Critical Numbers – All Work and No Cash! Here’s Why.
How many days is it taking to convert your debtors, stock and work in progress into cash? This is your ‘lock up days.’ The higher your lock up days the more cash either you or the bank needs to tip into your business and the higher the risk of a loss of that cash is. Worse, you are highly likely to pay tax on that lock up figure even before you have received the cash from your customers.
Here’s the formula to calculate lock up days:
(Debtors + Stock + Work in Progress) / Annual Sales x 365
Work in Progress $55,000
Annual Sales $1,200,000
($120,000 + $45,000 + $55,000) / $1,200,000 x 365 = 67 days
So how might you reduce lock up days?
- Increase your sales – talk to us about the 5 ways to grow sales
- Invoice more regularly – deposits, progress invoices, invoice on completion (as opposed to month end)
- Document your terms of trade, get them signed off with customers and stick to them
- Reduce stock holdings (especially obsolete and slow moving stock)
- Use an independent credit controller to chase up your slow payers
- Change your payment terms – 7 days vs 20th of month following invoice
- Reduce errors and re-work by providing better training / systems
- Set targets for stock levels / invoicing levels with your team
- Improve your reporting of lock up – you can’t manage what you don’t measure
- Ask us for 10 more ideas!!
‘You must gain control over your money or the lack of it will forever control you’ – Dave Ramsey