Your lock up days is the number of days it takes to convert your debtors, stock and work in progress into cash. The higher your lock up days, the more cash is needed in the business (either from you or the bank), and the higher the risk of losing that cash. Worse, you’re likely to pay tax on that lock up figure before you’ve 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’ll have more cash available in your business. How can you reduce your lock up days?
1. Increase your sales.
Talk to us about the five ways to grow sales.
2. Invoice more regularly.
Request deposits before work has started, send progress invoices and then invoice on completion, rather than at month’s end.
3. Document your Terms of Trade.
Don’t start work until your customer has signed them off. Make sure you stick to the terms.
4. Reduce stock holdings.
Especially obsolete and slow moving stock.
5. Use an independent credit controller to chase up your slow payers.
This should be a term in your Terms of Trade.
6. Change your payment terms.
Request payment within 7 days of invoice rather than on the 20th of the month following the invoice.
7. Reduce errors and re-work.
Review your processes and provide additional training.
8. Set targets for stock levels / invoicing levels.
Reward your team for achieving the targets.
9. Improve your reporting of lock up.
You can’t manage what you don’t measure.
10. 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 of the lack of it will forever control you.” – Dave Ramsey
This information does not constitute financial or legal advice and is for general information purposes only. Please contact DLA Partners for specific advice relating to your particular circumstances.