How To Generate More Profit For Your IT Business
Cash flow is everything when it comes to growing your Managed Services company. It takes money to make money, and when you don’t have enough free cash coming in, it can feel like you are in quicksand. When our company decided to focus heavily on profit and generating as much cash as possible, that was when things really started to click. Here are a few things we did that helped us make a great amount of improvements in a short amount of time.
Audit Expenses / Licensing
One of the first things to do when trying to increase your available cash is to do a full audit of your expenses. This means looking at every payment you make each month, what it is for, and figure out whether or not it is truly necessary. This does take manual time and effort. Cancelling a few $10/month subscription might seem obsolete, but having an intimate knowledge of your expenses helps you make decisions long term.
You might also find that you are carrying additional licenses for software or services that you don’t actually need. It is highly recommend that you get your license counts down to their lowest possible quantity, assuming the price breaks make financial sense. You may also find that you are paying for some customer licenses that aren’t being billed or billed improperly. Getting these in line and and spot checking them often is time well spent.
Renegotiate Vendor Contracts
Part of being an MSP is carrying contracts with numerous technology vendors. Not only do you have contracts for tools you use internally (RMM, PSA, etc) but you hold contracts for reseller services as well. I recommend adding the renewal dates for all of your services to your calendar so that you can get alerted a few weeks before each on of your services is renewable. From there, simply reach out to your Account Manager before the renewal and tell them you need a better rate before you can sign the contract.
You will be surprised at how many vendors are willing to work with you on price. Sometimes you may need to switch to quarterly or annual billing, or make slight changes to your account to whatever type of packages they offer. Nevertheless, reducing your expenses is what matters, so it will never hurt just to ask.
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Shop Your Vendor Contracts
If vendors are not willing to negotiate on price, you should certainly shop their services. There is enough competition in the channel at this point that someone is always wanting to give you a better deal for your business. It’s up to you as to whether or not you feel the product best aligns with your needs.
It is also possible to keep the same products/services, but buy them indirectly at a lower price point. When our Email Security vendor attempted to raise our costs by over 50% we found that we could cancel our contract with them directly and buy it again through Ingram Micro at a lower rate than we were paying initially. They even transferred our account, so we did not have to re-deploy any software or licenses.
Renew Legacy Customer Contracts
When MSPs grow they sometimes let their oldest customers hang on to their legacy contracts for far too long. This may be done out of gratitude for their long-standing loyalty, or maybe for respect of personal relationships. Either way, it is very challenging to grow an IT business without shedding your old skin from time to time.
Contracts need to be renewed often to guarantee margins at your current operating costs. If you find it difficult to do this personally, then hire someone to do it for you. You may get looped in once the customer gets wind that their good deal has finally run out. Ultimately telling the customer that you have relinquished control of contract negotiation and that you won’t micro-manage shows maturity and the customer should understand.
Eliminate Bad Customers
Sometimes customers don’t come around. Some over-utilize your services. And some are just bad to do business with. Every MSP has a handful of customers that they which they never had. The longer you let these customers stick around the harder it is to get rid of them. Don’t let these bad contracts eat up your profit month after month without taking action.
What we found works best in this situation is to make an introduction with another provider that you know provides great service. Be transparent to both parties about why you are discontinuing service and let them decide if they want to work together. After you do this once and see the impact it has, you won’t hesitate to do so in the future when a customer is dragging down your business.
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Outsource Level 1 Tasks
Making payroll is not always as easy as it should be, especially in Managed Services where margins are slim. It is most likely that a large portion of your company payroll is your Level 1 Help Desk (employee count, not dollars). Next time you need to hire in this department, consider outsourcing part of your intake and level 1 ticket resolution instead.
There can be pitfalls when outsourcing your service desk tasks, but as long as you have the proper management in place this can be a great way to lighten your payroll. If you choose to pay per ticket, it is also a far more scalable model for growth. Your costs increase in ticket by ticket increments, whereas scaling internal personnel means taking on entire salary. Overall, we found that outsourcing allowed us to keep our payroll in a very manageable state and our customers ultimately adjusted to the change.
Put Controls on Purchasing
The process of quoting, customer approvals, purchasing and delivery of goods needs to be well documented and managed by someone close to the financial side of the business. Having multiple steps of approval can slow down the selling process, but giving your team free reign to purchase product and relying on them to bill properly for it can be a costly mistake.
The most important part of this process is identifying a standard for what goods to source and constantly updating pricing in your system to reflect the current cost. If your system reflects the wrong price and items are sold, you may end up purchasing at a loss or little margin. This means that you have to tie up your cash purchasing items for your customers but don’t make any profit for the risk your taking.
Positive cash flow is only possible if you collect more money that you spend. If you are of the many MSPs that have customers that are slow to pay, than you need to consider an automated collection system. The easier you make it for your customers to pay, the better your cash flow will be.
There are a few systems, such as Connect Booster, that will connect to your PSA and your Accounting software to give you a payment portal. With this portal can view and pay invoices as well as set up automatic payments. They also have the ability to schedule follow up emails for customers that are late to pay. When our business moved to this type of system, we saw a significant decrease in the amount of time between customer payments.
Pay Off Debt
Debt, such as credit lines, business loans, or tax debt, is a major hindrance of growth. Depending on the amount of interest you pay and how well you manage the debt, it can also have a significant impact on the cash flow of your business.
It is ironic since most debt vehicles are actually designed to help cash flow and float your business at times when cash is tight. When this debt goes unpaid as planned, penalties and interest can compound, leaving you with a heavy financing charge that impacts your bottom line. There are ways to transfer your debt to save on interest or refinance it through a third party. If you find yourself carrying debt more than a few months at a time, consider some the aforementioned options.