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How many ways do you sell?

Posted by HarmonyPSA on Aug 15, 2017 9:47:57 AM

That may seem a stupid question, indeed, you may ask, what do you even mean by “way of selling”?

So, if you’ve never given it any thought, perhaps a couple of minutes reading this blog will be time well spent. It could save you $1,000s in wasted PSA fees when you find that you’ve chosen one that doesn’t support one of your ways of selling.

When we talk about a “way of selling”, we are talking about the relationship between two things:

  • The way the value of the invoice (cash flow) is determined, combined with the contractual terms controlling that process; and
  • The relationship between that cash flow, your balance sheet and your P/L account;

and this is a question that matters a lot when you come to choose your next PSA tool.

In the old days of break/fix operation, there was only really one way to sell. You did the work, you raised an invoice and booked it to the P/L account. Then the client paid the invoice, job done. No need to consider the balance sheet at all, with the exception of accounts receivable and your accounting system did that bit.

Ah, PSA systems were nice and simple in those days. The problem is, a number still are that simple, but the world has become more complex.

Firstly the good news is that for the PSA space there are really only 4 ways to sell, after many years of trying we still can’t think of a fifth. These selling (and service) behaviours are:

  • Transactional; the simple selling of time for work completed or the selling of equipment. As a minor complexity, transactional sales can be applied on a milestone basis, so not necessarily 100% for work completed, and this sub-way of selling used on fixed price work, requires Work-in-Progress accounting and the balance sheet to become involved
  • Pre-payment; the invoicing of time before the work is carried out (sub-ways include kit funds, paying in advance to build up a fund to replace broken items etc)
  • Recurring; the establishment of an agreement to pay a series of cash-flows in the future in return for an obligation to support or fix items when they need work
  • Consumption; the establishment of a set of rates to be applied to the use, subscription, consumption etc of a service, on the basis of how much is (was) used in a pre-determined period. When this is combined with a recurring contract, it can often allow for a “dead-band” or amount that can be used within the period (say a quarter or even a year), before charging commences

The common thread here is to have a system that understands the separation between receiving the cash and earning it. A system that automates the suspense accounting required to achieve accurate management accounts and, most importantly, customer profitability views.

The way the older PSA systems got around this problem was by restricting billing cycles to monthly events or limiting pre-payment fund carry overs to one month, so forcing a bad approximation of the relationship between cash and revenue.

It is important to understand that this is a PSA system limitation (i.e. a work-around), not a long term solution for your business.

This work-around restricts your potential commercial options and so ability to differentiate. It is not one to be ignored when you choose a system for your future.

  • Imagine running a perpetual (so never surrendered) pre-payment fund where you are forced to take the cash as revenue, without having done any work yet. That liability to provide a service will sit around until you need to perform some work, and meanwhile at year end you will pay corporation tax on money you haven’t earned yet!
  • Imagine being restricted to monthly recurring payments without the ability to offer a discount for quarterly or annual payments, are you happy to restrict your business in that manner?

However, the really limiting factor is not on the sell side, if you don’t mind restricting your options in that way, go ahead. But, what about your suppliers? If they choose to offer discounts for quarterly or annual billing, how do you take advantage of these offers without automated prepayment accounting?

In the old world, MSPs could afford to ignore suspense accounting, increasingly these days they can’t. So, when choosing your next PSA solution, make sure you ask the right questions and don’t accept that a work-around is the right long-term solution.

Tags: BUSINESS, deferred revenue, MSP BUSINESS, prepayments, products, selling, SOFTWARE BUSINESS, accounting

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