Why a machine builder with €700,000 of work in progress makes a profit and is still at its credit limit

The managing director of a machine builder with 45 employees is sitting with his account manager in October. The annual figures are good: €6.0 million revenue, €180,000 profit, equity that grows every year. The balance sheet shows €857,000 of work in progress, against €157,000 of stage payments invoiced in advance. The €500,000 overdraft facility has been fully drawn for months, and the business has just signed two orders of half a million each. The director asks for €300,000 of extra limit. The account manager looks at the receivables, the inventory, the director's personal guarantee and last year's annual figures, and says that the work in progress does not count.

The business sees work in progress as money earned that is still on its way. The bank sees a half-built machine in a workshop with a possible buyer, who only has to pay once the machine is running. For the bank, work in progress is a receivable that has yet to come into existence, and only an invoiced stage payment counts as collateral. In the worked example below, the difference between those two views is €700,000.

What is on the balance sheet and what the bank sees in it

The Raad voor de Jaarverslaggeving (Dutch Accounting Standards Board) requires in Guideline 221 (standard text, effective for financial years from 2022) that the revenue and costs of a construction contract in progress (work in progress, in IFRS terms a contract asset) are recognised in the profit and loss account in proportion to the work performed, and that a project in progress is presented on the balance sheet as a net item of realised project revenue, less recognised losses and invoiced stage payments. A project where the work is ahead of the invoices sits on the assets side; a project where the advance payment is larger than the work sits on the liabilities side. The €857,000 and the €157,000 from the opening are those two sides.

Artikel 3.29b Wet inkomstenbelasting 2001 (article 3.29b of the Income Tax Act 2001, statutory text) follows the same line for tax and sets the valuation of work in progress at the part of the agreed fee for the contracted work that is attributable to that work in progress. The Dutch Tax Administration (government source) adds that a proportional share of the profit margin is capitalised and that you may not wait to recognise profit until the work is finished. The profit in the €700,000 therefore counts in the tax return for the year in which the work was done, even if the customer has not yet seen an invoice.

ABN AMRO (bank page) reads the same balance sheet differently. For receivables financing it lends around 90 percent of the invoiced amount and at most 70 percent of paid-for inventory, on condition that the delivery or service has already been completed, that invoicing takes place afterwards, and that stage or advance invoicing does not qualify. Work in progress does not appear on that page. With machine builders we see that in practice the overdraft limit is matched to the receivables and the paid-for inventory, with a personal guarantee from the director on top, and that work in progress only comes up in the conversation with the bank as the reason why profit grows and cash does not.

Why a half-built machine is worth nothing to the bank

Shleifer and Vishny (1992) showed in the Journal of Finance (peer reviewed) that the liquidation value of an asset depends on who can buy it: when a company in distress has to sell assets, its industry peers usually have problems of their own, and assets are sold below their value in best use. According to them, this shortage of buyers makes assets cheap in bad times and explains why debt capacity differs by industry. Benmelech and Bergman (2009) found in the Journal of Financial Economics (peer reviewed), looking at secured debt of airlines, that debt with more redeployable collateral carries lower credit spreads, higher ratings and higher loan-to-value ratios, and that the ability to pledge redeployable collateral lowers the cost of financing and increases debt capacity.

A special-purpose machine that is 60 percent complete has no second buyer. The customer specified it and the foundation on its floor has already been poured for it. The customer only has to pay at the moment the contract specifies. Under artikel 3:239 van het Burgerlijk Wetboek (article 3:239 of the Dutch Civil Code, statutory text), the bank's pledge rests on receivables that exist or arise directly from an existing legal relationship. In a bankruptcy halfway through the project, the question is which receivable exists at that point: the administrator does not finish the machine, and the customer who has suffered a loss sets it off against what it still had to pay. The €300,000 of work in the workshop is then scrap and hours. That is why in the example the bank counts the receivables and not the work in progress. For the same reason, stage payments in the contract do more than fill the cash position: every completed and invoiced stage payment is a receivable the bank can work with.

