Have you ever heard of lock up days? Guess what? It’s not the number of days the gate was locked on a building site. Lock up days refers to the amount of time, the amount of days that you have money invested in every single item of stock or product that you have.
Now, this is relevant for businesses that have physical stock like shops. It’s also relevant for businesses that have ongoing manufacturing or materials. It’s also relevant for businesses that have service income, the terminology is just slightly different. It’s still called lockup days. And it is the number of days from the day that you start a job until you get paid. It’s as simple as that. And the more you can decrease those days, the quicker the cash turnover in your businesses.
Lock up days is the total days from when you receive the goods to when you receive payment for them.
So let’s just take a stock for example. The quicker you can pay for it get it in store, sell it and get paid for it, the quicker your lockup days, if you can get paid earlier, or you can sell it quicker the days decreases, which means you get more money into your business on a more regular basis, it improves your cash flow. It’s as simple as that. Because if you get money in from that stock, then you can buy some more.
If you’re a manufacturing business or a service type business, instead of physical products, you might have materials, you might have subcontractors, expenses, you might have wages, for the staff that are involved, sometimes in services business, we were talking about work in progress. And that’s exactly the same concept.
The number of days from when a job starts to when you get paid for is your lock up days irrelevant of the type of business and there is actually a formula for it. It is:
(Stock + Work In Process + Debtors)/(annual sales)*365