One of the joys of owning a business is the financial freedom it provides, or so the story goes. As most entrepreneurs know, without great customers, proven ways to manage accounts receivable, and procedures to collect in place (and enforced), economic independence is never assured.
The reality is that there are never any guarantees in business. You can have the best-laid plans and a robust financial model and still run into problems that the most insightful entrepreneur would never anticipate. Running an MSP business presents many challenges, including fluctuating workloads and staffing issues, and managing multiple vendor relationships, all while struggling to achieve operational efficiency.
One of the biggest challenges for IT services entrepreneurs is managing the financial side of the organization, which often takes a back seat to the latest tech emergency. When sales are booming, and support staff is onboarding new clients at breakneck speeds, many MSPs feel energized and focus all their efforts on building off that success. The inclination is to keep ‘striking while the metal’s hot’ makes perfect sense ̶ as long as someone is properly managing billing and collections.
Cash flow is key to your MSP’s success
While the natural inclination of managed services business owners is to grow operations with new technical solutions and services to support the IT needs of existing and new clients, you still have to get paid. Without a steady stream of money flowing into your bank account, it can be hard to juggle payroll and checks for rent, electric, gas, and the other expenses that keep the operation running.
Of course, cash flow problems don’t just occur in companies with recurring income issues. Some of the most successful MSPs can find themselves with inadequate financial reserves after months of record sales. Growth often requires capital investments for new offices and equipment and money to hire staff and pay for training and certifications, in addition to providing sales commissions and bonuses.
Those expenditures help explain why expansion is one of the top reasons for MSPs to borrow other people’s money. Without deep financial reserves, many providers rely on lines of credit and bank loans to meet current payroll and expense obligations. That infusion of cash allows MSPs to execute their growth plans while carrying on their day-to-day operations. No sane entrepreneur wants to bounce checks and deal with all the negative repercussions from employees, business partners, and the general public.
The answer to most MSPs’ cash flow issues lies in their collections processes. Many continue to provide the same excellent service month after month while allowing their clients to delay making payments for that support continuously. Improving an MSP’s collections procedures can help put more cash in their bank account that they can use to pay bills or improve and expand their operations. Why pay interest to use other people’s money when you could leverage your own?
Develop an A/R ‘Plan Of Action’
As with any business-related activity, the best way to manage your accounts receivables is to follow a well-designed strategy. Developing a healthy accounts receivables plan doesn’t need to be complicated, and there are many resources and best practices available for virtually every type of business. The managed services space is no different, with a plethora of financial books, podcasts, webinars, and industry experts with great advice for those in charge of finance, especially the collections operation.
From CompTIA and the ASCII Group to the major industry distributors and peer communities, there is a wealth of expertise available to help your MSP tame that accounts receivables monster. Most of those best practices fall into one of the following five categories:
1. Create strict collections policies. The first rule of business is to ensure your company gets paid for the valuable products and services it delivers. MSPs are fantastic at the IT side of the house but tend to struggle the most with billing and collections. Money is a sensitive topic, especially when clients get more than 30 days behind on their monthly payments, and you need to pay your staff, utilities, and other expenses. Those conversations are even harder for MSPs who don’t also have a collections policy in place. This written document should be accessible to all employees and customers and strictly followed to ensure timely payment of outstanding balances. The best way to ensure success is to thoroughly review your company’s accounts receivables policy with prospective clients before closing in the sales process and certainly discussed before signing any contracts.
2. Develop and periodically strengthen collections processes. Like any part of your business, your A/R procedures will inevitably require some adjustments over time. The introduction of new technologies and banking policies may allow you to modify collections timelines or restructure current internal practices to improve efficiencies. Worsening economic conditions could force firms to raise late fees and other penalties. A good best practice for MSPs is to discuss collections procedures with accounting professionals and peers periodically, especially before significant contract renewal periods, and make improvements as needed.
3. Create and regularly review A/R aging reports. Which of your clients appear at the top of the overdue billing list most often? Identify and monitor the frequently delinquent customers and leverage incentives or penalties (see option 5) to convert those businesses to a monthly automatic payment system. Be sure to note any companies high on the aging report with expiring contracts; it’s the perfect time to assess the value of the relationship, have those tough discussions, and implement payment processes and terms more favorable to your firm. MSPs must stick firm to their policies and may have to play hardball with these clients ‒ some may simply walk away from the relationship to focus on more ‘financially friendly’ prospects.
4. Automate payments. Recurring revenue means nothing to your managed services business unless your clients pay their bills regularly. Automation makes that possible. As an MSP, the tools are readily accessible, including your PSA (Professional Services Automation) platform and accounting package, which, when properly integrated, can automatically generate invoices. Connecting those systems to a secure payment portal like ConnectBooster creates a seamless (and virtually hand-free) billing and collections process that can eliminate many of your team’s biggest headaches. This automated payment platform also makes it easy for your clients to access and review current and past invoices and securely stores their credit and banking information.
5. Leverage Incentives and penalties. Do your clients respond better to the ‘carrot’ or the ‘stick?’ As mentioned above, an excellent way to get buy-in when implementing new collections terms, processes, or systems with existing customers is to use incentives and penalties. A traditional business best practice is to provide discounts such as 1%/ 10 Net 30, which allows clients to deduct 1% from that invoice if they pay the full amount within ten days, or 30 days if not taking the discount.
Some MSPs are taking a slightly different approach to encourage their existing clients to sign up for autopay. Instead of charging a 5% price increase for renewals, they offer a smaller adjustment of 2-3% if the customer agrees to use a secure automated payment platform such as ConnectBooster.
The ‘carrot’ approach is more proactive and positive and, if presented the right way, makes your clients feel like they are receiving added value for taking part. Inflicting penalties for late payments, such as charging a percentage of the overdue invoice multiplied by the number of days it goes unpaid, should be considered a last resort. Rarely do those conversations go well, and the business relationships tend to suffer (if not fail).
Free yourself and your employees from A/R headaches
Put more joy back into owning an MSP business. Streamline your accounts receivables processes, strengthen your policies, and implement automation wherever possible.
With the right tools and a forward-focused attitude, you can create the financial freedom needed to grow the business organically. Why rely on other people’s money when you could be spending your own, interest-free?