Why the business does not ask for stage payments

Klapper, Laeven and Rajan (2012) analysed almost 30,000 trade credit contracts in the Review of Financial Studies (peer reviewed) and found that the largest and most creditworthy buyers get the longest payment terms from smaller suppliers. A machine builder with 45 employees supplying a listed OEM or a large concrete manufacturer sits on the small side of that table. With machine builders we see that the payment schedule is the first thing given away in the negotiation: the salesperson wants the order, the customer's buyer has a target on payment terms, and 30 percent at order with the rest after acceptance feels normal to both sides. Of the five Dutch machine builders we looked at for this article, none of the websites says anything about stage payments or advance payments; they sell from concept to commissioning, and the final payment is released after the trial run at the customer's site.

The business does not see the item as a problem either. The work has been done, the margin is in the monthly figures, and the overdraft facility is there to absorb fluctuations. We see that the fluctuation is usually structural and grows with revenue: in the example below from €700,000 at €6.0 million to €875,000 at €7.5 million.

Worked example: twelve projects of €500,000

In this worked example a machine builder builds twelve machines a year at an average of €500,000, together €6.0 million revenue. A project takes seven months: two months of engineering, three months of purchasing and building, one month of trial running in its own workshop and one month of commissioning and acceptance at the customer's site. Direct costs per project are €425,000, 85 percent of the price; the company's fixed costs are €720,000 a year. Profit before tax is therefore twelve times 75,000 minus 720,000, which is €180,000, 3.0 percent of revenue. The business invoices 30 percent at order and 70 percent after acceptance, and the customer pays within thirty days.

The example treats progress as linear over the seven months, to keep the table small; in practice the purchasing of steel and components falls in months two and three, and the work in progress in the middle of the project is higher than shown here.

With twelve projects a year of seven months each, seven projects are running at any moment, each in a different phase. At 30/70 there is then €857,000 in projects where the work is ahead of the invoices, and €157,000 in projects that have just started and where the advance payment is still larger than the work. Net, that is €700,000 of work in progress, 43 days of revenue. On top of that there are €493,000 of receivables (thirty days on €6.0 million), €250,000 of materials and parts already received for projects that have yet to start, and €279,000 of payables (thirty days on €3.4 million of purchased materials and subcontracted work). Working capital is €1.16 million. The €500,000 overdraft facility covers less than half of that; the rest comes from the equity built up over twenty years.

The overdraft facility costs 3-month Euribor plus a margin of 2.9 percentage points. 3-month Euribor stood at 2.62 percent on 18 September 2026 (market data), so the business pays 5.5 percent, rounded. On €700,000 of work in progress that is €38,500 a year, more than a fifth of the €180,000 profit. Anyone who says that part of the work in progress is paid from equity and therefore costs nothing is assuming equity that does not need to earn a return; what interest on working capital costs a business at the current rate is set out in What the ECB rate rise costs a technical wholesaler that lets its customers pay in 52 days.

What work in progress does to the monthly figures

At the machine builders we see, the monthly report is in many cases based on invoices: revenue is what has been invoiced, costs are what was booked that month. In the example the business incurs €425,000 of direct costs and €60,000 of fixed costs every month. A month with a new order and no acceptance shows €150,000 of revenue and a loss of €335,000. A month with one order and two acceptances shows €850,000 of revenue and a profit of €365,000. The director who receives these figures cannot read the state of the business from them.

On a percentage-of-completion basis, as Guideline 221 requires, every month shows €500,000 of revenue and €15,000 of result, and a project that gets out of hand becomes visible in the month in which it happens. How to measure that progress per project without a new system is set out in Why a machine builder only sees at the invoice that a 2,400-hour project took 2,870. The movement schedule for work in progress, with per project the costs incurred, the realised revenue and the invoiced stage payments, is the same table as the first one in this article, and that table is also what the bank wants to see before it will discuss the item.

In the example, the seven running projects contain €1.75 million of realised revenue at the balance sheet date, and at the net margin of 3.0 percent, after allocating the constant share of fixed costs to the projects, €52,500 of profit that has not yet been invoiced to anyone. The tax authorities count that profit in the year in which the work was done. At the corporate income tax (vennootschapsbelasting, VPB) rate of 19 percent on the first €200,000 of profit (2026 rate), that is €9,975 of tax on money that is still standing in the workshop; the amount falls into the assessment after the year ends, and the €180,000 profit stays entirely below the €200,000 threshold.

