There is an absolute truth that will dictate the success or failure of your business venture. It applies whether you already own a business and are thinking of making a switch to the MSP business model or you are currently working one job but feel that you are ready to take the plunge:
Cashflow is king.
Repeat it daily just like you did “Valar Morghulis” (pre-season 8, of course).
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The MSP philosophy is to transform as many capital expenditure needs (one-time large purchases with varying life-cycles, CAPEX) into operational expenses (recurring lower predictable costs, OPEX).
To be successful with this model, you must be able to deal with an unprecedented number of recurring invoices, usually monthly, as well as running after your payments. Simply put, your survival will depend on your ability to make your payments on time and to make sure your clients pay you on time.
To pushback against the pressure from the invoice side, you’ll want to equip yourself with as many tools as possible. First, before you take on any clients, even before you even leave your current job, you’ll want to meet with your financial institution. Go and max out all the potential credit limits your credit score and current income level allow. Why would you want to do this when you don’t need it? Because it’s the best time to be approved, and at interest rates that make sense. If you have seed money for your business, consider using a portion of it as collateral on a credit line to get an even lower interest rate instead of keeping It as liquidity for a rainy day.
Talk to all your providers about payment method and terms. If they accept credit cards, this can benefit you in two ways; the first being the added 21-ish days grace period added to your billing cycle, and the second is the benefits/rewards/points/cashback that you get from your card with that kind of volume. It adds up fast. For terms, it’s also good for you to check if you can extend your payment due date by as much as twice your normal cycle. Keep checking with them periodically as you keep growing, since more volume and more history usually means more days before having to pay.
You’ll want to pre-bill as much as possible, avoid accepting credits cards, and if a potential client has recurring fees that would put your business at risk if they were late on a payment it’s also a good idea to require a deposit to reduce exposure.
When it comes to your clients, it’s the complete opposite. You’ll want to pre-bill as much as possible, avoid accepting credits cards, and if a potential client has recurring fees that would put your business at risk if they were late on a payment it’s also a good idea to require a deposit to reduce exposure.
How can you tell if a client is a potential risk to your business?
Remember how in the beginning, I said the first step was to go see your financial institution and obtain as much open credit as possible? Of course, you do, you’re an active reader!
Going through this financial exercise gives you a clear picture of what’s called your gross debt ratio. This ratio, usually expressed as a percentage, measures what’s coming in vs. what’s going out. To be comfortable, you’ll want that number to stay below 40%. Banks will tend to approve credit limits based on that number, and you should do the same.
Let’s use an oversimplified example. Johnny has an MSP business. His current gross debt ratio is 32% because he brings in $10,000 of revenue each month and has $3,200 of mandatory expenses. A potential new client would bring in a $1,000 of new monthly revenue, and $800 of new monthly expenses. The ratio would now be 4000/11000 or about 36%. Since this number is below 40% Johnny MSP feels comfortable taking on this new client. Johnny MSP is wise and prebills this client for the first 6 months of their relationship, because even though he is below 40%, the 4% bump brings him very close and the loss of other clients could put him at risk. Be like Johnny MSP.
Since you’ll usually have very little control over the business side aspects of your clients, you will very rarely get a chance to adequately prepare for seemingly external events. This is by far the most common killer of MSPs.
Diligently keeping an eye on your debt ratio is the best way to make sure that as you are scaling your revenue up, you are not putting your business at risk.
The financial stress from a large client going out of business or being bought out by a hostile 3rd party is something that must be anticipated and adequately planned for from day 1. Diligently keeping an eye on your debt ratio is the best way to make sure that as you are scaling your revenue up, you are not putting your business at risk.
Cashflow is king.
Cheers,
