Cash flow

A passionate love letter about service support plans

Paul Green Uncategorized

One of the hardest ways to grow a business is to do it one sale at a time.

That’s what causes boom and bust, a horrible phenomenon that holds back too many small businesses.

You’re quiet. And feeling anxious. So you throw yourself into marketing. A few weeks later, it starts to pay off, and you become busy with IT support or consulting work again.

So busy in fact, that you have to stop the marketing, to make space for all the work you need to deliver!

And a few months later, you become quiet again. The business is either in boom, or bust. It’s a vicious circle. And a very short sighted way to run a business.

A better way to grow your business is to sell something once, and then get revenue from it again, and again, off into the long future.

This is called recurring revenue. And if you can get it right, it will revolutionise both your cash flow, and ultimately your net profitability.

In your business, this would be a service support plan. There are lots of different ways to do it. Typically the client either pays for a number of units of work each month. Or they have unlimited access to support.

But whatever they buy, they pay for it on a monthly basis. And they pay whether they use the service or not.

This is becoming the normal. We live in a subscription economy

At home, people pay monthly for their Sky TV, their Netflix, and their mobile phone. They have a service plan with their plumber for their boiler, and pay Denplan for their teeth. Some have razor blades posted to them every month by Cornerstone, or boxes of nuts from Graze.

In their business, people are quickly becoming used to renting Office 365 and Adobe Creative Cloud.

Most people understand that to access better prices and a higher level of service, you become a member or subscriber, and not just a client.

Fully functioning IT is so important to run a business, that the best clients will completely understand the need for regular preventative maintenance. When they can see overall cost savings and fewer problems by paying for it monthly; it will be a no brainer.

The beauty is you only have to sell something once. And then the money comes in month by month, regardless of the work that’s done.

You know who’s going to love this the most? Your bank. Because recurring revenue eases the pressure on your cash flow. So you’ve got a £30,000 payroll on the 25th? No problem… when £32,000 of recurring revenue turns up in the bank on the 23rd. Predictable, forecastable cash flow.

Cash flow is the subject most likely to keep you awake at 4am. Recurring revenue = better sleep. A serious goal for your business should be to get the recurring revenue to more than cover the outgoings every month.

There are many other benefits of service support plans

From the client’s point of view, their cash flow is also less impacted. It’s easier to pay a small amount every month, than a big one off chunk.

They are also more likely to actually use a service they are paying for monthly. And we all know that if they use the service, they will typically have fewer IT problems, and so will stay with your business longer. Hooray!

Service support plans are one of the best retention tools you can use.

And weirdly, they encourage people to spend more. Maybe it’s because they have a better relationship with you. Or because they’re more proactive by virtue of having the support plan in place.

But typically you would see that the Average Lifetime Value of a plan client, would be far higher than that of an occasional user. Your service plan clients will be some of your best clients.

There’s one more thing. The higher the level of recurring revenue in your business, the more valuable it will become when you exit the business and sell it.

Buyers love recurring revenue as it’s considered “safer”. That money will keep coming when they buy the business. So if you have high levels of recurring revenue, they are likely to offer higher multiples of EBITDA.

The difference between a buyer paying 5x your net profit, and 8x can be considerable. makes it unbelievably simple to set up a plan

Taking Direct Debits used to be a pain in the arse. It’s virtually impossible for a small business to be set up as a Direct Debit originator. And the collection bureaux were expensive and unwieldy. Clients would cancel DDs and you wouldn’t know for weeks.

In just a few years, has removed all of this hassle. It’s the UK’s fastest growing DD collector. Takes minutes to get set up, and you manage everything from a beautiful SaaS dashboard. The collection costs are very reasonable too.

An excellent book on this subject

American business author John Warrilow wrote The Automatic Customer last year. It’s a follow-up and companion to his book Built to Sell. Both of which are very highly recommended to every IT support business owner.