The future looks promising for MSPs. Because of innovations like accounts receivable automation that increase cash flow, robust solutions that provide competitive advantages, as well as increased demand for services, opportunities are plentiful for IT services firms. The caveat for success is your business must have solid business development strategies in place and qualified sales and technology professionals on staff to capitalize on the managed service provider industry’s growth.
Demand is unusually heavy in the SMB where IT resources are fewer, and the competitive need is just as strong as in the enterprise space. Most small businesses can’t keep up with the pace of technological innovation and ever-evolving security concerns without third parties that can design, implement, protect, and support their systems.
That’s great news for MSPs that can meet those needs. The trick to catching those potential revenue-enhancing opportunities is that your team has to keep pace and adapt to meet clients’ continually growing requirements. While MSPs are always on the lookout for new ways to create efficiencies in their operations, expansion can be a daunting task, and many owners struggle with the financial side of that process.
That latter issue can be especially difficult for managed services providers that support a variety of clients with different services. Expansion can be a cumbersome process. Between finding technical professionals with the right mix of skills and identifying a profitable target audience, MSPs must assess which new practice opportunities make the most financial sense.
What would you invest in first, and where would you find the money? Knowing the answers to those two questions is essential when building your long-term growth strategy.
Address your growing pains (and fund them)
Expanding a business requires focus and a plan, as well as the financial resources to put it into action. Cash flow and timing are the two essential pieces of that equation, as MSPs must have enough money on hand at the critical points of their business growth.
For example, MSPs often increase their payroll expenses for weeks, if not months before onboarding major clients or introducing new services. Those costs may include hiring and paying overtime for training, testing, and implementation, often without new revenue streams to refill the coffers.
Capital improvements are another concern during expansion. To increase market presence and support capabilities, IT services companies frequently require additional office space, new vehicles, equipment, and other supplies. Acquiring those things limits the cash and credit available to enhance sales and marketing activities, which are critical for attracting new clients and keeping the money flowing.
The hard part for MSPs, or any business owner, is assessing the opportunity costs when building out their future growth strategies. What could your business miss out on when choosing one option versus another? Those “big dollar” decisions on the company’s direction and resource utilization are never easy, and without significant capital reserves or steady cash flow to fund those activities, it won’t take long to deplete your coffers.
Effective expansion plans are all about the Benjamins. MSPs with robust cash flows and strong customer loyalty will be in a much better position to grow their firms organically, with minimal or no outside investments. That financial independence leaves providers in firm control of their own decisions and destinies.
Reduce cash flow pressures
The best way for MSPs to put (and keep) their financial house in order is to strengthen their billing and collections processes and then implement accounts receivable automation. Those who commit the time and energy to complete those tasks tend to receive big dividends for their efforts.
The first step is establishing a collections policy. No matter how big or small your MSP, do your clients genuinely know when their payments are due each month and all their options for settling the bill? If not, review and update the terms and conditions listed in new sales contracts and, when possible, revisit and revise the agreement details with existing customers.
Communication is essential. Acknowledge that your customers, like any businesses, may run into financial issues from time to time. The goal of any good credit and collection policy is to make it easy for your clients to get back on track quickly without damaging the business relationship. MSPs must track invoice payment dates closely and, whenever one goes overdue, contact that client directly (phone is preferable) within 3-5 days to discuss the situation and find the quickest (and hopefully least painful) solution.
Monthly recurring revenue is a process that isn’t complete until you receive the payment. If you provide managed services to a business on a 24/7/365 basis and that client’s accounts receivable balance is more than 90 days out, would you count that as MRR?
By definition, this revenue stream is the portion of your firm’s income that is expected to be booked each month and continue for the life of the contract. “Recurring” is the key part of the term. Your team must stay on top of invoicing and payments to realize the actual benefits of MRR. With a little attention and an efficient collections process, you can alleviate many of the cash flow issues experienced by other IT services providers.
Cash flow is all about efficiency
The first step in scaling an MSP business is to strengthen, streamline, and lock down your operational procedure. Process improvement and best practice adoption are crucial in all aspects of your business. Maximizing your efficiencies now will save you time and grief correcting what could turn into more significant issues in the future.
