We’ve learned that the tone of your relationship with a client is established during the managed services sales process. How you sell the client sets the precedent for everything that happens later down the road.

This is true for cash management as well. The expectations that you set with your client in terms of when and how they must pay need to be established during the sales process or you’ll get off to a bad start with the client.

The following are three critical practices to put in place so that your sales process yields the cash management results you desire:

1.  Collect your cash in advance

This is probably the most critical practice to put in place at a managed service provider – collect payment before you do work.

I know many people reading this will object, thinking there isn’t any way they’ll get their clients to pay them in advance. I’m telling you that it can be done, and you must convince yourself of this first.

We invoice for our monthly services in advance of the month for which we are providing services, and we expect the first month’s payment from our clients before we’ll begin any work on their behalf.

When you stand firm to this requirement at the beginning of your relationship with a client, it demonstrates to them that you take timely payment seriously. Good clients won’t have any problem with this; in fact, they’ll respect it. Bad clients will refuse or put up a nasty fight. Walk away. If they give you a hard time now, you’ll spend the rest of your relationship trying to collect late payments from them.

2.  Automate payment on credit card or ACH

The easiest way to avoid any collections issues is to set up automatic payment from your clients.

Your contracts should have automatic payment of the managed services portion of your service as the only payment option for client. If you have it in your contract, about half of your clients will go ahead and pay this way, no questions asked. The other half will ask questions or squawk a bit, of which you’ll convert about another 15-25% after a reasonable conversation. The remaining will never pay by automatic payment either due to administrative challenges within their company or because they are just strongly opposed to doing so. You can show flexibility to that group, as long as they understand and commit to still paying in a timely manner.

In most cases you shouldn’t apply the automatic payment process to project work or break-fix work you do for your clients. This type of work is more variable in nature, and you should invoice your clients to give them the opportunity to review the invoice before payment; doing so avoids disputes.

3.  Structure commission payments to enforce proper client payment

When expecting a specific result from your sales team, you should at all times remember the saying:

“Salespeople do what you pay them to do, not what you tell them to do.”

Keeping in line with that lesson, we must structure our sales compensation system to ensure that we are getting our salespeople to sign up the right clients and establish the right payment expectations. There are two keys levers you can pull:

1. Don’t pay commissions until payment is collected – this will make your salespeople really pay attention to the types of clients they sign

2. Pay bonuses for clients that are signed up on ACH or credit card – your salespeople will suddenly start converting a lot more clients to credit card and ACH

If you follow the recommendations above, you’ll find that you will have a much healthier relationship with your clients because you’ll only sign good clients. The poor-payers will get filtered out over time as a result of your sales process.

You’ll also see your collections report shrinks dramatically, giving you cash to grow your managed services business, and stability to survive.

MRC

The ability to effectively manage cash is the single most important skill and concern of the entrepreneurial CEO, including managed service providers.

You can take all of the brilliant strategy, sales skills, people skills, and product innovation and toss them all out the window if you can’t effectively manage cash.

One of the beauties of the managed services business model is that is makes cash flow management much easier than the break-fix business model due to the recurring revenue. However, if you want to run a fast growth business, or to ensure your survival even in tough times, just relying on the recurring revenue isn’t enough; you need to take advantage of other strategies to ensure that you actually collect that revenue in a timely fashion.

While cash flow is different than profitability, I think it deserves to be in this section of the site. You can have all of the bottom-line profits in the world on your accounting statements, but it won’t matter if you can’t survive your cash flow situation.

At the time I am writing this introduction, our economy is starting to recover from what was previously a terrible state. I read the results of a survey of CEOs across the country from every industry and size of company, and cash management was the #1 concern of over 90% of those CEOs. Previously very successful and very profitable companies are in danger of disappearing almost overnight because their sources of cash have dried up. Their business models may still be perfectly sound, but their cash flow has dried to a trickle.

Don’t let that happen to your business.

Dig your well before you are thirsty.

Put the practices that we recommend in this section into place before you need them. Don’t wait until you’re in a bad spot; that’s the hardest time to collect cash.

MRC

Achieving meaningful profitability with managed services has been something that has largely evaded our industry. Most businesses barely break even; I think the industry average is somewhere around 2.5-5% net profitability. That’s not good.

Profitability has not been a real focus at Everon until this last year. Our priorities have always been:

1. Growth
2. Cash flow
3. Profitability

In that order. It can be difficult to work aggressively on #1 and have #2 and/or #3 at the same time, and we consciously sacrificed #3 at times to get #1. That’s ok, as long as it’s a conscious decision.

But in 2008, for several reasons, we decided to start paying closer attention to our numbers so we could drive profits. In the process, we learned several lessons that are key to success if you hope to maximize profits for your company. They are:

1. Profits don’t happen by accident!

Achieving solid profit numbers is kind of like running a fast time in a marathon – neither happen by accident. The only way you will run a fast time in a marathon is by very consciously managing a variety of factors to give you the best chance at success.

Same goes for profits.

If you want to have fat profit numbers, you have to take a very conscious and methodical approach to how you manage your numbers. Otherwise, it just won’t happen.

2. Profit doesn’t come from doing one thing much better; it comes from doing everything a little bit better.

What’s the one thing that will allow you to produce industry-leading profits?

There is no one thing.

Profits come from doing a lot of things incrementally better every day. You constantly have to work on a variety of factors – gross margins, operational efficiency, expenses, compensation plans, and others – all of which end up contributing a percentage point here and a percentage point there.

Before you know it, you’re talking real money!

