How to Use Your Billings as a Leading Indicator

I've begun to notice a pattern with remodeling clients whose income accounts were showing a decrease in "overbillings"--money already in the bank from clients that's to be used for promised work.

"Have your sales been declining in recent months?" I would ask.

"Yes," the remodeler invariably would reply, and then add: “I‘ve been so busy keeping up with the work that I haven't had enough time to sell.

That remark clearly is a warning sign that the remodeler needs to note, but how? Try this: Start watching the trend line of monthly over/under billings as a percentage of year-to-date volume.

You always want to be overbilled, because it means you're operating with the customer's money when you buy materials, hire subs, and generally do work for that client. It's the opposite of "underbilling," which occurs when you're shelling out time and money doing work that hasn't been paid for by the customer ... yet, if ever.

Note that total income/volume should reflect EARNED INCOME, not billed income. Bill often, bill lots but don’t confuse the amount you’re BILLING with true EARNED INCOME. True earned income relies on understanding the difference.

For years, I've encouraged my clients to track over/under billing as part of WIP--the Work in Progress report championed by Remodelers Advantage. WIP is an accounting method that helps you know on any given day how your business really is doing because it takes into account the flow of business you've got under way. (To learn more about WIP, search Remodeling's website for keywords like Percent Complete Accounting” or “WIP” or “Over/Under Billings.")

Smart clients like Andy Haste of Riverside Construction also use WIP accounting to predict the amount of total future volume. [Read the article here.) Watching over/under billing trends also is a forecasting tool because it's a leading indicator--a signal of where your business could be heading.

Let's start with a benchmark. Strive to have overbilling dollars totaling at least 10% more than what you've billed that month. Put another way, overbillings should be hover at 10% of any given period's volume; if you want to produce $1,000,000 in volume and maintain 10% overbilling, then your billings for produced work have to be $1,100,000, which represents 110%.

If overbilling as a percent of total revenue declines, it could be that the volume of sales in general--and upfront deposits in particular--have been falling relative to the past and/or to your goals. Likewise, if overbilling as a percentage of revenue goes up, you likely can thank an increase in sales and upfront deposits.

Let’s see what this might look like in practice. Scenario A shows a six-months‘ income statement/profit&loss for a company whose monthly billlings remain high but where the over/under billing is declining:

Overbilling shows on the accounts as a negative number because, again, it represents money you’ve pocketed for work you haven’t done yet. In January in the scenario above, it represents 10% of monthly volume. In February, the overbilling number begins to decline until in June it has reversed itself and shows a positive number—i.e. an underbilling. In Scenario A’s case, this indicates that the company has paid for work done on the client’s jobs but not been able to bill. You get a positive number when current jobs have spent the upfront deposit money without signing up new jobs and receiving new deposits.

Underbilling is ALWAYS a risky situation, especially when you’re doing time and materials (Time/Cost) billings. As these jobs near the end of the project, the potential for not receiving the final payment increases significantly.

Scenario B illustrates what happens when the company starts to sell again, take up-front deposits and thereby increases overbillings over the course of the six month. In this case, the old jobs that finished up in June/July were being followed in the pipeline by new jobs that were to be performed in the second half of the year. And the fact that overbillings grow through the second half of the year show that this remodeler has significantly increased her focus on sales.

Knowing all this, you now can look at your over/under billing number as a percent of billings monthly to look forward. Do you have enough new work to finance completion of old jobs? Are sales meeting expectations? Set up your over/under billing procedure for the end of December 2015 and consistently enter the adjustment every month and track that percentage against the 10% goal; if it starts to decline, you need to start selling!

Good luck in 2016--may it be a very good year!