Guide
4 min read
By MSP Margin Editorial
Recurring revenue only helps cash flow if clients pay on time. Many MSPs bill in advance and deliver services every day, which means a slow-paying client is effectively receiving free support while the balance grows. A steady collections routine keeps that from becoming normal.
Review the aging every week, not just at close
The AR aging report groups open invoices by how long they have been outstanding, usually current, 1 to 30 days past due, 31 to 60, 61 to 90 and over 90. Looking at it once a month during close is too late to act on most of it.
A short weekly review works better. Sort by the oldest bucket first, then by dollar size. For each past-due client, note the last contact, the reason given and the next step. Look for patterns too: invoices disputed over the same line item, clients who always pay just after a reminder, or balances that jumped after a project invoice.
Make sure the aging is clean before you act on it. Unapplied payments, credits that were never matched to invoices and duplicate invoices synced from the PSA all make clients look further behind than they are. Calling a client about a balance they already paid damages the relationship and wastes time.
Payment terms and autopay
Collections get easier when the terms are clear before the first invoice. Your agreement should state the due date, accepted payment methods, any late fees permitted, and what happens when an account goes past due.
Autopay through ACH or card is the most effective tool most MSPs have. It removes the need for the client to take action each month. Many MSPs require it for recurring services and allow manual payment only for larger project invoices. If you accept cards, decide whether processing fees are absorbed or handled through pricing, and check card network rules and any applicable state law before adding surcharges.
Shorter terms also help. If recurring invoices are due on receipt or within a short window, a missed payment shows up sooner.
Pausing services per contract
Pausing service is a serious step and should follow the agreement exactly. Your contract should spell out how many days past due before you can suspend, what notice you must give and which services are affected.
Even with the right clause, think through the operational effect. Suspending monitoring or backup on a client's systems can create security and data risks, and possibly liability if something happens during the pause. Many MSPs pause new project work, non-urgent tickets or new orders first, and treat suspension of core protective services as a last resort after written notice. Have your attorney review the suspension and termination language, and document every notice sent.
Write-offs and bad debt reserves
Some balances will not be collected. Accounting handles that in two ways.
Under accrual accounting, you estimate expected losses in advance with an allowance for doubtful accounts, a contra asset that reduces receivables on the balance sheet. The expense is recorded when you set or increase the allowance. When a specific invoice is finally deemed uncollectible, you write it off against the allowance.
Here is an illustrative example with round numbers and made-up loss percentages. Your percentages should come from your own collection history.
| Aging bucket | Balance | Estimated loss % | Reserve |
|---|---|---|---|
| Current | $120,000 | 1% | $1,200 |
| 1–30 days | $50,000 | 3% | $1,500 |
| 31–60 days | $15,000 | 10% | $1,500 |
| 61–90 days | $10,000 | 25% | $2,500 |
| Over 90 days | $5,000 | 50% | $2,500 |
| Total | $200,000 | $9,200 |
In this example, the allowance should be $9,200. If the allowance currently shows $6,000, you would record $3,200 of bad debt expense to bring it up. Many small MSPs instead review the over-90 accounts one by one and reserve for specific clients, which can be more accurate when the client count is small.
Tax treatment differs from book treatment. For federal income tax, a business generally deducts bad debts when specific accounts become worthless rather than through a general reserve, and a cash-basis taxpayer usually cannot deduct an unpaid invoice that was never included in income. Sales tax already remitted on an uncollected invoice may be recoverable in some jurisdictions. These are facts-and-circumstances questions.
Before writing anything off, confirm the balance is real, the collection steps are documented, and whether the account should go to a collections agency or attorney. Keep a record of what was written off and why.
This guide is general information, not legal, tax or accounting advice. Your contract terms, accounting basis and tax position affect the right treatment, so confirm your approach with your CPA and, for suspension or collection terms, your attorney.