It is vital for businesses to free up as much cash as possible, particularly in these tough economic times. Your ‘lock up days’ is the number of days it takes to convert your debtors, stock and work in progress into cash.
A high number of lock up days means your business needs to have more cash injected, either from you or the bank. You also have a higher risk of losing that cash, particularly if a lot of it is locked up in your debtors. Worse still, you are likely to be paying tax on that lock up figure before you have received the cash from your customers.
To calculate your lock up days:
(Debtors + stock + work in progress) / annual sales * 365
For example, if debtors are $120,000, stock is $45,000, work in progress is $55,000 and annual sales is $1,200,000, your lock up days would be 67 days (($120,000 + $45,000 + $55,000) / $1,200,000 * 365).
Reducing lock up days means you will have more cash available in your business, so how can you reduce your lock up days?
- Increase your sales.
Do you know the five ways to increase your sales?
- Invoice more often.
Consider sending progress invoices as well as invoices on completion or requesting a deposit before work has started.
- Ensure customers agree to your Terms of Trade.
Don’t start work until your customer has signed off the Terms of Trade and make sure you stick to them by following up customers as soon as payments become overdue.
- Reduce stock holdings.
Review stock on hand and reduce where possible. Consider getting rid of obsolete or slow-moving stock.
- Use an independent debt collector.
This should be a term in your Terms of Trade, including a clause specifying that the customer will be liable to pay associated costs.
- Change your payment terms.
Request payment within 7 days of invoice rather than on the 20th of the month following the invoice.
- Reduce errors and re-work.
Review your processes and provide additional training.
- Set targets for stock levels / invoicing levels.
Reward your team for achieving the targets.
- Improve your reporting of lock up.
You can’t manage what you don’t measure.
- Ask us for 10 more ideas.
We can help you identify the best strategies to reduce your lock up days.
“You must gain control over your money or the lack of it will forever control you.” – Dave Ramsey