There’s a massive difference between profit and cashflow. Profit increases when you create an invoice for work you’ve done or goods you’ve sold; cashflow only increases when you actually bank the money.
Your lockup equals the cash that isn’t in your bank account because it’s either in work in progress (you’ve done some work but you haven’t yet billed for it) or you have invoiced your customer but are still waiting to be paid.
There are two key processes that need improvement to reduce cash that is stuck in lockup. Within each of these two processes, there are many strategies that can be implemented to put more cash in your account.
The earlier you invoice a customer, the faster you’ll get paid. How quickly after delivery of a product or service do you bill? Do you carry large work in progress because your service spans weeks or even months? If so, maybe consider progress billing on a regular basis? Interim billing may in fact be best practice in your industry.
You’ve done the work, you’ve invoiced your customer, now it’s time to get paid.
Do your customers have clear Terms of Trade with you and do you set clear expectations as to when you expect to be paid? Is that 14 days after invoice? 7 days? Shorten up that timeframe and your cash lockup will go down significantly.
How easy do you make it for customers to pay you? Your invoices and statements should clearly show all the information that will speed up payments, such as bank account details, due date, and status (current or overdue. Don't show 90, 60, 30 days!).
Do you provide multiple payment methods to customers? For example, direct debit and credit, credit card, Eftpos, debtor finance (where appropriate). Having options is known as the choice of ‘yeses’. Do you offer a small discount for prompt payment? Customers love discounts.
These are just some of the changes you can consider to reduce cash lockup. There are dozens more. Talk to us about creating a Cashflow Management Plan. We’ll show you what’s possible, in cold hard cash of course!