From Daily Progress to Long-Term Wealth: A Simple Guide to Retained Earnings and WIP

As a business owner, your financial statements can sometimes feel like a completely different language. There are two specific concepts that frequently trip up entrepreneurs but mastering them is the ultimate secret to understanding your financial health.

Whether we are looking at day-to-day operations or the big-picture wealth of your company, it all comes down to two things: Retained Earnings and Work in Process (WIP).

Below, we will break down exactly what these terms mean and how they work together to paint a clear picture of your success.

Part 1: What the Heck Are Retained Earnings?

I have clients ask me all the time about a specific account they notice on their financial statements: an item called Retained Earnings. Retained earnings sits right in the equity section of your balance sheet. When people spot it, they almost always want to know the same thing: what the heck are retained earnings anyway?

To understand it, we have to look at what happens in your accounting system at the end of every year.

The New Year’s Shift

Throughout the year, you accumulate net profits. You can easily see these profits listed right on your income statement. But when the calendar flips and the year officially closes, those earnings… those profits, they move over to the balance sheet. Specifically, they move directly into an account called retained earnings.

Let’s look at an example:

• December 31st: Imagine it is your very first year of business and your business shows a neat profit of $10,000 on the income statement.

• January 1st: The next morning, your income statement resets to zero for the new year, and your retained earnings balance on the balance sheet will now equal exactly $10,000.

If you want to understand exactly how much wealth you have built in your business from Day 1, don’t just look at your current monthly revenue. Instead, go peek at the balance in your retained earnings. That specific number is the actual dollar amount of all the wealth you have created since the very inception of your business.

Part 2: Understanding Work in Process (WIP)

While retained earnings tells you about the total wealth you have accumulated over the years, you also need a way to track the value of the projects you are actively working on right now. This brings us to a foundational financial concept that accountants call Work in Process, very often abbreviated as a simple three-letter acronym: WIP.

Put simply, your work in process is the actual dollar value assigned to large projects that you are currently working on but have yet to complete.

Seeing WIP in the Real World

If you run a physical product or construction business, your work in process is pretty easy to see. Imagine you build homes: your WIP is the framing, the drywall, and the conduit running through the walls. All of those physical items have a clear dollar value associated with the material costs, combined with the direct labor it took to produce it.

The Hidden WIP in Service Businesses

If you run a service-based business and take on large contracts, your WIP can be a little harder to see… but it is no less important to track.

Let’s look at another example: Say your team builds large corporate websites, projects that take maybe six months to fully complete. After month three, you haven’t delivered the final product yet, but you have put in massive effort. At this halfway mark, your work in process is predominantly made up of all the labor costs of your staff: the actual hours they have worked on that specific project so far.

The Bottom Line: Why Both Metrics Matter

You can’t manage what you don’t measure. Truly understanding your work in process, and exactly where you stand in the timeline of a project, is a critical way to understand your true project profitability today.

By mastering your WIP on a daily basis, you ensure your individual projects stay profitable. Over time, those steady project profits will flow directly into your Retained Earnings, growing the long-term wealth and security of your entire business.