If you’ve been a managed service provider (MSP) for a while, you’ve likely encountered demanding customers and overdue accounts. While there’s no foolproof way to completely resolve this challenge, improving your billing practices can help reduce the issue. Continue reading this Tip Tuesday for frequently asked questions and helpful tips to consider.
I’m having trouble managing my cash flow. Any advice?
If you’re having cash flow issues, you are not alone. The average MSP makes an 8 percent to 12 percent profit, which leaves little room for growth. To begin, the best thing to do is to evaluate how much money you have moving in and out of your business. This way, you can determine the root problem. Are you charging too little? Are clients consistently late with payments? Even if you feel your pricing strategy aligns with your expertise and industry standards, review it. You likely have legacy clients paying less than your services are worth. While you might feel the need to show gratitude, you don’t want to be taken advantage of.
Unless you periodically revisit your contracts, inflation will chip away at your profits. Think back to 2022, when it peaked at 9.1 percent, and the annual inflation rate ended at its highest since the 1980s. Raising your prices to compensate for lost value is an excellent way to expedite things.
Another easy way to increase your positive cash flow is to pursue recourse for overdue accounts. Unpaid invoices create bottlenecks. While money is flowing out, it only trickles back in. If an invoice remains delinquent for 30 days, you can move to collect. However, you should adjust your billing practices to prevent these kinds of issues altogether.
Which billing practices will be the most effective?
The best billing practices are proactive and transparent. How clear are your payment terms? When was the last time you updated them? They might be due for an overhaul. A good rule of thumb is to use net 15 or 30 terms over net 60 or 90. Shorter billing cycles can increase the percentage of invoices paid on time.
To increase your MSP’s on-time payment ratio further, consider offering small discounts for early payments. You should also request deposits for large projects to promote financial stability. This way, you don’t have to purchase equipment or take on weeks of work on your credit. Billing in advance and putting clients on direct debit ensures you get paid on time, every time.
While you could technically use financing or credit lines to cover temporary cash flow gaps, preserving your MSP’s liquidity is better. Avoiding unnecessary debt is crucial, especially considering that improving your strategies only takes a few strategic changes. Ensure you regularly adjust your strategy based on market conditions and your service value.
How do you suggest I optimize those billing practices?
Periodically review your cash flow statement to identify your pain points. Just because you have money in the bank doesn’t mean your MSP is making a profit. Conversely, just because your bank account is nearly empty doesn’t mean you are taking losses. You need this report to see where the money related to operations, investments, and loans flows.
Ideally, you should forecast your cash flow at least a few months in advance to effectively anticipate challenges and mitigate risks. For reference, around 63 percent of small-business owners plan one year in advance at most. A recurring revenue model is better than a fixed or per-device pricing strategy for this approach.
Do you have any tips on managing accounts receivable?
Managing accounts receivable can be challenging, even for those who have been running MSPs for decades. Sometimes, major clients are difficult, which can complicate things. While you don’t want to lose their business, the alternative is an administrative headache.
Monitor your customers’ adherence to your terms to identify repeat offenders. Unless pursuing payment is more trouble than it’s worth, you should always follow up on overdue accounts. Also, you should offer several payment options — credit, debit, and installments — to make it easier for them to settle invoices promptly.
What if you don’t have enough staff members to assign someone to past-due accounts? Use reminders. While direct debit exists, some customers are stuck in their ways. Simply reminding them of upcoming bills is a cheap, easy way to increase your MSP’s on-time payment ratio. Automated billing software can expedite collection and free up resources.
What if things don’t pick up? How long should I give it?
You hold up your end of the deal, but your customer does not — it isn’t uncommon. That alone gives you enough reason to cut them off. However, recouping your losses might be worth the effort if liquidity is an issue for you.
If your automated billing software is not enough to incentivize a timely response, consider incorporating fees into your payment terms. Interest fees are typically capped at 10 percent, while late fees often range from $25 to $50. They can compound or multiply, disincentivizing delinquency.
Of course, you will need to rework your agreement before you can assess any fees. Here’s some advice — don’t refer to them as penalties. If you do, it may be seen as a punishment, the legality of which is tricky. Instead, frame them as charges needed to cover collection costs.
Even with automation technologies, refined payment terms, and improved invoicing practices, some clients may withhold compensation, causing cash flow bottlenecks. At what point do you cut off service until you get paid? There is no one-size-fits-all answer. However, following the Pareto Principle is a good rule of thumb.
According to the Pareto Principle, 80 percent of the consequences come from 20 percent of the causes. In business, this means approximately 80 percent of your MSP’s revenue comes from 20 percent of your customers. You likely can afford to cut some off. Don’t think of it as losing a client. Instead, think of it as freeing up your time, reducing resource waste, and increasing your revenue.
Your MSP will benefit from improved billing practices
Overhauling your invoicing practices enables consistency, helping you pay employees on time and mitigating financial crises. Best of all, it takes tremendous stress off your shoulders, helping you focus on growth.
Read the Tip Tuesdays series for more insights on how to better your MSP business.
Photo: Natee K Jindakum / Shutterstock