Invoicing earlier: what 30/40/30 delivers

The director from the opening can reduce the work in progress in two ways: deliver faster, or invoice earlier. Delivering faster is a production question. Invoicing earlier is a contract question for sales, and in the example it is worth €600,000.

In the example the business moves to 30 percent at order, 40 percent at mechanical completion in month four, and 30 percent after acceptance. The last column of the first table shows what that does per project: work in progress peaks at €78,571 instead of €278,571. Across the seven running projects the item falls from €857,000 to €286,000 on the assets side, and the stage payments invoiced in advance rise from €157,000 to €186,000 on the liabilities side. Net, €100,000 remains, six days of revenue. The difference from €700,000 is €600,000, and that amount leaves the overdraft facility: the €500,000 limit is unused and there is €100,000 in the account. Interest falls by €33,000 a year, from €38,500 to €5,500 on the remaining work in progress, and the two new orders of half a million can be started without a conversation with the bank.

The receivables do not change in this example: the business invoices €6.0 million a year in both cases and the customer pays within thirty days in both cases, so the receivables balance stays at €493,000. What changes is where the money sits: €600,000 moves from an item the bank does not count to the bank account.

Baños-Caballero, García-Teruel and Martínez-Solano (2014) found in the Journal of Business Research (peer reviewed), for UK non-financial companies, an inverted U-shaped relationship between investment in working capital and company performance, with an optimum that is lower for financially constrained companies. A machine builder with a fully drawn overdraft facility and a bank that says no is such a constrained company, and for that group the optimum in that study is lower than for companies that can borrow freely.

When this worked example does not apply

The model assumes a customer that accepts stage payments and a business that keeps the advance payment in the same project. The linear progress was already noted at the first table.

With a customer that does not accept stage payments, such as a government body with a fixed procurement policy or an OEM whose purchasing department is assessed on payment terms, the choice becomes a price. Pre-financing €200,000 for seven months at 5.5 percent interest costs €6,400, and that amount belongs in the quotation if the customer rejects the payment schedule. With machine builders we see that this sum is rarely made and that the amount then comes out of the margin.

If the customer demands an advance payment guarantee, the bank sets that guarantee against the credit facility. A €150,000 guarantee on the advance payment makes that amount of the €500,000 limit unusable for as long as the guarantee runs. We see that as the rule with large customers and in exports, and then the advance payment in cash delivers less than the table shows; the stage payment at mechanical completion, on which we rarely see a guarantee, then does most of the work.

Omopariola, Windapo, Edwards, Aigbavboa, Yakubu and Obari (2024) found in Engineering, Construction and Architectural Management (peer reviewed), among 504 contractors in South Africa, that a mandatory advance payment is no guarantee of a positive project cash flow or better company performance. We see the same with machine builders where the advance payment on the new project pays for the final phase of the previous one: the cash adds up while the work in progress grows, until the first month without a new order arrives. That is not visible in the bank account, but it is in the table per project: in that case it shows a higher balance every month against the same revenue.

For a business that supplies in series there is no work in progress in this sense; the work in the workshop is inventory, and the rules from Why a technical wholesaler pays €98,000 every year for €396,000 of inventory that has not moved in twelve months apply. For a business without bank debt the interest rate is the return the equity would have made elsewhere, and that is lower than 5.5 percent until the business postpones an investment because the money is sitting in the workshop.

What is acceptable and at what moment

We know of no machine builder without work in progress. Building a machine over seven months without work running ahead of the invoice at any point requires a customer that pays weekly for progress, and we have not come across one yet. What does differ is the number of days of revenue in the item and the moment in the project at which the item arises.

The limits of 20 and 45 days are our own experience with machine builders running projects of four to twelve months; in shipbuilding and for installations with an acceptance process lasting months they are higher, and then the quarterly trend says more than the number.

The moment that delivers most is the quotation. That is where the payment schedule is set, and we see that a schedule included in the quotation usually survives the negotiation, while a schedule proposed after the order is almost always rejected. Next comes the final invoice: in the table, acceptance falls in month seven, and at the businesses we see there are regularly three to six weeks between the customer's signature and the final invoice, because the project manager first wants the snag list cleared. In the example that is €350,000 per project sitting in work in progress for six weeks longer.

