Thursday, July 17, 2008

Cash flow

It’s got to be tough to be a web host right now. You have an enormous and growing electric bill, with no real way to hedge those cost increases. Your data pipes may be on a contracted rate, and computer hardware costs aren’t increasing rapidly, but that electric bill is going to eat you alive. Meanwhile, you get paid a monthly amount by your customers, and there’s tremendous pressure not to increase that monthly amount by much. Rate increases defeat customer inertia in driving down customer retention rates. And many of your customers prepay for a year of service in exchange for a discount, so there’s no hope of more money coming in from those customers in order to cover your increased costs. And you still have to meet payroll and tax obligations and other expenses.

One common desperation move when facing cash flow problems is to stall your payments to suppliers and try to accelerate your income. For example, you could ask your customers who normally pay for the upcoming year of service in January to pay you the previous July instead. That will help you for several months, because you’ll have all that money in the bank. Customers will be happy, because they’ve just locked in a future year of service at current rates, which seems like a good idea in an inflationary environment. Just don’t ask your accountant, who should be asking you how you plan to keep paying your bills next year when none of the usual money is coming in from your annual renewals.

My web host is pushing customers to prepay for 2009 web hosting now (instead of next January) and to prepay for many years of domain hosting now. I think they have a fair bit of breathing space, because they could still save some money by reducing their support staff. But I think it’s time to start exploring alternatives. When a business fails due to cash flow problems after already accelerating their income beyond all reason, it fails fast.

P.S. I’m not naming the web host, because I want other customers to continue paying them and signing up with them. Even if they’re not in financial trouble now, they will be if they appear to be having cash flow problems. A perfectly healthy business can easily be taken down by suppliers canceling credit terms and customers fleeing, just like a bank run can take down a financially solvent bank. So while the general problem is interesting to ponder, my bank is just fine and my web host has no problems. Keep repeating that, kids, or Tinkerbell will die.

1 comment:

Vardibidian said...

I hadn't thought about how brutal the inflation is for web hosts. The advantage to getting next year's money now is that it prepares you to apply for bankruptcy protection, right?

And, of course, it'll be fine when they cut the support staff, because (a) accounts receivable won't be receiving anything, and (2) clients who have pre-paid for two or three years won't have much leverage when you provide crappy service.

Thanks,
-V.