How do you calculate lock-up days?

The short answer

Lock-up days = WIP days + debtor days: the whole time money is locked up between doing the work and receiving the cash, first as unbilled work in progress and then as unpaid invoices.

Law firms, accountancy practices and consultancies watch it closely, because it decides how much working capital, and often how much overdraft, the firm needs.

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Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.

Two halves, measured the same way

WIP days = unbilled WIP ÷ fee income of the last three months × the days in those months (how to calculate)
Debtor days = trade debtors ÷ fee income of the last three months × the days in those months (how to calculate)
Lock-up days = WIP days + debtor days

Use the same three months for both, and treat tax the same way: debtors include VAT or GST, WIP and fees don't. Take the tax out of debtors, or lock-up is overstated.

A law firm with £770,000 locked up waits 57 days for its cash

An invented law firm at the end of September, with fees of £1,240,000 for July to September, over 92 days:

Item	Balance (£)	Days
Unbilled WIP	318,000	318,000 ÷ 1,240,000 × 92 = 23.6
Trade debtors, excluding VAT	452,000	452,000 ÷ 1,240,000 × 92 = 33.5
Lock-up	770,000	57.1 days

Every week of lock-up taken out releases about £94,000 of cash (1,240,000 ÷ 92 × 7).

A profitable firm with long lock-up can still run out of cash

Salaries are paid monthly; clients pay months after the work. Partners' drawings, tax and growth all depend on cash, which is why lock-up is often the first figure on a professional firm's monthly pack.

To find the problem, split it:

WIP days high, debtor days normal: a billing problem. Work isn't being invoiced promptly.
Debtor days high, WIP days normal: a collection problem.
Both high: look at a few large matters or clients first; lock-up is usually concentrated.

How firms reduce lock-up

Agree billing frequency and payment terms in every engagement letter.
Take money on account for new clients and long matters.
Bill monthly or at agreed stages, not at completion.
Review the debtors ageing and WIP over 60 days at every monthly partners' meeting.
Track write-offs, so lower lock-up doesn't come at the cost of realisation.

Three ways lock-up is got wrong

VAT-inclusive debtors added to VAT-exclusive WIP. Take the VAT out of debtors first.
Different windows for WIP days and debtor days.
WIP written off to hit a lock-up target. Lock-up falls, and so do realisation and profit; report them together.

Magic MIS computes debtor days; the WIP half takes the WIP balance

Lock-up isn't one of the figures Magic MIS computes. It computes fee income and debtor days every month, the same three-month way, and the WIP balance, wherever the books post it, is one click away in the ledgers behind the balance sheet, so the sum above takes a minute.

What people ask about lock-up

What is a good lock-up figure?

It depends on the practice area and the billing model. Compare with the firm's own trend, and with peers in the same specialism.

Should lock-up include disbursements?

Many firms include billed and unbilled disbursements. Say which you use and keep it consistent.

Can lock-up be calculated without a time system?

Debtor days can. WIP days needs a WIP value, usually from the time or practice management system.

Have debtor days computed from your trial balance

Create an account, load last month's trial balance, and get the report — paid per action.

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