before it’s billed. This additional layer of accrual allows an AEC firm to book the revenue that comes from work completed in the month it occurs. Booking revenue at this point in the project lifecycle provides the truest picture of a firm’s forecasted income.
   
   Since the accrual method entails booking expenses when a firm receives an invoice or timesheet, it will have a clear picture of costs for a given month. No matter which accrual method a firm uses (accrual or accrual-based WIP), expenses will always be booked in the month they occur. However, with WIP, there’s an additional option for booking revenue: An AEC firm can book revenue in the month work is completed.

Cash and accrual are two different methods of accounting. Each tells a different story about revenue, but neither gives the whole story — that’s where the work-in-progress method comes in.

The Revenue Story With WIP 

As the saying goes, “It takes money to make money,” so booking revenue in the same month as expenses gives the truest picture of a firm’s financial standing. But by taking it a step further with the WIP method, the WIP value on the financial reports will show the value of work before it’s billed. So, how is this helpful to an AEC firm?

If a firm is not using WIP and books expenses in a given month but invoices the client months later, the view of expenses versus revenue becomes skewed. The month in which the expenses are booked will have no offsetting revenue booked, and when the invoice eventually goes out, the revenue will appear with no offsetting expenses. Because the amounts will be booked in two separate periods, it’s harder to make the connection between the expenses incurred and the amount invoiced.

However, using the WIP method, the firm can accurately depict the revenue earned in the same month the expenses are booked. Since this value is booked as WIP, it’s recognized as a future invoice amount.

An Extra Layer Of Analysis

Since WIP is a statement of what a firm expects to bill in the future, when an invoice is sent, that value is offset from the WIP account. By booking that value as WIP, the firm can evaluate the time elapsed from completing the work to billing it. That same principle applies when cash is received. Noting the date of the invoice and the date that cash was received shows how long it took for a client to make a payment. Thus, WIP gives the firm a complete timeline from work completed to billing, and from billing to cash collected.

Here’s another way to look at it: Say work is completed in January. According to the WIP method, the firm would book that work in January. In March, upon reviewing the firm’s WIP balance (which represents work completed but not yet invoiced), the project accountant sees that there was a balance for WIP booked in January. This would immediately alert them that the work completed in January has not been invoiced. The firm can now proactively review WIP and give attention to projects that have fallen behind in invoicing, positively impacting the firm’s cash flow.

So, how is this added benefit helpful to your AEC firm?

How WIP Accounting Benefits AEC Firms

Every AEC firm is free to choose which accounting method works best for it. Cash accounting is straightforward, and accrual accounting is future oriented, but WIP goes further by helping the firm actively analyze and maximize profits. With WIP, Finance and Project Management teams improve communication about the time gap between work performed and work billed. This shared visibility allows Project teams to take ownership of cash flow health and strengthens client discussions around billing and payment timing.

BST Global has 50+ years of experience working exclusively with AEC firms, providing a smart, integrated ERP experience that adapts to the firm’s specific accounting needs, whether that be cash, accrual, or accrual-based WIP. For more information about our flexible ERP solution, request a demo.