Understanding cash lock up

Understanding the difference between profit and cash flow is essential for maintaining a financially healthy business. Profit is recorded when you issue an invoice for work completed or goods sold, while cash only increases when the payment hits your bank account. This distinction is crucial because even a profitable business can struggle without adequate cash flow.

One key area where cash can get tied up is your lockup—the money stuck in work in progress or unpaid invoices. Reducing this lockup is vital to improving cash flow, and it requires optimizing two critical processes: billing and collections.

1. Billing: Invoice Early and Often

The sooner you send an invoice, the faster you can expect payment. Reflect on your current billing practices:

  • How quickly after delivering a product or service do you bill?
  • Do you have significant work in progress due to long service timelines? If so, consider progress billing—invoicing at regular intervals during a project rather than waiting until completion.

Small changes to your billing approach can make a big difference in freeing up cash.

2. Collections: Get Paid Faster

Once you’ve billed your customer, the focus shifts to getting that payment into your bank account. Key questions to ask yourself include:

  • Clear Terms of Trade: Do customers sign off on your payment terms before doing business with you? Be explicit about payment timelines—whether that’s 7, 14, or 30 days after invoicing. Shorter payment terms can significantly reduce lockup.
  • Payment Convenience: Is it easy for customers to pay you? Include a clear payment link on invoices or provide your bank details and due date.
  • Multiple Payment Options: Offer a variety of payment methods such as direct debit, credit card, Eftpos, or debtor finance where suitable.
  • Early Payment Incentives: Even a small discount for prompt payment can encourage faster settlements.

Unlock More Cash Flow Opportunities

These are just a few strategies for reducing cash lockup and boosting your bank balance. Countless other process improvements can further strengthen your cash flow position.

If you’re ready to unlock the full potential of your business’s cash flow, consider booking a Cashflow & Profit Improvement Meeting with us. We’ll show you what’s possible—measured in cold, hard cash!

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