How to map the work in progress of your own business

The proper method follows Guideline 221 and article 3.29b: per project a progress measurement based on hours spent and materials purchased against the cost estimate, revenue in proportion to that progress, an overview of invoiced stage payments, and a monthly report showing the balance per project and the total in days of revenue across all projects. That goes together with a payment schedule per project type, a rule for the final invoice, an agreement on the advance payment guarantee and a conversation with the bank with the movement schedule on the table. Setting this up and keeping it going is work we do for our clients, and therefore also how we earn our money.

The do-it-yourself version takes an afternoon with the project administration and the sales invoices of the last twelve months.

Step 1 is an overview per running project: the contract price, the costs incurred to date, the estimate of total costs, and the invoiced stage payments one below the other. Costs incurred divided by estimated costs give the progress, progress times the contract price gives the realised revenue, and after deducting the invoiced stage payments the work in progress per project remains. In the example: a project in month four has €242,857 of costs on a €425,000 estimate, 57 percent progress, €285,714 of revenue, €150,000 invoiced, €135,714 of work in progress.

Step 2 adds up the positive balances and the negative balances separately and divides the net total by revenue per day. In the example 857,000 and 157,000, net 700,000, divided by €16,438 per day is 42.6 days, rounded 43. That number belongs next to the overdraft limit.

Step 3 is net work in progress times the interest rate on your overdraft facility. In the example 700,000 times 5.5 percent is €38,500, next to a profit before tax of €180,000.

For step 4 you need the contract of every running project, with the payment schedule in it. Per project, calculate what the work in progress would have been with one extra stage payment at a milestone in the middle, as in the last column of the first table. The difference, added up over all projects, is the amount you can recover in your next quotations.

Step 5 puts the acceptance date and the final invoice date side by side for each project completed in the last year. The average number of days in between, times the final payment, times the interest rate, is what the snag list costs.

Once you have done this, you have the table the bank wants to see, the amount the payment schedule is worth, the number of days the final invoice goes out late, and the argument for sales to structure the quotation differently.

How to bring down work in progress at a machine builder

Put the payment schedule in the quotation and build the pre-financing into the price if the customer rejects it. In the example, a 40 percent stage payment at mechanical completion means €600,000 less working capital and €33,000 of interest a year; a customer that stays at 30/70 pays €6,400 extra in the quotation for seven months of pre-financing of €200,000.

Every stage payment belongs with a milestone the customer can check. Klapper, Laeven and Rajan (2012) show that large buyers impose the longest terms; in our experience, a stage payment at a demonstrable milestone, such as a signed design release or a photo of the mechanically complete machine, is easier to defend than a stage payment on a calendar date.

The final payment goes out within five working days of the signature on the acceptance protocol, with the amount the customer may withhold for open items stated in the contract. At the businesses we see, that saves three to six weeks on €350,000 per project.

The movement schedule per project from step 1 goes to the bank every month. An account manager who sees per project what has been built, what has been invoiced and when the next stage payment falls due still cannot take the work in progress as collateral. We do see such an account manager grant a temporary increase on a signed order with a payment schedule, and that conversation goes differently from the conversation about a number on the balance sheet.

The advance payment on a project pays for the purchasing of that project. Omopariola and colleagues (2024) found that an advance payment on its own does not guarantee a positive cash flow; in the example the €150,000 at order covers the purchasing of steel and components in months two and three, and nothing else. What buying steel ahead at a fixed price does to the margin is set out in Why a machine builder with fixed prices loses its margin to a steel price rise between quotation and purchase.

With every growth step, the work in progress grows with it. In the example, 43 days at €6.0 million is €700,000; at €7.5 million revenue that becomes €875,000, and that difference of €175,000 comes out of that year's profit. Why a profitable project business gets stuck at the bank as soon as it grows faster is set out in Why a profitable installation company gets stuck at the bank as soon as it grows faster than its profit allows, and the bridge from profit to cash in Why a profitable SME still runs into cash flow problems.

We do not give tax advice or legal advice; what is written above about valuation is what Guideline 221, the law and the Dutch Tax Administration say. Ask your accountant and your tax adviser how they want progress per project to be substantiated, whether the tax valuation and the valuation in the annual accounts may diverge in your case, how an expected loss on a project should be accounted for, and what a payment schedule with milestones means for the moment at which a receivable arises and can be pledged.

Frequently asked questions about work in progress, the bank and stage invoicing

Why does the bank not count my work in progress as collateral?

