Rising prices and financial challenges can significantly impact the bottom line of any company. However, for IT services firms, the effects of the escalating costs of goods and services sold have an almost immediate impact on cash flow and profitability, especially when clients’ payments begin to slow. What starts out as a small blip on financial reports can quickly escalate into a full-blown AR emergency if an MSP does not take proactive steps to reverse negative trends.
Should providers be worried about the current economic situation? What actions could they take today to avoid bad financial scenarios in the future? With an annual inflation rate of between 4.9% and 7.0% over the last three years, according to the May 2023 U.S. Labor Department report, any business that has not increased prices or significantly decreased expenses during that period is already falling behind.
Not keeping pace with rising costs has a negative impact on cash flow and profitability and makes it harder for MSPs to hire new talent and expand and improve operations. Unfortunately, that is a situation many SMBs, including channel partners, find themselves in more often than their larger counterparts. Owners of smaller businesses tend to lag behind on price increases. Whether worrying about losing clients to competitors or expecting costs to drop in the not-too-distant future, some compromise profitability in the short term by avoiding those unpleasant discussions.
Unfortunately, banking on hope is never a good plan. With high inflation driving costs higher, and concerns in many industries causing businesses to pull back on spending in 2023, MSPs must keep close tabs on recurring revenue streams and, more importantly, cash flow. Collections take on ever greater importance as providers’ monthly payments for payroll, rent, taxes, tools and other “goods sold” rise. Without a corresponding increase in bank deposits, MSPs can see fund balances drop quickly, which is one of the many issues ConnectBooster helps providers address.
Assess AR and strengthen collections processes
Many business owners get so caught up in day-to-day operations that they miss the early warning signs of a potential problem. Even when things are running smoothly, it’s easy to overlook small increases in overdue payments or to dismiss concerning conversations with clients about contracts or sales numbers. Some alarms are quieter than others.
Today, MSPs need to know as much, if not more, about their clients’ operations as the owners and management teams of those companies. From addressing workflow problems and automating critical processes to tackling new or shifting business goals with new technologies, IT services firms are now mission-critical partners. Providers with strong client communications should have some level of insight into potential cash flow concerns, or at least the ability to look for normal warning signs.
- Watch invoice payment dates. Are clients approving invoices and reimbursements later than usual? This sign is one of the most obvious indications of financial issues. Tracking payment dates and noting deviations is a good standard best practice for accounts receivable teams and MSP owners/managers. ConnectBooster simplifies that process by keeping everyone in the loop on where clients are in the collections process.
- Be on the lookout for downsizing/furloughs. Have any clients recently reduced the size of their workforce, even temporarily? While never a good sign, these labor cutbacks can work in an MSP’s favor, signaling a need for greater IT investments such as managed services, automation and new efficiency solutions. However, these companies may also be struggling financially and slow down payments to contractors and other suppliers.
- Periodically review local tax notices. With more local governments posting open records online, it’s easier than ever to see which companies or individuals are in arrears with payments. While any business can forget a payment or overlook notices, a good rule of thumb for MSPs is to watch for clients’ names tied to concerning activities.
- Listen. MSPs’ team members often interact with a number of people in each client organization. Have employees expressed concern about the company’s viability or their competitive environment? Are they asking about potential job prospects (cutback concerns)? While some of these questions might be more personal than corporate, if they become a pattern, a deeper investigation may be worthwhile.
The hard part for MSPs is separating rumors from legitimate financial concerns. Inflation and economic uncertainty are just two of the many factors that can negatively affect business prospects and cash flow.
Take a proactive pricing approach
With the cost of products and services rising at a rapid pace, with little sign of a significant decline, IT services providers must keep pace to protect their profitability. A long-established channel best practice is to make annual incremental price increases to prevent hitting clients harder at a later point. No one ever likes to pay more for an existing service.
However, when MSPs can show an increasing value of the offerings they deliver – like cybersecurity and operations-optimizing solutions – most clients will understand related rate increases. Presentation is key. Those who continually educate clients on the rising threat vectors and the growing costs of protecting their systems and data are better able to justify cost increases. Selling decision-makers on the many benefits of automation, including the ability to reduce payroll and boost customer satisfaction and retention, can also help minimize anxiety (on both sides) during price increase discussions.
Confidence in an MSP’s support capabilities and portfolio of offerings gives them an edge. Few competitors can displace an effective IT services provider unless they can significantly undercut pricing or deliver unique programs or services. Based on reports from the greater MSP community, the rare clients that do defect in those cases typically return. In far too many cases, providers come to discover their profits improve after jettisoning customers that are continually late with payments or demand too much time and resources every month. Reducing the workload allows MSPs to bring on new and more financially lucrative business.
Implement a resilient payment policy
Although a strong cash flow may not eliminate the headaches of inflation and future economic uncertainty, it does allow providers to get paid for the services they deliver. That assurance helps MSPs pay the bills, invest in business expansion (i.e., hiring, developing new practices, enlarging portfolios), and build larger “rainy day” funds to get through harder times. An effective payment policy is an essential part of that plan.
Creating, communicating and enforcing collections guidelines provides safeguards for MSPs. Putting commonly accepted controls in place with penalties for noncompliance will ensure that more clients pay within the prescribed timelines of their managed services agreements.
Of course, as with most critical processes, automation makes it easier for providers to manage and track the collections part of the operation. Innovative solutions like ConnectBooster allow MSPs to get paid quickly and securely, minimizing the uncertainties around the current economic situation. Ensuring on-time payments while trimming collections costs is one of the best ways to hedge inflation and overcome future financial struggles.
ConnectBooster empowers MSPs with those capabilities. Learn how our secure payment automation solution can help your business get paid faster and minimize the impact of inflation. Request a demo today!