3. Benchmarking the best is critical

One of the best things we’ve done as a company is to hire Paul Dippell from Service Leadership. Not only is he one of the most intelligent persons I’ve ever met, he’s also one of the most experienced in our industry.

We bring Paul into our office a few times each year to meet with our leadership team. He digs through our numbers, asks tough questions, and tells us we could be doing better.

How does he know?

Because he benchmarks our industry, and knows the numbers of just about everyone’s business. Of course, he never shares any confidential information, but he will tell us “I know a company doing 5% better than you in this area and here is generally how I think they are doing it”.

That is SO incredibly valuable.

One, it sets a new benchmark in the minds of our leadership team. They now know something better is expected of them.

Two, it gets our competitive fire burning. I hate to lose, and it burns my butt to know that someone is doing better than me at the game I choose to play every day.

You can get this information from Paul via reports he sells on his website as well. Whether you get it from him or somewhere else – get it! Benchmarking the best will make you better.

4. The power of engaging and empowering your team with open book management.

Open book management is the theory that if you find ways to engage all of the employees of your company in the management of the numbers, you’ll get better results than if you try to manage the finances as if they are a dark secret for only the owner to know.

It works.

The best resource I’ve found for this subject is The Great Game of Business. I’ve had the privilege of attending some of their training, and I can tell you that it’s a must for every entrepreneur.

I know a lot of owners shy away from sharing financial information with their employees, but I must say that it’s one of the most powerful and engaging things you can do. If you align the incentives of the employee with your desire for profit and give them the opportunity, they will improve your numbers.

5. Have a very detailed P&L report

This is a very tactical lesson, but it’s so important and so many people get it wrong.

Most businesses have P&L reports that have big, broad categories. As I mentioned before, creating profits is about managing a lot of little details very well – a broadly structured P&L won’t allow you to do this.

You’ve got to structure your P&L report so that you can see every detail of your business. Take the time to have a good accountant or business consultant really get this right for you, and it will make a world of difference.

That’s it!

Five simple secrets to profitability! Ok, it may take a little more effort, but those are the fundamental lessons that have made a huge difference for us.

MRC

Attention managed service providers: One of the most damaging statements every made in the history of business is:

“The customer is always right.”

Why is this one of the most damaging statements ever? Because too many people take that statement and expand it in their minds until they think that they have to do anything and everything for every customer.

Not all customers are created equal!

We’ve all had customers that want everything in the world, but don’t want to pay for it. We’ve also all had customers that won’t actually listen to our advice, then get upset when they haven’t had their problems solved.

These customers are called Killer Customers, and you need to learn to identify them and deal with them appropriately, or they will suck the life out of your business.

This idea – that I could run my business without bowing down to every demand of every customer – was a revelation to me. I first grasped the concept when I read the book Killer Customers: Tell the Good from the Bad–and Dominate Your Competitors . It’s a great book; you should add it to your business library.

The point of the book is that you should get really good at telling the good customers from the killer customers, and then ditch the killer customers so your competition can have them and get bled to death (that may not be how the author would summarize it!).

How to segment

In my experience, the keys to customer segmentation are the following:

1. Know your target customer very well
2. Train your salesforce to find target customers and provide incentive to make sure they don’t sign killer customers

You will not turn a bad prospect into a good customer!!! It doesn’t matter how big the deal is or what the prospect tells you about how the relationship will be after you have signed a deal- it won’t turn into a good customer. You must make sure that you don’t bother bringing the wrong customer into your portfolio of business. The sale won’t stick and neither will the commission – it’s a waste of time for everyone involved.

1. Have a process for continuously reviewing your customers to weed out the killer customers that you accidentally let on board
2. Have enough service offerings to match the various needs of your clients’ desired service levels

Doing any one of these things will help you out a lot, but doing all four will result in increased profits, happy customers, and happy employees – a combination that’s hard to beat.

MRC

Before you plan your lead generation and marketing/sales efforts, you really must understand the concept of Total Lifetime Value (TLV) of your managed services clients, otherwise you won’t know how much money you can spend to acquire a new client.

The TLV calculation does exactly what its name implies; it tells you the total value of the client over its lifetime. In other words, it tells you how much your client is worth to you, which is the number that determines how much you are willing to spend to get a client.

How do you calculate TLV? I would suggest you use the following formula:

Average revenues from client over lifetime of service relationship X Gross Margin %

So let’s say that your typical client is worth $5000 per month and on average they stick around for 3 years. This means that this client brings in a total of $180,000 in revenue over its lifetime.

Let’s further say that you operate at 50% gross margins. This means that the amount of money that is actually returned to you from your work with this client to cover expenses and generate profit is $90,000.

Theoretically you could spend $90,000 to acquire this customer and still break even. Now, that wouldn’t leave you with any money to cover any of your operating expenses, so it’s not a realistic strategy in the long term.

A more realistic strategy can be found by multiplying the $90,000 by whatever percentage of your budget your business model says you can spend on sales and marketing and still have a viable business. Let’s say that the total combined number is 15% of total revenues.

That means you could spend up to $27,000 (15% x $180,000) in total sales and marketing expenses and still be operating within the framework of your business model! If you were to find a way to operate with even higher gross margins, you could spend even more money.

There is an old saying in direct marketing circles that goes something like this:

“The company that can spend the most money to acquire a customer wins.”

Effectively, if I know the TLV of my clients and you don’t know the TLV of yours, you are going to be very hesitant to spend the kind of money you could to win new business, which means that I’m going to beat you all day long out in the marketplace!

You must calculate your TLV so you know how much money you can spend to acquire a customer; otherwise you may not be putting in the appropriate amount of effort to be competitive in the marketplace.

MRC