Critical Numbers – All Work and No Cash! Here’s Why. | Bizdom



The sixth cause of poor cashflow – Overheads are too high


This isn’t typically a place where you will find a lot of wastage. Our experience is that business owners are very careful about managing their expenses, and the smaller the business is, the truer that statement is. Having said that, as a business grows, so do the layers of hierarchy. Management control can deteriorate, and […]

Back to the BLOG page

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

For example:

Debtors                           $120,000

Stock                                  $45,000

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?

  1. Increase your sales – talk to us about the 5 ways to grow sales
  2. Invoice more regularly – deposits, progress invoices, invoice on completion (as opposed to month end)
  3. Document your terms of trade, get them signed off with customers and stick to them
  4. Reduce stock holdings (especially obsolete and slow moving stock)
  5. Use an independent credit controller to chase up your slow payers
  6. Change your payment terms – 7 days vs 20th of month following invoice
  7. Reduce errors and re-work by providing better training / systems
  8. Set targets for stock levels / invoicing levels with your team
  9. Improve your reporting of lock up – you can’t manage what you don’t measure
  10. Ask us for 10 more ideas!!

‘You must gain control over your money or the lack of it will forever control you’ – Dave Ramsey

*Mandatory fields. Your email address will not be published.*