Profit needs unlocking
In an ideal world, we would bill our clients every month, they would pay us immediately and we would then have the money available in our bank accounts to draw out and spend. In the real world we tend to create profit which remains locked up – in cash terms – in WIP and trade debtors for many months. Meanwhile, we continue to spend money on business expenditure and draw money out for ourselves by way of monthly drawings and dividends. In a business generating turnover of £3m where the average trade debtor balance is £650,000, that’s 79 days’ worth of profit “locked up” and unavailable in cash terms. If we were to persuade our clients to pay us 20 days earlier than usual, it would increase our bank balance by £13,000 per day.