Preparing for Crisis and Beyond: Getting Finances in Order for the Long Term

As the world continues to grapple with the economic slowdown, many businesses—MSPs included—are struggling to rightly set their finances for stability now and growth later. While business leaders across the MSP landscape are busy addressing “high priority” customer retention and service delivery needs, there are still tough decisions to be made, starting with a few operational changes for healthy cash flow. Many MSPs found themselves unprepared for the economic stress of a global pandemic, but now is as good a time as any to take steps to be better situated for future challenges.

Create your short-term action plan

At IT By Design, we spent the first few days of the pandemic shutdown building our refocus plan, looking at the likely costs we would incur through potentially reduced revenue. To help us forecast (or re-forecast in this case), we built different models for different scenarios in terms of time and financial impact. It was still too early to accurately say where we would fall, or if we’d take a revenue hit at all. But once we had a few weeks’ data, we were able to make informed decisions.

It is impossible to create a resilient business without understanding the range of possible futures your businesses might face. So, from a pure finance perspective, you must consider the impact of the ongoing crisis on your business depending on different scenarios. I suggest you have operational models drawn assuming a 30% reduction in expected revenue, 50% reduction, and even a 70% reduction during a crisis. This will help you identify the necessary costs to cut in the next step. Having an idea what each scenario looks like for your MSP in advance will help you move more quickly when and if a crisis hits. While you may have to tweak general plans for each situation, you will be more agile if you have your homework done.

Know your numbers 

Before you make an informed decision, know where you stand. Conduct a thorough review of your cash flow, budget, expenses, and other resources. Take a look at the budget and make any adjustments that can help you improve cash flow. Make a list of every ongoing expense and determine which can be eliminated or reduced. This is the perfect time to cancel those often-forgotten recurring memberships or other costs. I highly recommend reviewing those outputs annually; it is so easy to overlook them—and they add up quickly even if they are minor cost.

Also, make the most of all informational and actionable metrics. Knowing how much cash reserve your MSP has (an informational metric) doesn’t guide you to change your operations, but it might help you define actionable. An actionable metric such as how many services calls on password resets you have per agreement can help you revisit your pricing.

Make some tough decisions 

No MSP wants to cut back on operations, lay off employees, or pull the plug on a new project, but sometimes making these changes can make or break your business. So, spend some time re-evaluating your business plan as a whole. Take a hard look at which of your products and services are producing the most returns, and which may be not as productive. Can you discontinue “below average” engineers and allocate more time and resources toward the winners? To manage the biggest business expense better, start reviewing utilization monthly, rather than every quarter, and take measures to increase your employees’ accountability.

Allocate the budget to only things that help increase your business profitability. This might mean postponing any plans for expansion or grand partner meet and greet, or reviewing purchase requests from each department or business unit more closely. Buckle down and remove nonessential costs. Monitoring your cash flow regularly will enable you to know what is hampering your cash flow and which expenses you must cut. We, at IT By Design, have utilized such cost cuts for the greater good such as investing in our people’s wellbeing. The more recultivated and motivated they feel after those “metal breaks” and “yoga” initiatives, the more sustainable we get from the employee attrition perspective.

Let profitability be the core of every business decision 

I have spoken to many experts in the channel and they all agree that every single MSP has a data issue. The adage “garbage in, garbage out” couldn’t be more true when it comes to making business decisions with inaccurate or incomplete data. At some point, in order to be more crisis and recession resilient, you must clean up your data. This will help you make more informed decisions and stay profitable—even during prosperous times.

To assess the risk level of your customers, segment them into “good” and “bad” categories based on their payment history. Determine which customers you should focus on and which customers you shouldn’t due to the risk of nonpayment.

Understand that even small to mid-sized MSPs have a distribution of less profitable clients up to very profitable clients. Try to identify the root cause of such imbalance. Is their legacy agreement mispriced? Is the price per endpoint and/or the price per user is below fair margins?

Reassess your pricing accordingly and determine if changes can help you increase your bottom line. Even if a price adjustment is not in order, your strategy for collecting payment may need to be tweaked. This may include reviewing and revising payment terms for all contracts.

Final Thought: Crises are like uninvited guests that can strike your business at the most vulnerable times. The key to overcoming these such challenges is to plan for the worst when times are good, remain flexible, review your budget consistently, and make necessary adjustments part of your business strategy. Watching the correct metrics in your MSP will also help your business sustain through any crisis.