In today’s competitive landscape, MSPs like you face various challenging obstacles. Each of these challenges is an additional concern with impacts on profitability that should not be underestimated; not to mention continuously keeping an eye on cash flow: 69% of entrepreneurs fear losing their business due to a lack of available liquidity. Needless to hide, cash flow and profitability are essential for several reasons. While the former refers to the money flowing in and out of your business, profits are left over after deducting all expenses from your total revenue. Having a healthy cash flow is essential because:
- it is the fuel that powers your business every day;
- allows you to manage business fluctuations;
- creates opportunities for favorable credit terms;
- allows you to take advantage of acquisitions.
Most companies are united by one important goal: to maximize profits, preferably by offering best-in-class products. However, as important as profits are to build a healthy business, profitable companies can run out of money to pay the bills. This happens because when an MSP invoices its customers, the amount owed counts as revenue, but until the customer pays the invoice, there is no cash flow to the MSP. You know that MSPs have bills for equipment and software suppliers, employees and contractors, and more.
Everyone needs to be paid on time because if they don’t pay, the MSP will no longer be able to order hardware and software for customers, and no one will work for free, no matter how much they love their job. We can easily understand that an MSP with significant revenues could run out of cash if its customers pay their bills slowly. Of course, the least profitable MSPs are more likely to run out of money. After all, when your expenses outweigh your income, having trouble paying your bills isn’t such a remote possibility. Either way, both scenarios are sustainable as long as MSP becomes profitable enough but as simple as it sounds, increasing profits comes with some challenges.
Five Hurdles That Could Threaten Your Profitability
Below Cost
What do you see if you look at all the prices that come from offering a service? Does your pricing model provide you with enough gross margin to achieve profitability? Or are you knee-deep in a price war that consumes your entire market, leading you to offer deep discounts to win or keep your customers? To optimize pricing, the best MSPs carefully evaluate their actual costs and desired profit margins. Because they prioritize the value of their services and how to explain it to customers, they rarely offer discounts, especially when dealing with new or unique customers.
Delays And Non-Payments By The Customer
Delays affect every step of a process, including payment. If a supplier has to be paid, they don’t care if the delays are due to a customer not paying. As this will affect your cash flow, you may consider implementing partial upfront payments, billing based on certain milestones or late fees, and changing your service level agreements accordingly. A customer who still needs to pay is yet another matter. Depending on the situation, the consequences for your business can be substantial, which is why doing it right is critical. Remember, a customer who doesn’t pay is not a customer.
Unforeseen Expenses
Having an emergency fund is a proven financial strategy. For MSPs, this tactic is beneficial because it ensures stability in the event of unexpected expenses. If you can’t predict these expenses, you can always expect that there will be!
Macroeconomic Events
The pandemic has transformed businesses in unprecedented ways. For example, if you’ve lost a significant client or specialized in a particularly hard-hit industry, you may need to reinvent your approach to retention and selling. It is often the case that we navigate economic uncertainty today more than ever, so you need to maintain an edge and protect your profits from any eventuality.
Inflation
In this historical moment, the rate of inflation has skyrocketed. Thanks to the growing demand for tech labor, salaries have increased—a problem for all MSPs since wages typically don’t rise with inflation. A more expensive workforce could lead to issues with cash flow and profit margins. It becomes crucial to understand how many employees are needed to serve your customers effectively and what level they need to be. For many, these obstacles become real setbacks. The good news is that there are some things you can do to increase your profits.
Three Things To Do To Increase Profitability In A Fast-Paced Climate
Benchmarking
You can only get where you want if you know where you’ve been and where you are today. Benchmarking gives you insight into how your business is doing. When you start benchmarking your financial performance quarterly against top MSPs, you’ll have an accurate picture of how you’re doing against your peers and where you can improve to grow your profitability and cash reserves.
Best Practices
Do you want to grow your company? Then you need to adopt some best practices used by top performers. You’ll get even closer to the results you wish by emulating the best. These best practices vary by business model and operational maturity. For example, some MSPs may find it necessary to streamline the onboarding process, while others may focus on budgeting. In this article, we talk about how to grow the profit of your MSP business.
Technology
Innovation isn’t just an advantage. It’s an opportunity. It’s a fact now: automation is exploding, with a projected growth rate of 100% over the next three years. MSPs are banking heavily on PSA and RMM solutions to boost operations and growth. If you want to know the trends to follow to improve your business, this article is for you. For businesses worldwide, profitability and a healthy cash flow are critical to success. In today’s unpredictable climate, wanting the best is more than a desire – it’s a necessity.
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