Monday, September 03, 2007

Response re: Cash Flow

[ KP Note: The entire "Managed Services in a Month" series has been collected, collated, and indexed. Still free. You may access it now at http://www.greatlittlebook.com/Seminars/managed_service_in_a_month.htm. ]


Ken asked about cash flow in the transition to managed services. Great question with a long answer, so I thought I'd post answer as a separate post.

A few thoughts.

First, your transition to pre-payment will give you an influx of money.

Second, as you move to flat-fee managed services you'll have another influx of money.

Third, your only real concern is losing clients.

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First your transition to pre-payment will give you an influx of money.

Here's how it works.

Old schedule (Let's assume everyone pays $500):










Client OneInvoiced 9/1/07Due 9/20/07Pays on 9/30/07
Client TwoInvoiced 9/1/07Due on recptPays on 9/5/07
Client ThreeInvoiced 9/1/07Due on recptPays on 9/10/07
Client FourInvoiced 9/1/07Due on recptPays on 9/20/07
Client FiveInvoiced 9/1/07Due 9/20/07Pays on 9/10/07
Client SixInvoiced 9/1/07Due 9/20/07Pays on 9/15/07


So your outflow / inflow looks like this:

Work completed in August. Let's say you have employees and they are paid $1,800 for this expected $3,000 in revenue. You pay your employees on time. The column for sole proporietor would be your cash flow if you think you time has no value.















Sept. 1 balance:- $1,800sole prop: $0
payments 9/5 = $500
Sept. 5 balance:- $1,300sole prop: $500
Payments 9/10 = $1,000
Sept. 10 balance:- $ 300sole prop: $1,500
Payments 9/15 = $500
Sept. 15 balance:$ 200sole prop: $2,000
Payments 9/20 = $500
Sept. 20 balance:$ 700sole prop: $2,500
Payments 9/30 = $500
Sept. 30 balance:$1,200sole prop: $3,000


Now let's do it all with prepayments:










Client OneInvoiced 8/15/07Due 9/1/07Pays on 8/30/07
Client TwoInvoiced 8/15/07Due 9/1/07Pays on 8/31/07
Client ThreeInvoiced 8/15/07Due 9/1/07Pays on 9/1/07
Client FourInvoiced 8/15/07Due 9/1/07Pays on 9/1/07
Client FiveInvoiced 8/15/07Due 9/1/07Pays on 9/2/07
Client SixInvoiced 8/15/07Due 9/1/07Pays on 9/3/07


So your outflow / inflow looks like this:







August outgo
Leads to balance- $1,800
Payments by 9/1/07 = $2,000
Sept. 1 balance:$ 200sole prop: $2,000
payments by 9/5 = $1,000
Sept. 5 balance:$1,200sole prop:$3,000


So, "bottom line" as they say, as you move clients to pre-payment, your money flows more quickly. It sits in your bank instead of theirs.

There are other advantages to pre-payment we won't go into.

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Second, as you move to flat-fee managed services you'll have another influx of money.

Two things happen when you start signing those flat-fee service agreements.

One: You will charge a setup fee. Now, truth be told, this is an area of flexibility and therefore a selling point.

Let's assume your setup fee is 50% of the monthly fee.

You can waive this because it's a great client, because they've always paid their bills on time, because they're already set up with Zenith/Kaseya/LPI. Whatever your excuse, you can "give back" this money and the client will appreciate that.

But, if it's early in the month, or mid-month, and it's an average client, by all means collect that setup fee. It really helps pay for the current month.

So you'll have a bit of cash flowing in for setup fees. All good!

Two: When clients sign up for the flat fee service, they're going to get on the pre-payment bus. There are two options. They can give you a credit card and you set up an auto-payment. Generally these get dinged on the 1st of the month and settle into your account in 2-3 business days.

If they don't want to pay by credit card, the other option is to prepay by check. We require three months in advance. Most people won't do this, but those who do will be handing you checks for three times their monthly fees.

Now that's cash flow, baby!

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Third, your only real concern is losing clients.

Ken: I know you. Your clients love you. They want you to continue to be their outsourced I.T. Department.

So they don't want to lose you. And, unless you push them away, they won't lose you.

Don't put the question as "Do this or I'll drop you." Put the question as "Do you want me to continue to provide your computer services?" Yes!

"Very well, then. There are three options. Let me first start out by telling you why I think Platinum is best for your business . . .."

Truth be told, there are some clients you need to get rid of. We'll cover that.

But you'll be amazed at the clients who sign a Platinum deal after years of being fair to middland clients! And when you ask why they've been such cheapskates in the past, but signed now? They'll say "You never asked me to sign Platinum before."

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All growth involves overcoming fear.

Ken, you've been on this fence for years. It has to be uncomfortable by now.

Give it a shot.

I'm only asking you to sign ONE service agreement by the end of the month! ONE.

You can do that.

It won't mess up your cash flow. It won't destroy your business.

Just do it.

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