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Wednesday, March 5, 2014/Categories: Small Business
To successfully run a business, any business-cash flow management is key. In fact all other skills and strategies used to grow your business are of little importance if you are unable to effectively manage your cash flow. Managed service providers are not exempt from this rule. In fact MSP's have a certain advantage in that the very business model used in this industry makes it possible to manage cash flow somewhat easier than other businesses that do not have the same source of recurring revenue. Nevertheless, it is important for all businesses, managed service providers included to understand the difference between cash flow and profitability in order for the business to be successful long term.
Cash Flow Vs Profitability
The concept is really very simple. In order for a business to see a profit, they must earn more money than they spent. Without this a business is working at a loss. On the other hand, turning a profit is not enough to keep the business moving forward without positive cash flow. Cash flow is the actual movement of money in and out of your business and even more specifically when money moves in and out of your business. After all, showing a profit at the end of a quarter or year may not be enough to keep your business going if you are unable to pay your bills and other expenses during those periods when there is no positive cash flow.
How to manage cash flow as a MSP
As a managed service provider you have several options available to you in order to ensure your cash is flowing in a positive direction. Consider the following two strategies to guarantee payment on a timely basis.
Make it automatic- There are many businesses that would not be able to use this option simply due to the nature of their business. MSP's on the other hand generally provide the same services for the same price each month. Therefore MSP's have the option to require automatic billing for a specific amount on a specific day. Review your contract carefully and only include routine recurring contract work in the automatic payment. Projected work or other invoices that would be better off invoiced separately should be excluded. When automatic payments are part of your contract with clients, many will agree without question yet a percentage may balk due to administrative restrictions or simply because they do not believe in automatic payments. For that percentage of clients, flexibility may be needed, however it should be made clear that timely payment is required and expected.
Payment upfront- Yes, some clients are reluctant to consider the thought and many businesses won't even try to get payment from clients before work is performed. Again, in this instance MSP's have a certain advantage due to the business model that allows for this type of invoicing. By collecting payment in advance you avoid spending valuable time and energy chasing after cash owed by clients who have a tendency to "forget" when payment is due. Not all clients will embrace this type of payment requirement, yet most who understand the importance of uninterrupted service will also understand the need for payment in advance.
By collecting payment in advance or requiring automated payments, you guarantee to some degree how much cash you will have available at specific times. When you eliminate the need to chase after late payments which have a negative impact on your cash flow, you can focus more energy and time on providing the services for which your clients are paying.
Content by Managed Services Provider University