One way to frame accounts receivable (A/R) is that they are money you have earned but not yet received. This is an idea that has gone without question since the idea of credit was first conceived. Yet, what it really means is that you are financing your customers. You’re not a bank, so why are you providing financing for perfectly viable businesses?
The reality is that financing isn’t free — it is a cost and your business is bearing that cost. It’s time to bring about the end of receivables.
Financial decision making is about effectively pricing risk. If you’re going to take on default risk by extending credit to your customers, there had better be a payoff to justify that. For MSPs, there usually isn’t.
The benefits of eliminating receivables, however, are many.
Reduce your costs
- A/R is a cost. Eliminate it and lower your cost of goods sold.
Eliminates risk of default
- Extending credit creates default risk — and you probably don’t know their finances, so you don’t even know how much risk you’re taking. Why take it at all?
Pass savings along to all customers
- If your costs are lower, you can use increased profits to lower prices and be more competitive.
Shorter cash conversion cycle
- Receive income before you’ve even provided the service – use the payment to cover the cost of service
Improve free cash flow
- Cover both your costs and your profits up front.
Now let’s look at the costs. The reason why companies offer credit to their clients is basically as a discount. The client saves money by delaying payment, and the client likes that. But is this really a deal-breaker for the client? Top MSPs are finding that it isn’t.
Clients value things like SLA performance, overall pricing, and a strong relationship. A/R is pretty far down the list of what is important for clients. Plus, if not doing A/R allows you to offer a lower price, you end up just as competitive, but without the added risks and costs associated with holding receivables on the books.
The other thing to consider is that receivables are used in other businesses to allow clients to better align their costs with their revenues. This makes sense when the cost is a physical good that will be resold. However, that logic simply doesn’t hold when selling an ongoing service with monthly fees.
There are tools like ConnectBooster targeting the MSP industry that can help manage finances and reduce your receivables. ConnectBooster is integrated with ConnectWise, Autotask and QuickBooks.
So get rid of receivables. The ROI simply isn’t there, and neither is the business case. Tighten your cash conversion cycle, reduce your costs and lower your risk. It just makes good financial sense.
IT Glue is the leading IT documentation platform. Our system integrates with your PSA and RMM to help you organize client information, increase efficiency and reduce costs at your MSP.