When Your Spreadsheet Becomes a Liability: Work-in-Progress Inventory for Made-to-Order E-commerce

Why Tracking Work-in-Progress Inventory is Critical for Custom Orders

For a growing made-to-order e-commerce business, the signs of success can feel like problems. The order queue is consistently full and the workshop is busy, but your cash flow feels tight and it’s difficult to know which custom products are truly profitable. You are likely tracking dozens, maybe hundreds, of unique items at different stages of completion, often using a combination of spreadsheets and Trello boards. While this works initially, it quickly hides critical financial information.

The value of these partially finished goods is your Work-in-Progress (WIP) inventory. It represents a significant amount of cash tied up in materials and labor. Without a systematic way to track this value, you risk mispricing products, understating your company’s assets, and making critical scaling decisions based on incomplete financial data. Learning how to track work in progress inventory for custom orders is not just an accounting task; it’s a core discipline for building a scalable, profitable manufacturing business.

Recognizing the Spreadsheet Tipping Point

Every made-to-order business starts with a simple system, usually a spreadsheet. It’s flexible, free, and perfectly adequate for the early days. However, as you grow, this manual approach reaches a tipping point where it becomes a liability instead of an asset. The key question is not if you will outgrow your spreadsheet, but when. Recognizing the signals is crucial for protecting your margins and enabling further growth.

In practice, we see that the tipping point is not a single event but a combination of financial, operational, and growth-related pressures. These signals tell you it's time to find a better system.

• The Operational Signal: You have more than 50-100 open orders at a time. At this volume, manual updates become intensely time-consuming and error-prone. This leads to lost order details, inaccurate status tracking, and ultimately, customer dissatisfaction from shipment delays.
• The Growth Signal: Your business is approaching $1M+ in annual revenue. At this scale, even small inaccuracies in costing, such as a 5% miscalculation on a popular product, can compound into tens of thousands of dollars in lost profit over a year.
• The Financial Signal: You are seeking a bank loan or line of credit. Lenders and investors require an accurate Balance Sheet to assess your company's health. Your WIP inventory is a significant current asset that must be properly valued and reported, not just expensed as costs occur.

This highlights a critical accounting distinction: WIP inventory is an asset on your Balance Sheet, while Cost of Goods Sold (COGS) is an expense on your Profit & Loss (P&L) statement. The costs you incur to create a product, from raw materials to labor, accumulate in the WIP inventory account. This value stays on the Balance Sheet, reflecting cash tied up in production, until the customer’s order is shipped. Only then does the value transfer from an asset (WIP) to an expense (COGS). This process correctly matches the cost of a product to the revenue it generates in the same period. For a summary of inventory accounting fundamentals see the IAS 2 guidance on inventory measurement: IAS 2.

How to Value Unfinished Goods: Calculating Your WIP Inventory

To accurately value your WIP, you must understand the real cost of a product that is only halfway through production. This process, often called partial inventory accounting, requires breaking down costs into three core components. A concise definition of WIP inventory can be found at Investopedia: Work-in-Progress (WIP).

1. Direct Materials: These are the raw materials that go directly into the final product. For a custom furniture maker, this would be the wood, screws, and finish. For a jewelry business, it’s the precious metals and gemstones.
2. Direct Labor: This is the cost of the wages for the employees physically assembling or creating the product. It’s the time your team spends casting, setting, sanding, or sewing, multiplied by their hourly rate.
3. Manufacturing Overhead: These are the indirect but necessary costs of running your production facility. It includes the workshop rent, utilities, insurance, and depreciation on manufacturing equipment. These costs are essential for production but are not tied to a single, specific unit.

To apply overhead, a simple and effective method is to calculate an overhead rate. Divide your total estimated annual manufacturing overhead costs by a reliable activity measure, such as total estimated annual direct labor hours. This gives you an overhead cost to apply for every hour of labor.

For example, let's trace the unfinished goods valuation for a custom ring at two distinct production stages. Assume your total annual overhead is $50,000 and your team works 2,000 direct labor hours per year, giving you an overhead rate of $25 per hour.

• Stage 1: 'Casting Complete': A customer orders a 14k gold ring. The casting takes two hours of a jeweler's time at $30/hour. The gold costs $400. The WIP value is the sum of its components so far: $400 for gold (Direct Material) + $60 for labor (Direct Labor) + $50 in applied overhead (2 hours x $25/hour). The total WIP value is $510.
• Stage 2: 'Stone Set': The ring moves to the next stage where a diamond is set, which costs $800 and takes one hour of a setter's time ($40/hour). The WIP value is now updated. It includes the entire value from Stage 1, plus the new costs: $510 (from Stage 1) + $800 for the diamond (Direct Material) + $40 for labor (Direct Labor) + $25 in applied overhead (1 hour x $25/hour). The new WIP value is $1,375.

This method ensures that the value of your inventory on the Balance Sheet accurately reflects the true cost invested in it at any point in the e-commerce manufacturing workflow.

Connecting the Shop Floor to Your Financials for Real-Time Visibility

Knowing the financial value of your WIP is one half of the equation. The other half is having real-time visibility into where each of those orders is physically located in your production process. This operational insight is essential for effective custom product fulfillment, managing cash flow, and setting accurate delivery dates for customers.

The first step is to map your physical production stages clearly. A typical workflow for a custom product might look like this: Order Placed → Materials Picked → Fabrication → Finishing → Quality Control → Ready to Ship. Each stage represents a point where value is added and should be tracked.

