Reducing lock-up in WIP and debtors
What lock-up means for an accounting firm, how to measure the money tied up in unbilled work and unpaid invoices, and practical ways to bring it down.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A profitable firm can still run short of cash. The partners look at the year's figures and see healthy fees, yet salaries are paid from the overdraft and drawings are postponed again. The fees are real. They are simply not in the bank, because they are sitting in two places: work done but not yet billed, and invoices issued but not yet paid.
That money is called lock-up. Every firm has some; the question is how much, and whether it is growing. Reducing it is one of the few ways a firm can improve its cash without winning a single new client.
What lock-up is
Lock-up has two parts.
WIP lock-up is the value of work done that has not been invoiced. It builds up when time is recorded but billing waits for the end of the job, for a partner's review, or for someone to get round to it.
Debtor lock-up is the value of invoices issued that clients have not paid. It builds up when invoices go out late, are unclear, or are not followed up.
Firms usually express each part in days: roughly, how many days of fees are tied up in unbilled work, and how many in unpaid invoices. Added together, they show how long it takes, on average, for an hour of work to become cash. The debtor half is the same idea that businesses call days sales outstanding; Investopedia's explanation of days sales outstanding shows how it is calculated and what it says about how quickly customers pay.
The exact formula matters less than using the same one every month. A firm that measures consistently can see the trend, and the trend is what tells it whether things are improving.
The age of unbilled work
The WIP side is often the larger and the less watched. Under BILLING & FINANCE > Rate Cards & Realisation, a firm can see the age of its unbilled work, along with realisation and recovery, valued from its rate cards. Time recorded by someone with no rate is counted as unvalued rather than estimated, so a missing rate leaves a gap rather than an invented figure. Fill those gaps, or the WIP total will be understated.
Read the ageing for patterns, not just totals:
- Old WIP on finished jobs. The work is complete but nobody has billed it. This is the easiest lock-up to release.
- Old WIP on running jobs. The engagement has no interim billing, so everything waits for the end.
- WIP that will never be billed. Time the partner already knows the client will not pay. Holding it inflates the figures and delays a decision.
For the last group, the WIP Register is where a partner, manager or administrator writes unbilled time down or off with a reason. Write-downs above the firm's threshold, 10% by default, and every write-off wait for another partner's approval. Facing those decisions promptly makes the remaining WIP figure honest.
Billing sooner: milestones and retainers
The surest way to cut WIP lock-up is to stop waiting for the end of the job.
Milestones. Long engagements can be billed in stages agreed with the client. Staff can invoice a billing milestone from the engagement's own page, and Achekam refuses to invoice the same milestone twice. Note that the BILLING & FINANCE > Billing Milestones menu entry does not list these milestones; work from the engagement page.
Retainers. Recurring fees from signed contracts appear under Retainers, where staff raise each period as a draft invoice, or a partner authorises the daily billing run to issue them. Monthly billing for monthly work means WIP never has the chance to build up.
Regular interim billing. Where neither fits, agree in the engagement letter that work in progress will be billed monthly or at set points. Clients generally prefer smaller, regular invoices to one large surprise.
Collecting sooner
Once invoiced, the aim is to shorten the time to payment.
- Make paying easy. A firm can e-mail an invoice with a pay link through a gateway it has configured with its own keys, or by EFT. With no gateway set up there is no pay link, so configure one.
- Send statements routinely. Client invoices, receipts, credit notes and statements of account are kept in the receivables ledger on the server, and a statement of account can be downloaded as a PDF or e-mailed. A monthly statement to every client with a balance keeps the amount in front of the person who pays.
- Follow up early. The first reminder shortly after the due date does more than a stern letter months later. A full routine is in chasing overdue client fees.
- Fix the causes of disputes. Invoices that clients query sit unpaid while the query is resolved. Clear narratives and fees that match the engagement letter cut queries at the source.
Watching the trend
Lock-up responds to attention. Pick a day each month and record the same figures:
- Total unbilled WIP, and how much of it is older than the firm's billing cycle.
- Total debtors, and how much is overdue.
- Lock-up days for each part, using the same formula every month.
- The largest individual balances in each, and what is being done about them.
| Signal | What it usually means | First action |
|---|---|---|
| WIP days rising | Billing is waiting for job completion | Introduce milestones or interim billing |
| Debtor days rising | Follow-up has slipped, or disputes are growing | Review overdue list, phone the largest |
| Both rising | Billing and collection are both neglected | Assign an owner for each |
| WIP falling, debtors rising | Billing improved but collection did not | Add pay links and statements |
Realisation belongs in the same conversation, because a firm that cuts lock-up by writing everything off has not improved anything; see rate cards, realisation and recovery.
Start by listing the ten oldest WIP balances and the ten oldest unpaid invoices, give each a named owner, and review the list at next month's partners' meeting.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
