Why Too Much Work-in-Progress Drains Your Bank Account
I’ll never forget the conversation I had with a small engineering firm owner a couple of years back. “I don’t understand it,” Where’s all the money going?”
When we looked at his accounts, the answer was sitting right there on the factory floor. He had nearly £280,000 tied up in work-in-progress jobs that had been started but not finished, invoiced, or paid for. His money was literally gathering dust in half-finished products.
This is one of the most common cashflow problems I see in small manufacturing businesses, and it’s completely avoidable once you understand what’s happening and why it matters.
Let me show you exactly how excessive work-in-progress destroys cashflow, what causes it, and what you can do about it.
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What Is Work-in-Progress (WIP)?
Work-in-progress, or WIP, is exactly what it sounds like products or jobs that you’ve started making but haven’t finished yet.
You’ve bought materials, you’ve invested labour hours, you’ve used machine time, and you’ve incurred overhead costs. But the product isn’t complete, so you can’t deliver it, invoice it, or get paid for it.
In accounting terms, WIP sits on your balance sheet as an asset part of inventory. You’ve spent money creating it, and it has value, but that value isn’t liquid. It’s not cash you can use to pay wages, suppliers, or your rent.
For a jobbing manufacturer making bespoke products, WIP might be the partially completed orders on your shop floor. For a batch manufacturer, it’s the production runs that are underway but not yet finished. For an assembly operation, it’s components that have been started through the production process but haven’t reached completion.
Why WIP Is a Cashflow Killer
When you buy materials, pay your production staff or pay the electricity bill for running your machines, cash leaves your bank account.
All of that cash is now tied up in the half-finished job sitting on your production floor. And it stays tied up until you finish the job, deliver it, invoice it, and get paid which might be weeks or even months away.
The more WIP you have, the more cash is locked up. And while that cash is locked up in WIP, you can’t use it for anything else.
You can’t pay suppliers, which might mean losing early payment discounts or damaging relationships. You can’t invest in new equipment. You can’t build a cash buffer for quiet periods. You might even struggle to make payroll if WIP levels get high enough.
This is why profitable businesses can still have cashflow crises. Your profit and loss account might look great because you’re recognising the value of that WIP, but your bank account tells a very different story.
The Real Cost of Excessive WIP
Let’s put some numbers on this to make it concrete.
Imagine you’re a small manufacturer with typical monthly costs of:
- Materials: £15,000
- Labour: £20,000
- Overheads: £10,000
- Total monthly spend: £45,000
Now let’s say you typically have 6 weeks of WIP sitting on your shop floor. That means you’ve got:
£45,000 ÷ 4.33 weeks per month × 6 weeks = £62,284 tied up in WIP
That’s over £62,000 of cash that’s not in your bank account. It’s locked up in jobs you haven’t finished.
If you could reduce that to 3 weeks of WIP, you’d free up over £31,000 in cash. That’s money you could use to:
- Negotiate better supplier terms by paying faster
- Take advantage of bulk purchase discounts
- Build a cash reserve for quiet periods
- Invest in efficiency improvements
And here’s another cost people forget: if you’re using overdraft or invoice finance to manage cashflow, you’re paying interest on money that’s tied up in WIP. At 8% annual interest, that £62,000 of WIP is costing you nearly £5,000 a year in finance charges.
Product Costing Accountant – Skynet Accounting – Accountants For Manufacturing & Engineering
What Causes Excessive WIP to Build Up?
WIP doesn’t usually appear overnight. It creeps up gradually, and there are several common causes.
Poor production planning and scheduling. Without proper planning, jobs get started in the wrong sequence. You might start Job A, then realise you’re waiting for a component, so you start Job B. Then a rush job comes in and you start Job C. Suddenly you’ve got three jobs underway and none of them are progressing quickly.
Bottlenecks in the production process. If one stage of your process is slower than the others, work piles up waiting for that stage. Maybe your machining is fast but assembly is slow, so partly-machined components accumulate.
Missing components or materials. You start a job, then discover you’re missing a component. The job sits waiting while you order the part, tying up everything you’ve invested so far.
Quality issues causing rework. A batch fails quality inspection and needs rework. It sits in your WIP while you fix it, along with all the costs you’ve already incurred.
Long production lead times. Some products genuinely take weeks or months to make. If your typical job takes 8 weeks from start to finish, you’ll naturally have high WIP levels.
Poor finishing discipline. Jobs get to 90% complete and then sit waiting for final touches, packaging, or paperwork. You’ve invested 90% of the cost but can’t invoice until it’s 100% done.
Customer delays. The customer changes specifications mid-job, or doesn’t approve the next stage, or isn’t ready to accept delivery. The job sits in your WIP waiting for them.
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How to Measure Your WIP Levels
You can’t manage what you don’t measure, so start by understanding your current WIP position.
Calculate your WIP value. Add up the cost of all part-finished jobs. Materials consumed, labour hours invested, and allocated overheads. This is your total WIP value.
Calculate WIP as days or weeks of production. Divide your WIP value by your average daily or weekly production costs. This tells you how many days or weeks of work you’ve got sitting unfinished.
For example, if you’ve got £50,000 of WIP and you spend £2,000 per day on production, that’s 25 days of WIP.
Track WIP age. How long has each job been sitting in WIP? Jobs over a certain age (say, 30 days) should be flagged for investigation.
Monitor WIP turnover. How quickly does work move through your production process? Calculate this as: Cost of Goods Sold ÷ Average WIP value. Higher is better, it means you’re completing work quickly rather than accumulating it.
Watch for trends. Is WIP growing over time? If your WIP value is climbing month after month, you’ve got a problem that needs addressing.
