Mastering MSP Cash Flow
by Brian Sherman
One common lesson for first-time business owners is often learned the hard way. If the company doesn’t have secondary funding sources or substantial funds available when starting out, fluctuations in income payments can lead to a cash shortage when the monthly bills come due. Many enthusiastic entrepreneurs fail to account for the numerous (and significant) costs associated with opening a new business, and that rapid depletion of funds can impact their bank account considerably.
Even the best intentioned and well managed companies have been known to struggle with cash flow issues, especially when the organization is undergoing major (or even minor) expansion. It takes a lot of capital to secure more clients, hire additional employees and conduct the training needed when you take on different markets.
The same issues face solution providers who move to a managed services delivery model: especially when they undergo a full-blown transition to a pure MSP. In some cases, major clients may decide not to sign on, which takes away a source of consistent project and support revenue, and causes a significantly negative impact on the organizations coffers. While that example may be the exception, it’s still a concern that has to be addressed by the architect of any managed services business plan. If at any time the company’s income is expected to be too low to pay its expenses, cash reserves or credit options must be available to cover any potential shortages. That’s a common occurrence with new companies, but effective cash flow management can minimize the amount of a deficit or the frequency of its occurrence.
Of course, the best way to manage an organization’s finances is with the help of a certified professional or firm with the skills to develop a useful cash management plan and an associated payment schedule. That expertise is crucial to ensuring the company has sufficient cash on hand at the times it’s needed, and a plan in place to secure capital from external sources when expansion or fund shortages dictate.
In addition, there are several things an MSP can do improve cash flow, minimize borrowing, and ensure the company’s financial footing is secure enough to handle growth and unforeseen expenses. By implementing a professional services automation (PSA) tool and integrating it with their accounting software (or cloud application), IT service providers can accelerate their collections and keep better track of all their billable operations. While MSPs often tout the benefits of leveraging a PSA with their monitoring, email management and backup and data recovery solutions, the quickest ROI comes from its financial automation opportunities.
How can it help? A properly implemented PSA can accelerate an MSP’s collections processes by using reminders and automating the manual processes that support a number of critical employee actions, including:
- Ensuring service tickets are completed immediately after service is completed
- Immediately invoicing all services that fall outside the scope of monthly contract payments
- Automating the monthly billing process to prevent potential delays
Employees still play a critical role in the billing process, starting with entering time and the correct information on service tickets (though an easy to use interface minimizes the mistakes). The accounting and management teams still need to review processes and perform occasional audits to ensure the systems and employee actions are working properly, but the procedures and errors and typically minimized.
PSAs can help MSPs stop ‘floating’ their business, tightening the accounts receivable process to ensure payments can be accelerated. Creating and sending invoices is just the tip of the iceberg. PSAs allow providers to track more billable hours, manage projects, organize customer information, and improve many other aspects of their business.
Of course, a PSA focuses on the billing and ticketing process—it won’t entice clients to pay their bills in a timely manner. Other receivables collections methods should be adopted to keep payments flowing at a steady rate. If cash flow becomes an issue, a discount incentive program may be an effective measure, such as a 5% cut if paid within 15 days. The longer receivables are outstanding, the less likely they are to collect.
That doesn’t mean MSPs have to implement harsh rules to collect promptly from their clients. A follow up statement 10-30 days from the due date on the invoice, or a gentle reminder call (check in to see if everything is ok), are both good options to keep customers timely. When their MSP is financially healthy, disruptions of their critical business systems will be minimal. That’s a message everyone should understand.