Because a half-built machine has no second buyer in a bankruptcy, and the customer only has to pay at the moment the contract specifies. Shleifer and Vishny (1992) described why the liquidation value of such assets is low, and Benmelech and Bergman (2009) found that more redeployable collateral leads to lower interest rates and higher loan-to-value. On its page about receivables financing, ABN AMRO sets as a condition that the work has been completed and that stage or advance invoicing does not qualify. An invoiced stage payment after a completed milestone is a receivable, and the bank can do something with that.

How do I value work in progress on the balance sheet?

Guideline 221 requires revenue and costs to be recognised in proportion to the work performed, and a project to be shown on the balance sheet as realised revenue minus recognised losses minus invoiced stage payments, netted per project. In the worked example: a project in month four is 57 percent complete, with €285,714 of realised revenue, €150,000 invoiced and therefore €135,714 of work in progress. For tax purposes, article 3.29b of the Income Tax Act 2001 sets the valuation at the attributable part of the agreed fee, including a proportional share of the profit.

How much work in progress is normal for a machine builder?

For machine builders with projects of four to twelve months, we see that net work in progress below 20 days of revenue is workable with a payment schedule that has a milestone in the middle, and below 45 days with 30 percent upfront and 70 percent at the end. In the worked example the business is at 43 days with 30/70 and at six days with 30/40/30. In shipbuilding and with long acceptance processes the limits are higher.

How do I finance work in progress?

In practice from equity and from the overdraft facility, because banks require completed work for receivables financing. In the example, €700,000 of work in progress at 5.5 percent costs €38,500 in interest per year. The cheapest financier is the customer: a payment schedule of 30, 40 and 30 percent brings the work in progress in the example down to €100,000. If the customer will not agree, build the pre-financing into the price, in the example €6,400 for €200,000 over seven months.

Which stage payments can I agree on a machine building project?

In the worked example, 30 percent at order, 40 percent at mechanical completion and 30 percent after acceptance works; work in progress per project then peaks at €78,571 instead of €278,571. Link each stage payment to a milestone the customer can check: a signed design release, a photo or a visit at mechanical completion, the trial run report, the acceptance protocol. Klapper, Laeven and Rajan (2012) found that large buyers impose the longest terms on smaller suppliers; so put the schedule in the quotation, before the negotiation starts.

Do I have to recognise profit on work in progress for tax purposes?

Yes. Article 3.29b of the Income Tax Act 2001 sets the valuation at the attributable part of the agreed fee, and the Dutch Tax Administration states that a proportional share of the profit margin is capitalised and that you may not wait to recognise profit until the work is finished. In the example, at the balance sheet date there is €52,500 of profit in the running projects, €9,975 of corporate income tax at 19 percent, which falls into the assessment after the year ends. How you substantiate progress and whether the tax and commercial valuations may differ is something to discuss with your tax adviser; we do not give tax advice.

Why does my monthly result fluctuate if I invoice on delivery?

Because the revenue then falls in the month of the final invoice and the costs in the months of the work. In the example, a month without acceptance shows a loss of €335,000 and a month with two acceptances a profit of €365,000, while the business did the same in both months. On a percentage-of-completion basis the result is €15,000 every month, and a project that gets out of hand becomes visible in the month in which it happens.

What does stage invoicing deliver in euros?

Calculate the work in progress per project under the current schedule and under a schedule with a stage payment in the middle, and add up the difference over all running projects. In the example that is €600,000 less working capital and €33,000 less interest per year, on a profit of €180,000. Then there is the final invoice: in the example, each week between acceptance and invoice costs €350,000 times 5.5 percent divided by 52, €370 per project per week.

Further reading: Why a profitable installation company gets stuck at the bank as soon as it grows faster than its profit allows, Why a machine builder only sees at the invoice that a 2,400-hour project took 2,870, Why a machine builder with fixed prices loses its margin to a steel price rise between quotation and purchase and Why a profitable SME still runs into cash flow problems. New: Why a machine builder with €5 million of project revenue does €300,000 of extra work every year that never makes it onto an invoice. New: Why a machine with a 3.2-year payback period costs €434,375 in year one. New: What one day of working capital is worth to a metal supplier with €10 million revenue, and which lever to pull first.

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