The Optimum WIP Level for Your Business
There’s no universal “right” level of WIP. It depends on your production process, lead times, and business model.
A manufacturer making simple products in a few hours might target 3-5 days of WIP. A precision engineer with jobs that take several weeks might have 4-6 weeks of WIP and that’s normal.
The key is finding what’s right for your business and then staying within that range.
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As a general principle, you want enough WIP to keep production flowing smoothly. You don’t want machines or people standing idle waiting for work. But you don’t want so much that cash is unnecessarily tied up or that you lose track of what’s in progress.
Most small manufacturers should be aiming for the minimum WIP that maintains production efficiency. Anything above that is cash you’re locking up for no good reason.
Strategies to Reduce Excessive WIP
If you’ve identified that WIP is too high, here’s what you can do about it.
Finish what you’ve started before starting new work. This sounds obvious but it’s hard to do when a new order comes in. Resist the temptation to start fresh jobs if it means existing jobs will sit unfinished.
Improve production scheduling. Plan job sequences to minimise work sitting idle. Use scheduling tools or even just a whiteboard to visualise what’s in progress and what order things should be completed.
Identify and fix bottlenecks. Find the slowest part of your process and work on speeding it up or adding capacity there. This keeps work flowing rather than accumulating.
Get materials right first time. Before starting a job, verify you have everything you need. It’s better to delay the start slightly than to start and then have the job sitting half-done waiting for parts.
Set WIP limits for each production stage. Decide the maximum number of jobs that should be at each stage and stick to it. When a stage is “full”, nothing new enters until something exits.
Focus on completion, not starting. Measure and incentivise job completion, not job starts. Getting to 100% done is what generates invoices and cashflow.
Chase customer approvals actively. If jobs are waiting for customer sign-off, don’t let them drift. Follow up promptly and keep things moving.
Review job complexity. Are you taking on jobs that are too complex or too long for your business? Sometimes saying no to work that will tie up capacity for months is the right call.
Break large jobs into milestones. For long jobs, structure them as phases that can be invoiced separately. This turns some WIP into invoiced work-in-progress, improving cashflow.
The Hidden Benefit: Better Control and Visibility
Reducing WIP improve cashflow and it also gives you much better control over your operation.
With lower WIP levels, you know exactly what’s in progress at any time. Jobs don’t get lost or forgotten on the shop floor. You can give customers accurate delivery updates because you’re not juggling dozens of part-finished jobs.
Quality improves too. When you’re focused on finishing jobs rather than starting new ones, there’s more attention to detail and less rushing. Defect rates often drop when WIP is properly controlled.
Your team also benefits from clearer priorities. Instead of constantly context-switching between multiple jobs, they can focus and complete work efficiently.
WIP and Your Working Capital Requirement
Here’s a broader perspective: WIP is a major component of your working capital requirement.
Working capital is roughly: Stock + WIP + Debtors – Creditors
The more working capital your business needs, the more funding you require. Reducing WIP directly reduces your working capital requirement, which means you need less external financing.
For a small manufacturing business, reducing WIP by £30,000 might mean the difference between needing an overdraft facility and not needing one at all. That saves interest costs and gives you more financial flexibility.
Monitoring WIP Going Forward
Once you’ve got WIP under control, don’t let it drift back up. Build ongoing monitoring into your monthly routine.
Review WIP value monthly. Include it in your management accounts and track it alongside other key metrics like revenue and gross margin.
Set a WIP target or ceiling. Decide what WIP level is acceptable for your business and treat exceeding it as a red flag.
Investigate aged WIP. Any job sitting in WIP for longer than your standard lead time should be reviewed. What’s holding it up? What can be done to complete it?
Link WIP to production performance. Use WIP levels as an indicator of how well your production planning and execution is working.
Include WIP in cashflow forecasting. When you’re projecting future cashflow, factor in expected changes in WIP levels. If you’re planning to take on larger jobs, you know WIP will increase and can plan for the cash impact.
Don’t Let Your Cashflow Sit on the Shop Floor
Work-in-progress is one of those things that doesn’t feel urgent because it’s not a crisis, it’s just part of how manufacturing works. But excessive WIP quietly drains your cashflow, limits your financial flexibility, and creates hidden costs.
Getting WIP under control doesn’t require major investment or complicated systems. It requires awareness, discipline, and better planning. Finish what you start. Don’t start what you can’t finish quickly. Keep work flowing through production rather than accumulating on your shop floor.
Do this well and you’ll free up cash that’s currently tied up in half-finished jobs. You’ll have better visibility of what’s happening in production. You’ll make more reliable delivery promises. And you’ll sleep better knowing your bank balance reflects the work you’re doing.
If you’re not currently tracking WIP properly, or if you suspect it’s higher than it should be but you’re not sure what to do about it, it’s worth getting expert help.
Proper management accounts that show you WIP levels and trends, combined with production costing that helps you understand where cash is going, will give you the control you need.
Concerned that excessive WIP might be draining your cashflow?
Want to understand exactly how much cash you’ve got tied up in unfinished work?
Let’s talk about your production process and how accurate product costing and management accounts can help you get WIP under control.
Get in touch for a practical conversation about improving your manufacturing cashflow.
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About the Author
Written by Yesim Tilley Founder of Skynet Accounting is a chartered accountant with over 20 years of experience supporting manufacturing and engineering businesses across the UK. Specialising in cost analysis, product costing, and financial strategy, she helps industrial businesses understand their numbers and make more profitable decisions. Skynet Accounting provides tailored finance, compliance, and taxation support designed specifically for the manufacturing and engineering sector.