This physical tracking connects directly to your accounting. The accounting flow follows the product's journey. When you purchase raw materials, their value sits in a 'Raw Materials' inventory asset account on your Balance Sheet. As those materials are assigned to an order, their value moves to the 'WIP Inventory' asset account, along with the accrued labor and overhead. When the finished product is finally sold and shipped, its total accumulated value moves from the 'WIP Inventory' asset on the Balance Sheet to the 'Cost of Goods Sold' expense on your P&L statement. This system ensures you accurately match costs to the revenue they generate.

This isn't just a pure accounting exercise. The operational value is immense. By tracking which orders are in which stage, you can instantly identify bottlenecks. If you see 50 orders piling up in 'Finishing' but only five in 'Fabrication', you know exactly where your process is breaking down. This visibility allows you to reallocate resources, manage lead times, and proactively communicate with customers about potential delays. Regular cycle counts and reconciliation are also vital to ensure your physical WIP count matches your financial records.

Choosing the Right System for Custom Order Inventory Management

When you have hit the spreadsheet tipping point, the next logical question is what tool to use. The market offers a range of options, and the right choice depends on your scale and complexity. The reality for most startups is more pragmatic: you should choose a system that matches your current stage, not one you hope to grow into five years from now.

The progression of systems typically follows three levels.

• Level 1: Spreadsheet (Businesses <$1M revenue / <50 open orders). This is the starting point. It's ideal for founders tracking their first batches of custom orders. The primary tools are Google Sheets or Trello, which require constant manual updates. At this stage, the risk of data entry errors is high, and there is no integration with your e-commerce platform like Shopify or your accounting software like QuickBooks or Xero.
• Level 2: Integrated Apps (Businesses $1M-$10M revenue / 50-500 open orders). This is the logical next step for most scaling made-to-order businesses. Systems like Katana, Cin7, or DEAR Systems are designed for this stage. Their key advantage is integration. They connect directly to Shopify to pull in orders and sync with accounting software like QuickBooks (common in the US) or Xero (common in the UK) to automate the accounting entries. They provide a central hub for work in progress inventory tracking, managing raw materials, and giving you real-time visibility into production status.
• Level 3: Light ERP (Businesses >$10M+ or with complex supply chains). For businesses with highly complex operations, a light Enterprise Resource Planning (ERP) system becomes necessary. These are more comprehensive, expensive, and require significant effort to implement but offer granular control over every aspect of manufacturing and finance.

The trade-off is clear: spreadsheets offer maximum flexibility at the cost of manual effort and high risk. Integrated apps balance automation and control at a moderate cost. Light ERPs offer maximum control but come with significant cost and complexity. For a founder-led business grappling with 100 open orders, a Level 2 system is almost always the correct answer.

A Clear Path to Scalable Production

Moving from a reactive, manual process to a systematic approach for tracking WIP inventory is foundational for scaling a custom manufacturing business. It provides the clarity needed to protect margins, manage cash flow, and deliver a reliable customer experience. What founders find actually works is focusing on a few key steps.

1. Know Your Tipping Point. If you have more than 50-100 open orders at once, are approaching $1M in revenue, or need to present financials to a lender, your spreadsheet is already a liability. Acknowledge this and begin planning your transition now.
2. Calculate Your True Costs. Even if it's an estimate, start tracking direct materials, direct labor, and a simple applied overhead rate for your products. This information is invaluable for ensuring your pricing is actually profitable. Use basic inventory KPIs to spot margin erosion early.
3. Map Your Production Workflow. Document every step an order takes from creation to shipment. This exercise alone will reveal hidden inefficiencies and forms the basis for any tracking system you choose to implement.
4. Match the System to Your Scale. Acknowledge where your business is today. For most businesses outgrowing a spreadsheet, the clear next step is an integrated inventory application that connects your e-commerce and accounting platforms. This creates a single source of truth for your operations and financials.

By taking these steps, you can transform inventory management from a source of stress into a strategic advantage. For more related resources, explore the Inventory & Fulfilment Cost Accounting hub.

Frequently Asked Questions

Q: What is the main difference between WIP and finished goods inventory?
A: Work-in-Progress (WIP) inventory includes all costs for partially completed products that are still in the production process. Finished goods inventory represents the total cost of products that are complete and ready for sale but have not yet been shipped to a customer. Both are assets on the Balance Sheet.

Q: How does tracking WIP inventory affect my business taxes?
A: Properly tracking WIP inventory ensures your Cost of Goods Sold (COGS) is accurate. Since COGS is a major expense that reduces your taxable income, accurate tracking helps you avoid overpaying taxes. It also provides an auditable record of your inventory assets, which is critical for financial compliance.

Q: Can I use my e-commerce platform like Shopify to track WIP?
A: While platforms like Shopify are excellent for managing sales and finished goods, they are not designed for the complexities of work in progress inventory tracking. They typically lack features to track raw materials, labor, overhead, or multi-stage production workflows, which is why specialized integrated apps are necessary.

Q: What is the easiest first step to calculating manufacturing overhead?
A: Start by listing all your indirect production costs for a recent period, such as the last year. This includes factory rent, utilities, equipment maintenance, and supervisor salaries. Add them up to get a total overhead cost. Then, estimate your total direct labor hours for the same period to calculate a simple overhead rate per labor hour.