That’s especially true when it comes to collections. Minor issues that cost your firm a few dollars a month in lost revenue or interest could turn into a money pit when you double or triple your client base and service delivery options. For example, an hour of lost time per client each month may not matter when you have two accounts, but when that scales across 20 customers at a $100 hourly rate, that’s big money.
The same holds for accounts receivables. Scaling an MSP business that has an out of control A/R balance (90 days + and growing) is not only inadvisable but a potentially fatal mistake if management can’t correct its collections issues. Those problems are likely to carry over to new clients, if not escalate as employees spend more time onboarding and putting out fires than following up on late payments. When sales are on the rise and new services are rolling out, it’s easy for everyone, including the management team, to overlook adverse cash flow trends.
That’s why continual oversight of the collections process is so important. Someone must be responsible for tracking and periodically (i.e., weekly, monthly) reporting cash flow statistics to management and suggesting, if not implementing, enhancements to policies and procedures.
Leverage cash flow to fund expansion
An efficient collections process contributes significantly to a company’s bottom line and helps fuel future growth. While there’s an appeal to using other people’s money to fund expansion plans, the costs, both direct and implied, reduce profitability and limit the organization’s true potential.
Unpaid customer invoices are another problem. As your firm’s aging accounts receivable balances climb, your ability to leverage your own money to pay for new hires and additional resources diminishes. A healthy cash flow erases many of those financial roadblocks also allows MSPs to control their destiny. When your company’s revenue is fueling expansion plans, you don’t have investors or lenders watching over your business or putting the brakes on future-minded projects. Self-funding also frees up your credit lines in case unexpected new opportunities come along (like onboarding a significant client, buying a rival, etc.).
Those are just a couple of the reasons why MSPs work so hard to boost their cash flow. When you collect every earned dollar from your clients in the shortest amount of time, it builds a larger pool of money for reinvesting in your business, and that can save you thousands in interest in lost opportunity costs each year!
For example, an MSP that bills $100,000 for delivering managed services each month and takes 60 days on average to collect payments could benefit significantly from improvements to its collections processes. Trimming the payment lag time to 30 days for just half their clients would allow the company to put $50,000 more in its bank account: the money they can use to hire one or more new sales or technical staff or fund a major marketing program. That lead time can help the company expand or deliver additional revenue-generating services quickly without having to use other peoples’ money.
Practical accounts receivable automation tools
Fixing the collections process is just the first step in the cash flow improvement process. After tightening all those procedures and creating policies to back them up, it’s time to automate. Adding 21st-century tools to the mix, especially for MSPs who understand the value of automation and thrive on these systems, frees up resources and provides greater accountability of the accounts receivables’ operations.
Payment platforms play a significant role in accounts receivables automation, as do their integrations with an MSPs’ PSA billing system, accounting package, and quoting tools. Combined, they can remove hours of tedious labor each month; trimming your payroll costs and eliminating many of your collections-related headaches.
For example, offering your clients a secure portal like ConnectBooster allows them to set up automatic ACH or credit card payments for recurring services. This is a win-win scenario for customers and MSPs. A platform like ConnectBooster not only speeds up and strengthens the collections process for firms like yours, but provides customers with greater control, allowing them to view current and past invoices and update payment options as needed.
Accounts receivable automation as a business expansion tool
MSPs can benefit significantly from changing their mindset on collections. Stop considering the process a burden that comes at the end of each month ̶ chasing down customer payments one invoice at a time, and start focusing on proactive steps to make it your business growth fund.
Automation is a vital part of that process. The only sure way to convert aging A/R into real monthly recurring revenue is to lock down your collections processes and give your clients the tools they need to pay their invoices automatically (and on time) each month.
Once those systems are in place, your company will be better positioned to achieve its accounts receivables goals and begin fueling additional expansion projects. Automation is the driver, allowing MSPs to:
1. Increase available funds
No more interest-free loans to clients. When invoices go out, and the billing window closes (i.e., net 15 or 30), that cash essentially belongs to your company and every day of delay is an opportunity cost to your business. MSPs provide millions, if not billions of dollars to their customers interest-free every year that they should be employing in their own operations. And relatively few of those firms charge late fees for that service.
