Your MSP business is doing well; you have enough customers now so that your employees’ workload is comfortably full. Money is coming in; you’re finally turning a healthy profit. That doesn’t mean you can just sit back and relax and turn the management of that money over to someone else – even if you can now afford to do that.
This is the time when you might be tempted to turn all that over to the “pros,” but you should resist the temptation. No matter how much you trust your bookkeeper/accountant, banker, investment advisor, etc., it’s important for you to stay involved in the management of your company’s money and stay aware and alert to what’s going on. In this series of articles, we’ll review some basic money management principles that will help keep your MSP in the black.
First, you need to make sure that the money is there to manage. “Cash flow problems” – that’s a common sign of a business that’s in trouble. Just because you have more customers and more work than ever, that doesn’t always mean the money is coming in. Don’t let the number at the bottom of your balance sheet – your total assets – fool you into thinking all is well if there’s a constant shortage of cash. Remember that it’s cash (or expensive credit) that pays the bills – not inventory, property, or accounts receivable.
In a service business, you provide services in exchange for money, so you don’t generally have inventory. You have investment in equipment, possibly buildings and other capital assets. You have expenses for personnel, operational supplies and services provided by others, such as electricity, Internet connectivity, janitorial, maintenance, and so forth. Your receivables represent the money owed to you by your customers.
Cash flow is about how much real money comes into and goes out of your accounts over a period of time, typically monthly. The ideal situation is to have positive cash flow, which means more money comes in than goes out. If you’re always scrambling – or even having to borrow money – to pay the company’s bills, something is wrong. Either you don’t have enough coming in, or you have too much going out (or both).
Calculating cash flow
Managing your cash flow requires “knowing how it’s flowing.” You do that by periodically doing (or having done) a cash flow analysis. It’s a pretty simple process, as shown by this article on How to do a Cash Flow Analysis.
Correcting negative cash flow
Maybe you need more customers. Maybe you need to raise your rates. Maybe you need to make a greater effort to collect what’s owed to you in a timely fashion. Those are ways to increase the amount of cash coming in. Or maybe you need to reduce your expenditures. That could mean making some hard decisions, such as letting go employees who aren’t essential to the business, reducing salaries, or even moving to a less expensive part of town or to a smaller workspace. Or you might only need to “tighten the belt” and take some less painful steps to reduce the outgo, such as the ones suggested in this article titled 12 Cost Cutting Ideas for Your Small Business to Save Money & Reduce Expenses.
A common problem with growing businesses is lack of time to get everything done that needs to be done. Sometimes we’re all working so hard to make the money that we don’t get around to following up so that work turns into money. As a small business owner, I’ve been guilty of this one myself – forgetting to invoice customers promptly, or letting a stack of checks sit around because I didn’t have time to get to the bank to deposit them.
You want to collect the money as quickly as you can; send out invoices as soon as the services are rendered (or promptly on a monthly basis if that’s the payment arrangement). Give customers an incentive to pay promptly by instituting a late fee. On the other hand, you should pay your on bills on time, but not early.
Putting your cash to work
Once you have the cash flowing properly, you can enjoy the benefits of a positive cash flow. You’ll automatically reduce outgo by avoiding paying the interest that you owe when you have to borrow to pay the bills. You can take advantage of cash discounts to save money on purchases for the business. You’ll have money in reserve in case of an emergency, such as a natural disaster or the sudden loss of a key customer.
How much cash is too much? If you’re too “cash heavy,” you have money sitting there that could perhaps be put to better use elsewhere. You want to keep enough money in your accounts so that your bank won’t charge you service fees, but not a lot more. If you have loans, use the extra cash to pay them off. Or invest the cash in safe investments. It’s true that interest rates are at all-time lows (good for borrowers, bad for investors) but some interest is better than no interest.
Next time, we’ll talk about dealing with banks.