Do you understand your cash lockup? Having your cash locked up in WIP or accounts receivable is a key cause of poor cashflow.
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; cash increases when you 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 the work but you haven’t billed for it) or you’ve billed your customer but are waiting to be paid.
There are two key processes that need to be improved to reduce the cash that is stuck in your lockup. Within each of these two processes, there are lots of strategies that can be implemented to put more cash in your bank account.
Billing
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 significant work in progress (WIP) because your service spans a number of weeks or even months? If so, should you consider progress billing on a regular basis? Interim billing may in fact be best practice in your industry.
Debt Collections
You’ve done the work, you’ve invoiced your customer, now it’s time to get paid.
- Do your customers sign off clear Terms of Trade before they do business with you for the first time?
- Are there clear expectations as to when an account is due for payment? 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? 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, NOT 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 process 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!
