One of the most common conversations we have with architects, design agencies and consultancy clients starts the same way. The profit and loss account shows a healthy profit, the pipeline looks strong, and yet the bank account is uncomfortably tight. The usual culprit is work in progress, the value of work you have already done but not yet invoiced or been paid for, and how you account for it. From 1 January 2026, the rules governing exactly when and how this work should be recognised as revenue have also changed significantly.
Disclaimer: This article is for general information only and reflects FRS 102 guidance confirmed at the time of writing. The application of revenue recognition rules depends closely on the specific terms of individual contracts. Always seek specific advice tailored to your own engagements.
This article explains what work in progress actually represents, why it creates a gap between profit and cash, the new five step revenue recognition model that applies to accounting periods beginning on or after 1 January 2026, and practical steps to close the cash flow gap it can create.
Why Profit and Cash Are Not the Same Thing
A professional services business rarely gets paid the moment work is done. An architect might spend three months on design development before an invoice is raised at a project milestone. An agency running a retainer might deliver work continuously through a month but only invoice at the end of it. A consultancy on a fixed fee project might complete significant analysis before the client has agreed the next stage payment.
Under standard accounting rules, revenue and the related profit are often recognised as the work is performed, not simply when an invoice is sent or cash arrives. This is generally the right approach for producing an accurate picture of how the business is actually performing over time, but it creates a very real practical problem, since the tax and reporting position can show a healthy profit built substantially from work in progress that has not yet turned into an invoice, let alone been paid.
What Work in Progress Actually Is
Work in progress, often shortened to WIP, is the value of work completed for a client that has not yet been invoiced. It sits on the balance sheet as an asset, representing value the business has created but not yet billed, and it typically converts into revenue and profit in the accounts before it converts into an actual invoice, and then again before it converts into cash in the bank.
This is where the gap widens. A project might sit in work in progress for several months of delivery, only for the invoice raised at the end of that period to then sit for a further thirty or sixty days on payment terms before cash is actually received. A business tracking only its profit and loss account, without separately monitoring the value and age of its work in progress, can be caught out by a cash position that looks nothing like the profit figure would suggest.
Worked Example 1: The Profit and Cash Gap on a Single Project
Fenwick Architects takes on a nine month residential design project with a total agreed fee of £90,000, invoiced at three milestones roughly three months apart. By month three, the practice has completed a third of the design work, recognising £30,000 of revenue and a proportionate share of profit in its management accounts, but the first milestone invoice has not yet been raised because the client sign off meeting has slipped by two weeks.
At this point, Fenwick Architects shows £30,000 of profit related revenue on its books that exists only as work in progress, not as an invoice, and certainly not as cash. If the practice has been paying staff salaries and overheads throughout this period from its bank account, as it must, while this £30,000 remains unbilled, the practice can find itself short of cash despite the project itself being entirely profitable and on track. This is not a sign the project is going badly. It is simply the normal, predictable gap between recognising profit and actually collecting cash.
The New FRS 102 Revenue Recognition Rules
For accounting periods beginning on or after 1 January 2026, Section 23 of FRS 102, the accounting standard most UK private companies use, has been substantially rewritten. The previous approach, based broadly on whether the risks and rewards of a contract had transferred to the customer, or on a simple stage of completion assessment, has been replaced with a five step model closely aligned to international accounting standards.
Under the new model, a business must identify the contract with the customer, identify the separate performance obligations within that contract, determine the total transaction price, allocate that price across the different performance obligations, and then recognise revenue as each performance obligation is actually satisfied. This is a genuinely different way of thinking about revenue for businesses with contracts involving multiple deliverables, ongoing retainers, or milestone based fee structures, which describes a large proportion of architecture practices, agencies and consultancies.
The practical effect for many professional services businesses is that revenue recognition needs to be mapped much more explicitly against the actual deliverables in a contract, rather than relying on a general sense of overall project progress. A design contract that includes concept design, detailed design and planning support as genuinely separate deliverables, for example, may now need each element assessed and recognised somewhat independently, rather than treated as one continuous stream of value building towards a single final outcome.
Worked Example 2: An Agency Retainer Under the New Model
Marlow Creative runs a monthly retainer for a client covering ongoing content production and a separate quarterly strategy review. Under the previous approach, the agency might have recognised retainer revenue fairly evenly across each month without distinguishing between the two elements of the service. Under the new five step model, the agency needs to identify the monthly content production and the quarterly strategy review as separate performance obligations within the same overall contract, allocate a proportion of the total retainer fee to each based on their relative value, and recognise revenue against each obligation as it is actually satisfied. In a quarter where the strategy review slips into the following month, this could genuinely change how much revenue Marlow Creative recognises in that specific month compared with how it would have been recognised under the previous approach, even though the total annual revenue over the life of the contract remains the same.
