For a Managed Service Provider, management of cash flow is essential in order to run a successful business. To effectively manage cash flow, a MSP needs to be able to understand the difference between cash flow and profitability. If the business has an accountant, an investment advisor, etc., think twice before entirely handing over the finances to them. It’s important to remain involved in the finance management in order to have an understanding on how well the company is operating.
A MSP gains profit when it earns more money than it spends. Regardless of how much profit a MSP builds, positive cash flow – having more money moving in than out – is important to the growth of the business. Without great cash flow, profit is almost irrelevant. True profit can’t always be determined by the number of customers and work load that the MSP has. Just because a MSP is extremely busy doesn’t mean that they are pulling in enough profit.
When a MSP maintains an even cash flow, regardless of what the quarterly margin of profit is, they are still able to pay bills and expenses on time without issue. A big warning sign is when a MSP is having trouble meeting costs. When this happens, a MSP is struggling with the issue of too much being expensed and not enough income of profit to cover it.
It’s good to understand how cash flow works as well as how to manage money as MSP’s provide services so it makes tracking money a little more difficult as an MSP isn’t necessarily able to track inventory. Expenses Money for an MSP goes towards equipment, employees, and for services within their business like electricity and internet.
MSP’s, especially small MSP’s, need to realize the importance of collecting customer payments on time. In what ways can a MSP make sure that their business has a positive cash flow? Implement two simple strategies that will ensure the business gets paid on time. When customers pay bills on time, the business will be guaranteed to always have a set amount of cash.
Complete a cash flow analysis to figure out where the business stands in terms of finances. If the outcome isn’t as good as expected, determine the cause of the negative cash flow. Assess the number of customers the business has. If the number isn’t as high as it could be, look into how you can build your customer base. On the other hand, the business might be at a point where it can’t take on more customers, but it still isn’t raking in the profit that it needs. In this situation, the business needs to look at the rates of the services it is billing for. Adjusting costs could make a big difference in cash flow.
Because MSP’s provide the same services at the same price for extended periods of time, they have the luxury of implementing automatic billing for customers. For customers who are set to receive automatic payment notifications, invoices should only include billing for routine work. Save all other invoices that charge for new or additional services and bill those invoices separately to avoid any late payment issues if due to incorrect billing or if a customer disputes the rates. MSP’s should keep in mind that not all customers will be a good fit for automatic billing and should be billed accordingly. This means you might have to provide a little flexibility when it comes to payment due dates so install a late fee, which will provide incentive for customers to pay on time.
Another way to manage cash flow is by having customers pay up front for products and services. This means the business won’t have to worry about late payments. The more the business has to spend time getting customer payments that are correct and on time, the less time you have to focus on providing them with great, uninterrupted service. While some customers might not prefer this type of bill payment, others that have been customers for years and are familiar with the business and services know that upfront payments means no risk of interrupted services.
The benefits of a positive cash flow are great for a MSP. The business will automatically save money as it won’t be stuck paying interest on borrowed money for bills. The business will also qualify for cash discounts in regards to any purchases for the business. A positive cash flow also means extra money for a MSP to put into an emergency finance account that will cover unexpected expenses if something breaks, if they lose a customer, or if they don’t have a good quarter. On the other hand, understanding positive cash flow will also help a MSP recognize if they have extra money that could be better dispersed by paying off loans or investing, which will help boost success even more.
Alex Green wrote this article on behalf of GMSLiveExpert.com.
