Lock-up is the value of revenue that has been earned but has not yet been converted to cash as it is either tied up (or locked up) in unbilled work in progress or outstanding trade debtors. A high level of lock-up value is one of the main causes of profitable agencies having cash flow problems with staff, freelancers and suppliers paid long before payment has been received from clients.
It is worth measuring lock-up regularly to ensure it is kept at a low level and not increasing which would be detrimental to cash flow.
These are examples of how agencies can reduce lock-up:
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Contracts should be signed off before starting work as clients can reject invoices without having signed agreements in place. At a minimum, heads of terms should have been agreed in writing to ensure that both parties are clear on the fundamentals including fee structure.
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When taking on a new client, their invoicing requirements should be noted and applied to prevent invoices from being rejected. Requirements can often be found in the client’s master services agreement (MSA) or you can request that a new client form is completed where this is asked. Examples include needing to reference a PO number or contact on invoices, using third-party invoicing portals (which you may have to pay to use!) and having stages of work signed off in advance.
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As part of the negotiation process for projects, more payment should be requested upfront and at the beginning of each stage. Clients can often be the cause of delays so try not to leave a significant proportion of the total fee left to bill on completion.
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For retainer or service level agreements, invoices should be raised and issued on the first day of each calendar month.
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Where third-party charges will be recharged to clients, get agreement that they will be billed as incurred or get an allowance paid upfront for them. Especially where they are not included in the budget, costs should not be incurred on behalf of the clients without their written consent. Track and monitor project costs against jobs to ensure that they are not forgotten about and to allow them to be billed in a timely fashion.
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Negotiate payment terms down where a client is asking for concessions and has a longer standard payment term.
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Whilst larger clients are more likely to reject paying by Direct Debit, smaller clients are more likely to accept this method. Providers such as GoCardless make it easier to offer Direct Debit and to automatically collect payments when invoices are raised, in line with agreed payment terms.
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Make it easier for clients to pay by bank transfer by including bank details on the invoice.
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A proactive approach should be taken to credit control. The first contact shouldn’t be made when payment is overdue but not long after the invoice is first issued to confirm it has been received and processed. A statement should be sent out not long after and contact made again not long before the invoice falls due to confirm that payment will be made.
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Where payment is late despite attempts to resolve it with the client’s accounts payable team, project managers or account handlers should raise the issue with the client stakeholders. If the problem persists, consider stopping work until payment has been received.
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