Many SMEs have too much cash locked up in stock, work in progress and debtors.  Know how your "lockup" cycle occurs so you can turn your locked-up earnings into cash. Prompt payment of invoices is vital for SMEs.  Ensure faster payment by streamlining your invoicing and credit control systems. 

Ireland has one of the worst records in Europe for paying bills on time (over 70 days on average).  The term “lockup” best describes the latent profit in your business that is tied up in your stock, work in progress and debtors.  Too big a lockup will strangle the cash flow of your business.

What is in the 'lockup'?

Every item used to produce your goods or services is classified as inventory or stock.  This could include raw materials, goods used in the production process, and your finished products.  The investment made in acquiring stock represents “locked-up cash” as long as that stock remains in storage and unsold. 

Your work in progress (those goods or contracts for services which are still in the process of manufacture or completion), have incurred the costs of your company’s time and labour but have yet to be paid for by your clients and customers: your payment is locked-up until you can complete the sale.
 
When the goods are delivered or the service completed and your client has still not paid, although the client is now a debtor; your cash is still in the “lockup”.
 
These are the underlying locked-up earnings of your business that have not yet been turned into cash in your bank account to help you keep the business going, pay your wages, pay your rent and keep the doors open. 

Credit Controller

Your credit controller is the unsung hero of the recession: and their principal function should be to vigorously attack your lockup on a daily basis.  If your business does not have a dedicated financial or credit controller then the business owner or manager must make releasing the locked-up cash of the business his or her top priority. 

Attacking the Lockup

Attack your lockup by ensuring cash is not tied up in stock through proper inventory management; that goods and services are efficiently delivered and billed; and that the company’s cash collection techniques are as rigorous as possible. 

Invoicing Tips

The invoice should be sent within a day of the sale or provision of service.
Invoices should be sent by post, addressed directly to the individual that will discharge the account. 

Invoices for large amounts or for customers with a habit of mislaying bills should be sent by courier or registered post. 

Do not include any superfluous material with the invoice such as advertising literature. 
The information on the document itself must be clear and accurate and include the date, name of the customer, order reference numbers, description and price of goods or services, the total amount due, clear payment terms and the exact due date for payment.

One of the final steps to take at the invoice stage is for your credit controller to call to confirm receipt of the invoice a day or so after it is sent to the customer.  This can be done by a polite call (which perhaps is more likely to be accepted at this stage than in 30 days time!) to ensure that the invoice has been received and that there is no issue or dispute with it.  If it hasn’t been received, it can be emailed again immediately. 

This means that any discrepancy or any issue with the amount of the invoice is cleared up there and then so that an uncompromised “30 day clock” can start to tick immediately.