The 4 Biggest Financial Failures of MSPs
Every year we watch managed service providers succeed and fail. Leaders often drive their team to new heights, or stumble to new lows. Unfortunately, failing executives often equate busy-ness with high productivity or profitability and forget the core basics of money.
Because there is such a need for CFO expertise, we are launching a Virtual CFO service ("vCFO"). Email me if you want to learn more.
To help you today better understand where your profits are leaking out of your organization, we reached out to Brian Hoppe, former CFO of McLane Intelligent Solutions. Brian has spent years at MSPs managing operations and improving financial health.
Here are his 4 Biggest MSP Financial Failures (they apply to almost any industry) - each one could be costing you thousands in unnecessary waste, inefficiencies, and risk:
#1 - Ignoring the Metrics
Either you master the metrics, or they master you. Your business is speaking to you every day, if not every hour. If you are not willing to listen, then you miss out on huge opportunities for improvement.
Are you tracking the right metrics daily - weekly - monthly? Do you clearly and correctly assess your services gross margin? Are you tracking a 2-3X billing and 5-10X sales model to achieve maximum product, project, and managed services contract profitability? Are your revenue and CoGS in the right buckets? Is your chart of accounts set up correctly? Are you tracking sales so you catch issues early, before you lose opportunities?
We know many MSP's whose systems track many of the metrics they need, but lack the discipline to monitor them. The result is poor financial performance. Not sure what metrics to track or how to find them? Another MSP we know doesn't have all the metrics they need, but is implementing systems to generate them. They are following a plan to get where they need to be within the next 3-6 months and you can too.
#2 - Lurking in "Tomorrowland"
You tell yourself, "We're not profitable now, or as profitable as we would like, but if we can just add more revenue then we will be." That's foolish.
We see this happen too often. One MSP we know is always thinking about tomorrow and never focused on today! As a result, they have not fixed their metric and margin issues for years and remain in a financial abyss. More revenue is great, but it does not solve your problem. Even if you can increase revenue despite your margin issues, you have the same problems, they are just bigger.
On the other hand, we know of another MSP who engaged a virtual CFO, reversed their fortunes within a year, and built a six-figure cash reserve.
Which company do you want to be?
#3 - Easy Sales Compensation
Too often sales people, particularly if they are long-term employees, are paid too much salary rather than being challenged by a more heavily weighted performance-based plan.
Do you have a monthly quota for each sales person? Is it realistic? Are you managing it with them daily and weekly? Are you compensating behaviors that lead to sales, or just the sales? Are you paying based on the gross or net? Where is each type of compensation appropriate? Are you targeting a 5-10X sales model for compensation to automatically drive profitability?
Managing a sales team can be like adult daycare or coaching an Olympic athletic team. It depends on your strategy and the people you hire. Make sure you have the right people on the bus, your sales strategy is clear, your plan is effective, and you have someone in place to drive the details plus help each individual meet or exceed their targets.
#4 - No Budget = Limited Profits
It is amazing how many managed service providers operate without a clearly defined budget based on numbers from the previous period, with clear projections and targets. Without this basic discipline there is limited upside you can achieve because every review of finances is a best guess rather than a focus on the facts that bring the most money possible to your bottom line.
Budgeting is one of the most important things you can do. What would it take for you to put together a budget for the next 3-12 months? Do you know the right questions to ask? Is your budget based on real numbers, or hope? Does your budget fluctuate monthly based on historical information? Do you know what your returns should be? Are you looking through the windshield rather than the rear view mirror?
Do you want more? Join us for a 30-45 minute webinar on Tuesday, August 11th at 10:00 a.m. PST / 11 MST / noon CST / 1pm EST. I am interviewing Brian Hoppe to get more of his perspective on these costly financial failures. Click here to register.
Finally, this is not a complete list of every financial mistake you can make, just the most common ones. Contact us if you would like to learn more about how you can improve the financial health and operational efficiency of your business, or our upcoming vCFO services.
