Well-run organizations rarely have cash flow problems. They develop goods and services that others want, build solid margins in their pricing models, and execute on their commitments. Most importantly, they create effective payment policies and processes to strengthen finances and provide room for future growth.
A note at the bottom of each invoice stating that all money is due within the next 30-days is simply not enough. Nor is that occasional email reminder that a customer’s payment is past due by a week ‒ or maybe a month.
Those are the passive, outdated collections methods that MSPs can’t afford to rely on if they wish to grow profitably.
Convert AR to cash
No matter how much a firm’s monthly recurring revenue contracts are worth, when payment processes and policies are lax or non-existent, accounts receivable will increase at a faster rate than bank deposits. Slow collecting firms essentially allow their customers to finance their business on the backs of their vendors, and when that situation is no longer acceptable to you, it may be too late to quickly change the behavior.
One of the biggest struggles for a thriving MSP is funding its expansion: hiring, acquiring new tools, marketing, etc. So, when cash flow falls short of projections, that firm either needs to borrow or delay those business-enhancing investments ‒ which negatively impact its future revenue and profitability.
Both options can be quite costly in the long run.
The buck stops here
Most IT pros don’t moonlight as collections experts ‒ nor should they attempt to. But with a little effort in three key areas, they can convert a larger percentage of their receivables to cash. How can they make that happen?
1. Speed up invoicing: Many IT firms still create and deliver their invoices manually. Antiquated processes such as collecting closed tickets until the end of the month before billing and printing and sending each invoice through the post office. Either procedure can slow payments by weeks or months ‒ especially when combined with other manual processes. IT industry standards have changed. Professional services automation (PSA) platforms with accounting package integrations simplify and speed the billing process, allowing providers to generate and email invoices as soon as employees close their tickets. Their reporting and tracking capabilities are icing on the cake, giving MSPs an overview of what they’re doing right, and what needs more improvement.
2. Require electronic payments: Asking for a financial commitment has become the IT services norm. Many MSPs make upfront ACH (Automated Clearing House) or credit card payments mandatory for new managed services clients and contract renewals. Others implement that standard across the board ‒ with some going as far as firing customers that refuse to use electronic payments. That policy may sound harsh, but it’s hard to argue with the resulting cash flow improvements when those slow paying (or non-paying) clients fall away.
The similar reduction in collection headaches helps offset any revenue losses, and the MSP is free to redeploy its resources to new and more profitable customers.
3. Solidify the process: Exceptions to standard customer payment practices must be minimal. What happens when other clients find out that another client isn’t complying with the policy? They’ll probably want a pass, too. In those situations, employees’ commitments tend to waver, and the payment policies erode and die. The best way to avoid that problem is to clearly define the new payment process in all contracts and ensure sales and account management teams brief each customer on the changes. Management approval should be required for any exception, and only in extreme circumstances, such as the real potential loss of a valued client.
Resolve is key in all three areas. Owners must follow through with their technical and policy commitments, monitoring progress and making improvements along the way. Failure on the follow-through not only hurts their companies’ bank accounts, but it undermines their growth opportunities. What’s the bottom line? MSPs simply can’t afford to be in the collections business ‒ there’s no future (or money) in it.