Lockup: The Financial Metric That Saves Your Firm from Cash Flow Chaos

Think “lockup,” and your mind might jump to supervillains behind bars—but in the world of business finance, lockup is the metric that stops cash flow chaos in its tracks. 

For law firms, understanding lockup is your secret weapon for improving cash flow, boosting profitability, and making your firm run like a well-oiled superhero headquarters.

So, suit up—let’s break down what lockup is and how to use it to speed up revenue realization, crush inefficiencies, and keep your firm flying high.

What is Lockup?

Lockup measures the time between finishing a job and getting paid. It’s the arch-nemesis of smooth cash flow, keeping money tied up when it should be powering your firm forward.

Lockup highlights the important connection between Work in Progress (WIP), Accounts Receivable (A/R), and cash flow: 

• WIP represents the work you’ve completed but haven’t billed

• A/R represents invoices you’ve sent but haven’t collected

Together, they determine how long your revenue stays tied up before hitting your bank account. 

The longer your WIP and A/R stay unresolved, the tighter your cash flow becomes, limiting your ability to invest in growth or cover operational costs.

Lockup is made up of two key components:

1. Realization Lockup 

Realization Lockup is how long work sits in progress before becoming billable revenue.

Example: If a project drags on without being finalized or invoiced, realization lockup increases.

2. Collection Lockup

Collection Lockup is how long it takes to collect payment after sending an invoice.

Example: Slow-paying clients, unclear billing practices, or weak follow-up processes all extend collection lockup.

Why Lockup Matters for Your Business

Lockup can have a major influence over your firm, including:

• Cash Flow: A high lockup means money is trapped in unpaid invoices and unbilled work. Lowering it ensures your firm has the cash it needs.

• Profitability: Long delays in revenue recognition make it harder to predict earnings, plan growth, or even pay your team on time.

• Operational Efficiency: Tracking lockup exposes inefficiencies—whether it’s slow work completion, lagging invoicing, or clients who need a nudge to pay up.

Key Components of Lockup

Let’s look more closely at the two key components of lockup: 

1. Realization Lockup: Converting WIP to Revenue

• What it Tracks: How long work stays in progress before being invoiced.

• Common Villains:

  • Tasks dragging on due to inefficiencies

  • Missed billable hours from poor tracking

  • Delays in client approvals or internal review processes

2. Collection Lockup: Converting Invoices to Cash

• What it Tracks: The time between sending an invoice and receiving payment.

• Common Villains:

  • Late-paying clients

  • Vague invoices that lead to disputes

  • Lack of consistent follow-up on overdue payments

Calculating Lockup: Formulas and Examples

You can calculate lockup with this simple formula:

Lockup = Realization Lockup + Collection Lockup

It gets more interesting when you look into the components: 

Realization Lockup Formula:

Realization Lockup = (Work in Progress × Realization Rate) ÷ Revenue Generated

Collection Lockup Formula:

Collection Lockup = (Accounts Receivable  × Collection Time) ÷ Total Billings

Example Calculation:

Let’s explore what this could look like in a full calculation. 

• Work in Progress (WIP): $50,000

• Realization Rate: 85%

• Revenue Generated: $100,000

• Accounts Receivable (A/R): $40,000

• Collection Time: 30 days

• Total Billings: $120,000

Realization Lockup: (50,000 × 0.85) ÷ 100,000 = ~12.75 daysCollection Lockup: (40,000 × 30) ÷ 120,000 = 10 days

Total Lockup = 12.75 days + 10 days = 22.75 days

That means it takes just three weeks for your firm to turn work into cash. The faster you lower lockup, the faster you can fund growth, pay employees, and invest in your firm’s future.

Interpreting Your Lockup Metric

Here’s how to interpret your numbers and what they could be signaling:

Ideal Lockup Benchmarks

Lockup benchmarks can vary by industry, but in professional services like law or accounting, the average is typically 45–60 days.

• Under 45 days: Strong performance—your processes are efficient, and payments are coming in quickly.

• 45–60 days: Healthy range, but there may still be opportunities to tighten processes.

• Over 60 days: Red flag—it’s time to investigate where delays are happening.

What High Lockup Values Could Mean

If your lockup is creeping up, one or more villains could be slowing you down:

• Inefficient Billing Processes: Inconsistent invoicing cycles or delays in sending out bills extend realization lockup.

• Delayed Work Completion: Projects staying too long in WIP without being closed out hold up revenue recognition.

• Slow Client Payments: Clients dragging their feet on invoices increase collection lockup. This could stem from unclear payment terms or a lack of follow-up.

• Billing Disputes: Errors or unclear invoices can cause payment delays as clients seek clarification or adjustments.

What Low Lockup Values Could Indicate

• Efficient Processes: Your WIP is converting quickly to revenue, and clients are paying promptly.

• Strong Client Relationships: Clear expectations and payment terms are keeping collections on track.

• Automated Systems: You’ve streamlined your invoicing and collections processes with the right tools.

So, where does your firm fall on the spectrum? 

Remember, if your firm needs help compiling, interpreting, or strategizing, a virtual CFO could be your perfect partner in fighting crime! 

Fighting Lockup: How to Improve WIP and A/R Conversion

Superheroes don’t wait for the danger to pass—they take action. If lockup is slowing your firm down, here’s how to break free:

1. Speed Up WIP Conversion

While we can’t wave a magic lasso and get all of our work completed immediately, there are ways you can try to speed up your work in progress conversion: 

• Set firm deadlines for completing billable work.

• Automate time tracking to ensure no billable hour goes unbilled.

• Invoice as soon as work is done—waiting until the end of the month just slows cash flow.

2. Optimize A/R Collection

It’s tempting with accounts receivable to just “set it and forget it”, but that shouldn’t be done without a solid system in place. Make sure to: 

• Make invoices crystal clear—avoid billing disputes that slow down payments.

• Offer incentives for early payments and penalties for late ones.

• Follow up consistently—automate reminders before and after due dates.

3. Monitor and Adjust Regularly

Just like anything in business, review and adjustment based on what you’re learning makes all the difference. Remember to:

• Review lockup monthly to identify trends, and during annual planning. 

• Use accounting software like QuickBooks Online or Clio Manage to track WIP and A/R in real time.

• Set performance benchmarks so your team stays accountable for billing and collections.

The Bottom Line: Unlocking Cash Flow for a Stronger Business

Lowering lockup can make the world of difference when you’re out saving the world with your legal team. It can mean:

• More cash on hand for payroll, growth, and investments

• Faster realization of revenue for a stronger bottom line

• Less stress over slow payments or unpredictable cash flow

And just like any superhero, you shouldn’t have to do it alone.

At Accounting Girl, we help law firms and professional service businesses take control of their finances, optimize lockup, and boost cash flow. Whether you need custom reporting, cash flow strategy, or billing process improvements, we’ve got your back.

Ready to unlock more cash flow and leave lockup struggles behind? 

Contact Accounting Girl today! Because when it comes to financial rescue missions, we’re standing by waiting to save the day!