One of the key cash flow indicators of legal practices is its Lock Up days, or simply ‘Lock Up’. If your lock up days are getting out of control, implementing some specific cash flow enhancement strategies will help you get back on track.
In his recent Webinar, my good friend, Matt Schlyder, known as ‘The Lawyers Accountant’ and Director of FWO Chartered Accountants, suggested Lock Up was one of the “only two numbers you need to worry about to drive improvement!”
For those of you unfamiliar with this KPI, Lock Up is the amount of revenue your firm has earned either through unbilled or billed work that has not yet been converted into cash.
Lock Up consists of two key metrics:
- Work in Progress (WIP): Work your firm has recorded and intends to invoice to a client, however, has not yet invoiced; and
- Debtors: Invoices raised from billed WIP and disbursements that have not been paid by your clients.
Now you may think that you need a maths degree to understand this concept, but it’s simpler than it looks. Your WIP and debtors are calculated with identical formulas as follows, and is most commonly determined over a one-year period:
The aggregate of the two creates your Lock Up Days.
So, let’s take a look at a firm with the following financial performance KPIs at the end of the last financial year:
Closing WIP: $1,750,875
Opening WIP: $1,950,345
Closing Debtors: $733,815
Opening Debtors: $615,875
Using our formula, we know this firm has:
- WIP Days = 123
- Debtor Days = 45
- Lock up Days = 168 days
As a percentage this equates to 46% or, for this firm, $2,531,852 of the firm’s revenue still waiting to be turned into cash. Furthermore, this firm has spent 46% of the year funding the costs of doing business: wages, office lease, IT, insurances and the myriad of other operational costs law firms must absorb.
You may question that we’re collecting the cash from six months ago, now? However, I ask you this: Would Apple allow you to purchase an iPhone from the Apple Store and pay for it in six months’ time? I suspect not, certainly not without some caveats.
An unhealthy cash flow performance is also perilous in the event your firm suffers a major setback. An example of this is the loss of a key partner, or a major client moving to another firm. Healthy cash flow performance is the heartbeat of any firm and unlocking your Lock Up should be a key focus to get cash in your account sooner.
Continuing with our example above, if this firm were to employ some strategies to reduce their Lock Up by a third, say to 112 days, this firm would have an additional $843,951 in their account today. This is without doing one more unit of client work than they already completed.
So, let me explain how this firm got an additional $843,951 in their account without doing any more client work. With their Lock up days reduced to 112, or 31% of revenue, the firm now has $1,687,901 of their revenue waiting to be turned into cash. This is a reduction of $843,951. Where is all that cash now? It’s in the firms account where it should be.
With some cash flow enhancement strategies involving discipline around strict client engagement protocols, file management, billings and collections processes, your firm can seriously reduce its Lock Up as well.
As a business owner, there’s little value in walking down to the store with a stack of WIP reports and bills you’ve issued and asking the cashier to accept them as security for your purchase. Cash is king and profit on paper means nothing. So, if you’re totally Locked Up, getting cash in your account should become your focus. Lawganised can help you by employing some these much-needed cash flow enhancement strategies. Perhaps it’s time to get in touch with us if you want to know the steps to unlocking your Lock Up.