On-time payments increase MSPs’ cash flow, giving you instant access to money that can be used to make capital improvements, fund marketing campaigns, and onboard new clients. Why settle for promises when accounts receivables automation can turn customer invoices into real monthly recurring revenue?
2. Get more time to focus on business
You’re an IT services professional and, if you’ve been in business long, you’re likely better at managing and protecting networks than you are making collections. The latter is a time-consuming and unappealing process to most people, and your time would be better spent supporting the computing needs of your business clients.
Accounts receivable automation can help reduce those unpleasant collections calls and emails and keep your team focused on IT, not worrying about outstanding invoices and processing credit card transactions. Our research shows ConnectBooster users enjoy significant time savings, with 84% reporting they save two or more hours per week on their billing processes (and 64% indicating they trim four or more hours off those activities).
Automation lets MSPs spend more time on essential tasks like developing business plans, closing large managed services deals, and preparing to launch new services.
3. Save on collections expenses
Time is just one of the costs associated with past-due invoices, and the longer it takes MSPs to collect, the higher the price tag. When you add in the fees for accounting and legal support, as well as discounts you might give to collection agencies for the slowest paying clients, it won’t take long to rack up a lot of expenses trying to recoup money owed to your business.
That’s one reason some MSPs don’t try too hard. Fearing that an aggressive collections play will negatively impact their client relationships, those firms wait out late payers. Unfortunately, hope is a harmful and potentially costly business strategy.
Other collections expenses include increased payroll costs (i.e., employees making follow up calls and sending email and snail mail messages), postage, and reimbursement for gas and mileage. Payment automation helps MSPs trim or eliminate many of these incidentals and boost their margins. They can reallocate that extra cash to expansion-related activities.
4. Improve customer relationships
No business owner enjoys making collections calls. Asking for payment for overdue invoices is uncomfortable for most, and excruciatingly painful for others. Accounts receivables automation simplifies the collections process so much for your customers that they’ll start asking other suppliers for automatic payment options.
The best part is your limited time with clients can be used to talk upgrades, not collections! Automation reduces your stress levels and allows MSPs like you to focus on essential business tasks such as sales, customer service, and long-term growth.
5. Create an aura of professionalism
Business owners tend to put more faith in suppliers with high-level presentations that demonstrate their technical capabilities. Most are more willing to spend more for quality and expect their MSPs to employ technology liberally in their operations. Yes, appearances matter and can promote your expertise — from the company website and contracts to its easy to use payment processing platform — innovation can raise your firm’s credibility and attract new clients.
It’s not about the flash. Prospects often vet multiple MSPs before signing a long-term contract, so you need to stand out, and a payment processing system can be that professional differentiator that seals the deal. Better yet, your company can realize actual monthly recurring revenue by establishing and communicating payment expectations with your clients. Professionalism helps you land new clients, increase the size of deals, and drive margins —a sure way to expand your business!
Clear the road for future success
Once you decide to implement payment automation, the collections process must change. Implement payment policies that will ensure your company gets paid on time every month.
First off, include strict language on payments in all new contracts and encourage existing customers to upload their information into the online portal. Speed adoption by communicating the benefits of an automated platform and offer incentives such as giveaways or discounts if needed.
The key for MSPs is to build a client onboarding plan and follow through. With close attention and commitment to converting all your contracts (and clients), they will eventually fall in line and boost your cash flow. That income stream, in turn, will help fuel your firm’s development plans.
Accounts receivable automation makes dreams come true
With today’s tools, MSPs don’t have to depend on other people’s money to grow their businesses. Leveraging a secure payment processing platform will allow your team to collect its accounts receivables more efficiently and quickly convert invoices to cash.
Give your clients a more comfortable and more professional way to pay their bills. Put accounts receivable automation to work in your MSP business with a payment processing platform like ConnectBooster —and start self-funding your expansion plans.