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 Cofounder 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.
“Most builders and around 95% 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.
“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, they must hold enough cash reserves to cover their WIPAA liability.
“Yet, accountants that do not understand this calculation 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.
“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.
“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.”
Mr Stephens said 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,” Toby 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.
“We started using the WIPAA calculation five years ago when working with the Association of Professional Builders 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 travelling, allowing us to maintain a strong and steady level of growth.”
Toby has been a member of the Association of Professional Builders for more than five years.
The Association of Professional Builders have helped over 1,451 building companies to calculate their WIPAA and establish their true financial position.
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