Monthly recurring revenue is the engine that drives a managed services business. The more of that steady income that flows in without major delays or additional costs, the more money MSPs will have available for paying bills and investing in new tools, programs and people. Strong cash flow fuels healthy, organic growth
The age-old problem for IT firms (or any business) is identifying and adopting the most cost-effective processes for converting those predictable income streams into actual bank deposits. Cash flow is entirely predicated on receiving payments for services the company renders, so the faster that turnaround time, the better the organization’s financial situation. That’s business basics 101.
MSPs are masters of the recurring revenue and cash flow concepts. However, the collections process tends to foil success for many as clients either delay or withhold payments or their checks get “lost in the mail.” That last point happens more often than most business owners are willing to admit.
Cash Flow is Key to Your MSP’s Success
Financial problems are not limited to organizations with declining sales. Even the most successful MSPs can run into cash flow issues, especially when they onboard many new clients in a short period. Procuring new tools and licenses and hiring team members to handle the added workloads consume a lot of money, which can be a real issue if their accounts receivable balance is out of hand.
Expansion is a key reason MSPs end up in debt, and borrowing other people’s money can be costly. Without a strong cash flow, companies often rely on lines of credit and bank loans to meet their payroll obligations and pay other necessary expenses. Cash reserves are critical for funding expansion plans without “robbing Peter to pay Paul.” In other words, IT services firms must properly manage their A/R and optimize the collections processes to effectively pay for day-to-day operations and their strategic growth.
No business owner wants to get into the practice of delaying payments to contractors, utilities, landlords and others simply because of problems with their own debt-collection methods. Many MSPs provide quality service month after month while outstanding A/R continues to rise. Strengthening collections policies and procedures will put more cash in their bank accounts for paying those bills and boosting and expanding operations. No business with a healthy stream of monthly recurring revenues should ever need to borrow other people’s money just to keep the doors open.
Collections Strategies 101
An effective accounts receivables plan should not be complex or hard to communicate with employees and customers. The good news for MSPs is that there are a plethora of resources available to help them develop and refine these strategies, from industry associations, distributors and peer communities to the ConnectBooster library, videos and blogs.
One of the biggest tasks is finding a starting point. How can an MSP design the most effective plan for their specific business? Here are six tips to make that happen:
- Create strict collections policies.
These rules must be clearly written into all managed services contracts and be accessible to the MSP’s employees and clients. Strict adherence to these policies is critical for ensuring the timely payment of current balances and any late fees or assessments. A thorough review with prospective clients before the sales close and during the onboarding process will address any misconceptions and clarify expectations.
- Focus on Continual Improvement.
Disorganization kills profitability. MSPs are highly proactive in tackling clients’ IT problems, securing systems and managing all the various technology components. However, those skills don’t help with invoicing and collections, which typically get less attention than sales, marketing and other parts of their operations. Every MSP needs someone to be accountable for generating and sending bills, monitoring A/R and tracking down late payments. Collections teams need the time and resources to complete each of those tasks effectively and, most importantly, an opportunity to improve policies and procedures.
- Collections is a responsibility, not a punishment.
Some companies put their least qualified people in charge of A/R activities, either as retribution for poor performance or because no one else wants that responsibility. As an essential part of the financial engine, MSPs should have a dedicated person with accounting and collections skills in place or provide that person with the right support and training. Those with a financial stake in the business (more than a paycheck) will be more willing to follow through with collections calls and enforce the stipulations in each client contract.
- Create and regularly review A/R aging reports.
Tracking which clients appear most frequently at the top of an MSP’s accounts receivable list is essential. That periodic review helps IT firms identify and monitor harmful financial trends and implement penalties to change those behaviors. Those that rank high on the aging report should be the first an MSP converts to autopay to avoid the need for tough discussions in the future.
- Implement automation.
Recurring revenue means little without an effective collections process. Getting each client to pay on time each billing period can be a chore without the right policies, management, and systems, and automation can make that happen. MSPs have the tools at their disposal, including PSA (Professional Services Automation) platform and accounting packages, which, when connected to a secure payment portal like ConnectBooster, create a seamless (and essentially hands-free) invoice-to-payment collections system.
- Incentives or penalties.
Most business owners respond more favorably to inducements than fees and late charges. That’s why many MSPs offer discounts for signing up for autopay and using a secure platform like ConnectBooster. For example, a 10% discount for six months can ease the transition for reluctant clients. Alternatively, instead of taking on a 10% price increase for contract renewals, MSPs could drop that to 5% (or less) if the company opts into autopay
Taming A/R isn’t Rocket Science
Getting paid on time is not an unreasonable expectation, nor should it be a difficult hurdle for MSPs to overcome. Strengthening and refining the accounts receivables processes requires time, focus and dedication. From tightening policies and procedures to automating and integrating back-office and IT services-specific tools, there’s a long list of best practices available for MSPs to follow.
With the right tools and a forward-focused attitude, any IT business can boost its financial freedom, strengthening its cash flow to pay the bills and fund organic growth.
Why should any MSP have to rely on other people’s money? With an effective A/R strategy and the right tools, providers can tap into their own reserves without paying interest.
Schedule a demo to see how ConnectBooster can help your MSP automate its cash flow.