MSP Finance: Mastering Cash Flow

BY IT GLUE | April 05, 2021

If you liked doing financial management for small businesses, you would have made that your profession, not managed services. You run an MSP because you’re great at working with technology and add value to the world by helping others with their technological challenges. Unfortunately, this leaves things like finance on the back burner.

Obviously, you hire people to do your accounting, but it always helps to know a bit of financial matters yourself, if only to have intelligent conversations with the financial folks. For the month of April, we’re running a series of blog posts through which we’ll give you a rundown on some fundamental financial issues. In a perfect world, this would be a lot of Captain Obvious stuff. But if it were obvious, businesses wouldn’t struggle so much with financial matters.

We’re going to start with the most important one — MSP cash flow. If the cash isn’t flowing, that’s when solvency issues start to rear their heads, which also happens to be the cause of a significant percentage of small business failures. That’s why attention to cash flow is, to say the least, mission-critical. Without cash, you can’t pay your staff or your bills, so watch your cash at all times.

Forecast Cash Flow

If you have no way of knowing how your cash is flowing, you’re screwed. Cash flow forecasts give you a picture of what’s coming in and when. Understanding your inflows makes it easier to time your outflows. This is why the break-fix business evolved into managed services; with the latter, it’s a lot easier to know what your future inflows look like, which puts you in a position to plan better. Make sure your MSP cash flow forecasts are up to date. That also means that if your projections are off, you need to find out why. Have you overestimated how much revenue you’ll get from a service type or a client?

Pro Tip: Account for bad debts. Don’t assume every customer will pay you on time, every time. Use past data to estimate how much to set aside for bad debts and account for that in advance.

Managing Cash Flow

Let’s say you’ve identified that your flow could be flowing a little better. Maybe your biggest customer just went under and your forecast flipped from black to red. How do you deal with this?

Tighten Receivables

Extending credit to clients is pretty standard in a lot of lines of work. But you’re not a bank, so don’t get carried away with letting receivables slide. If you’re not getting paid upfront, keep an eye and make sure that receivables aren’t stretching out too far. You don’t have to be a jerk about it since the pandemic made it clear that sometimes your customers get smacked with unforeseen issues. But be wary of customers who should be paying but aren’t. That could indicate that they’re in trouble and you definitely want to tighten up on those clients, lest they default on you.

Stretch Payables

This is the reverse, and yes, it signals to your vendors that you’re having some issues of your own. This tactic makes the most sense when it’s a one-off, unusual scenario. For example, maybe you had to settle a lawsuit that left you a bit strapped this month, but your operating budget hasn’t actually changed, so you’ll be back to normal next month.

Increase Sales Without Increasing Your Costs

I mean, who wouldn’t do this? However, the point is to look for other ways to increase revenue that usually tend to be overlooked. Ensure your billing is aligned with service delivery; often, items get out of whack, especially if your clients are growing. Sell as many of your services to your clients as possible. Maybe they’ve changed their tune about cyber insurance or disaster recovery since the last time you talked. Leave no stone unturned.

Increase Efficiency

Shameless IT Glue plug? Sure, but there are other ways to increase efficiency as well. We just know that our partners get efficiency gains from standardizing their processes and cutting out space between the knowledge their techs need and the tools that hold that knowledge. Increasing efficiency can help you grow your business without increasing expenses.

Know Your Sources of Financing

Growth can be a massive cash flow sink, especially if you invest in growth first and don’t see a return very quickly. While this is a bigger issue in industries that are more capital intensive than managed services, it still pays to be aware of your options for aligning the costs of expansion with the benefits of it. This is one area where financial accounting and cash flow accounting can yield completely different perspectives on your finances – spending big on items you amortize doesn’t brutalize your income statement. However, if it puts you in a bad spot in terms of cash flow, you can still get into trouble. Align your outflows and inflows.

The main thing to remember about cash flow management is this: If you think about MSP cash flow proactively, you should be fine. If you think about cash flow retroactively, after you notice you’ve got a problem, you have much less flexibility to fix things.

Want to learn more about MSP finance? Sign-up for our upcoming finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.

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