WIP and Debtors When Buying an Accounting Practice: What Should You Review?
GUEST AUTHOR | Blackhall & Co
Today’s guest post is by Blackhall & Co. Blackhall & Co helps buyers find businesses worth owning. Opinions expressed by guest authors are their own and do not necessarily reflect the views of Fairlane Finance.
WIP and debtors deserve a closer look because the balances on a practice's reports may represent future cash, unfinished obligations or work that will never be recovered.
WIP and Debtors can make an accounting practice look comfortably funded on paper.
Yet an unpaid invoice is not money in the bank, and hours recorded against a client do not necessarily create another fee you can collect.
For an Australian buyer at Stage 5, the question is what sits behind those numbers.
How much is recoverable? What effort remains? And, after settlement, whose cash and whose responsibility will it be? Answering those questions helps you see the practice as you will actually operate it.
The short answer
The reports should reconcile to the ledger at a consistent date.
Debtor recovery needs support from receipts, collection history and explanations for disputes.
WIP needs to be understood by engagement, including billing rights and completion costs.
Prepaid fees may come with services you still need to deliver.
The agreed transaction should clearly allocate cash, outstanding work and follow-up responsibilities.
What do WIP and Debtors actually represent?
Debtors are amounts invoiced but not yet collected. WIP, or work in progress, records work before billing, although its measurement depends on the practice's system and accounting approach.
That distinction matters: an invoice and a time entry provide different evidence of what a client may pay.
Your earlier review of debtor and WIP information may have established the headline balances. Due diligence takes the next step, connecting those figures to the underlying jobs, invoices and receipts. A difference between reports is a reason to understand their preparation, rather than immediately assuming something is wrong.
business.gov.au's acquisition guide includes receivable records within financial due diligence. For an accounting practice, those records become more useful when you can connect them to the client's engagement and the proposed settlement treatment.
The reporting date matters too. Collections after that date may explain an old balance, while new work recorded later belongs to a different period. Comparing mismatched dates can create a discrepancy that is simply a timing difference.
How much of the debtor balance is likely to arrive?
An aged debtor report gives you a starting point, but the collection story sits underneath it. You should be able to follow a material invoice from the report through to a later bank receipt, a documented repayment arrangement or an explanation of why it remains unpaid.
For instance, a long-standing client who has made regular payments under an agreed plan presents a different situation from a client disputing the quality of the work. Both invoices may sit in the same ageing column. Treating them alike would lose information that matters to your cash-flow forecast.
Subsequent receipts should match the specific invoices being reviewed.
Collection notes can explain disputes, payment plans and unanswered follow-ups.
Credit notes, discounts and write-offs may reduce the reported amount.
Large or related-party balances deserve their own explanation.
It also helps to compare several periods. If overdue accounts repeatedly clear after a seasonal billing peak, the issue may be timing. If old invoices routinely disappear through write-offs, recoverability needs closer attention. Neither explanation should rest solely on reassurance that the clients always pay eventually.
What will it take to turn WIP into an invoice?
WIP is most informative when you can see the engagement behind it.
A nearly completed tax return awaiting final review is different from a job stalled because the client has not supplied records. The recorded hours may look similar, while the remaining effort and billing timing differ considerably.
As the buyer, you should understand how the balance is measured: hours at charge-out rates, cost, estimated recovery or another basis. Your adviser can then reconcile it to the ledger and explore any work held outside the main reporting system.
The important conversation is about completion. Who can finish the work, what review is required and whether the agreed fee covers that effort? Unapproved extras, rework or unresolved service concerns may make the path to billing less straightforward than the report suggests.
APESB's Terms of Engagement resource provides a useful reference point for reviewing engagement arrangements. The practice's actual documents can help explain scope, fees and billing milestones.
Where entitlement to payment or transfer of an arrangement is unclear, that uncertainty belongs with your professional advisers.
Why fixed fees and prepayments need special attention
A fixed-fee client may have substantial recorded time without owing a further amount. If the annual package has already been invoiced, adding the WIP balance to expected collections could count the same economic value twice.
The useful comparison is the agreed fee, invoices issued, cash received and work still required.
Prepayments create the opposite cash-flow challenge. A client may have paid ahead, leaving you to deliver services after settlement without receiving fresh cash for them. That does not automatically make the arrangement unattractive, but the purchase assumptions need to recognise the remaining workload.
Your solicitor and financial adviser should help clarify how those amounts and obligations are reflected in the transaction. Although a blanket deduction or allowance can conceal differences between engagements, an agreed schedule makes the treatment easier to understand and check.
Who receives the cash and who finishes the work?
A balance appearing in the financial statements does not establish that you are acquiring it.
The answer depends on the transaction and its documents, including whether you are buying assets or shares. This is where a commercial discussion needs to become a clear allocation of responsibilities.
For example, the vendor might retain old debtors while your team assists collection. That arrangement can use staff time and create awkward client conversations.
You should know who issues reminders, handles disputes, receives payments and reimburses any agreed collection costs.
Work spanning settlement needs similar clarity. A client should not have to untangle competing invoices because the buyer and vendor disagree about the cut-off. Agreed schedules, access to supporting records and a process for later credits or adjustments can help your advisers address that risk.
An illustrative example: the balance and the cash differ
Suppose a practice reports $40,000 of WIP. In this hypothetical example, $15,000 relates to work already covered by prepaid packages, $10,000 concerns jobs needing further information and review, and the remaining $15,000 relates to completed work awaiting billing.
You could not reasonably treat the full $40,000 as first-month cash simply because it appears on the report. Each group has a different combination of future receipts, delivery costs and timing. Even completed work still needs a supported billing and collection assumption. Actual outcomes will depend on the engagements and transaction.
The verified financial information should therefore feed into your forecast.
If the review reveals a longer wait for cash or more completion costs than expected, your working-capital requirement may change. Your acquisition finance adviser needs that information before you rely on the earlier funding position.
Frequently asked questions
Are debtors always included in the purchase price?
No. Their inclusion and treatment depend on the agreed transaction. Your solicitor should confirm what the contract includes, rather than leaving you to rely on the sale presentation.
Does a large WIP balance indicate a valuable practice?
Not by itself. It may represent billable work, delayed jobs or work requiring substantial further effort. Billing arrangements, completion costs and collection prospects give the balance its meaning.
Do subsequent receipts prove all debtors are recoverable?
They support the recovery of the specific invoices paid. Other accounts still need their own review, because a strong collection from one client does not resolve an unrelated dispute.
What should happen to uncertain balances?
They should stay visible, with the evidence outstanding and the next action recorded. Uncertainty is useful information when you are deciding which assumptions need changing before proceeding.
What should be clear before you proceed?
A sound review leaves you able to explain the cash you expect, the work still owed and the costs you will carry. Where the evidence changes that picture, the response may be a revised forecast, further investigation or negotiated treatment. The point is to understand the obligation behind the balance before it becomes yours.
Sources and further reading
Contributor disclaimer: This article is contributed by Blackhall & Co and published on the Fairlane Finance website. The views, opinions and conclusions expressed are those of the contributor alone, not statements of Fairlane Finance’s position. Publication does not constitute Fairlane Finance’s endorsement of the contributor’s views, services or any proposed acquisition.
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