Worked Example 3: A Consultancy Preparing for the Transition
Ashgrove Consulting has a financial year running to 31 March, meaning its first accounting period affected by the new rules begins on 1 April 2026. In the months beforehand, the practice reviews its standard client contracts against the five step model, identifying that its typical fixed fee advisory engagements, which bundle initial diagnostic work with an implementation phase, likely need to be treated as containing two separate performance obligations rather than one continuous engagement. Ashgrove Consulting works with its accountant to update its revenue recognition policy and its internal project tracking templates ahead of the change, rather than working this out retrospectively when the first affected year end accounts are being prepared, which would be a considerably harder and more disruptive exercise to carry out under time pressure.
Practical Steps to Close the Cash Flow Gap
None of the accounting detail above changes the underlying commercial reality that cash needs to keep flowing into the business while work in progress builds up. A few practical habits make a real difference.
Structuring milestone invoices around genuinely achievable trigger points, rather than points that depend on external sign off from the client, reduces the risk of invoices being delayed by factors outside your control. Where a project allows it, invoicing on delivery of a draft rather than waiting for final client approval can meaningfully shorten the gap between work being done and cash arriving.
Requesting a deposit or an upfront payment before significant work begins, particularly for new clients or larger projects, reduces how much of the project's value is ever sitting purely as work in progress with no cash behind it at all.
Treating work in progress as a number to actively monitor, not just an accounting entry that appears in the year end accounts, matters considerably. Reviewing the value and age of unbilled work on a monthly basis, alongside your normal management accounts, makes it far easier to spot a project that is quietly building up a large unbilled balance before it becomes a genuine cash flow problem. This ties directly into the kind of rolling cash flow forecasting we cover in our guide to cash flow forecasting for growing businesses, which is worth reading alongside this one if work in progress is a recurring issue for your business.
Shortening payment terms on invoices once they are raised, or introducing a modest early payment incentive, addresses the second half of the gap, the delay between an invoice being issued and cash actually arriving, which compounds the delay already built into the work in progress cycle itself.
Frequently Asked Questions
What is work in progress in simple terms?
Work in progress is the value of work you have completed for a client but have not yet invoiced. It represents real value created by the business, but it has not yet become an invoice, and it certainly has not yet become cash in your bank account.
Does the new FRS 102 revenue recognition change apply to my small business?
Most UK private companies preparing accounts under FRS 102, including many small companies, are affected by the change for accounting periods beginning on or after 1 January 2026, though the practical impact varies considerably depending on how complex your typical contracts are. A business with simple, single deliverable engagements may see very little practical change, while a business with bundled services, retainers or milestone contracts is more likely to need to review its approach.
Should I invoice for work in progress even if the client has not formally signed it off?
This depends on your contract terms and client relationship, but where your agreement allows it, invoicing based on work genuinely delivered, rather than waiting for a formal sign off that may be delayed for reasons entirely outside your control, is usually the better approach for managing cash flow, provided it does not damage the client relationship or breach the terms you have agreed.
Does work in progress affect how much Corporation Tax I pay?
Yes, in most cases. Because revenue and profit are typically recognised as work is performed under standard accounting rules, work in progress that has been recognised as revenue in your accounts generally forms part of your taxable profit for the period, even though you have not yet invoiced or been paid for it. This is another reason unbilled work in progress can create pressure, since the tax due on that profit can fall due before the related cash has actually been collected.
How do I know if my contracts have separate performance obligations under the new rules?
This generally comes down to whether a client could reasonably benefit from one part of the service on its own, separately from the other parts, and whether the different elements are priced or described distinctly within the contract. This is genuinely one of the more judgement based areas of the new standard, and it is worth reviewing your specific standard contract templates with your accountant rather than guessing.
What is the biggest risk of not managing work in progress properly?
The most common risk is a business that looks profitable on paper running into a genuine cash shortage, sometimes severe enough to affect payroll or supplier payments, simply because a large amount of value is sitting unbilled across several projects at once. This is rarely a sign the business itself is unhealthy, but it can create serious short term pressure if it is not actively monitored and managed.
What CoreAcc Accountants Can Help You With
CoreAcc Accountants works with architecture practices, agencies and consultancies to build management accounts and cash flow forecasts that show work in progress clearly, not buried inside a single profit figure, so problems are visible while there is still time to act on them. We also help clients review their contract structures against the new FRS 102 revenue recognition rules ahead of their first affected year end, rather than scrambling to reinterpret existing contracts under time pressure once the accounts are already being prepared.
Get in Touch
If your management accounts show healthy profit but your bank balance tells a different story, or you have not yet reviewed your contracts against the new FRS 102 revenue recognition rules, contact CoreAcc Accountants and we will help you get a clearer picture of both.
CoreAcc Accountants is an ACCA accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was published in October 2026 and reflects FRS 102 guidance confirmed at the time of writing. It does not constitute professional or legal advice. Always seek specific advice tailored to your individual circumstances.
