Taking your MSP business to the next level can be a real struggle.
There is something unique about the MSP business model, isn’t there? So many things to focus on. At last, you get more clients, and then your top tech hands his notice in. You can’t recruit for love or money. You eventually build a great team, then your top client hands their notice in.
How can you get that growth, bottom-line profit, and sleep at night with so much to do?
You are forced into the daily operations that stop you from working on the business, building your team and strategy to serve your clients the way you set out to. Your profitability is not where you would like it to be, and maybe you’re not completely clear on your cash flow position. You are involved in too many admin and accounting matters when you should be spending more time on future business growth opportunities.
Most owners of MSPs are engineers. They are unlikely to be financial directors or financial controllers. And they are certainly not accountants or bookkeepers. So how does an MSP owner run the business and make good financial decisions to deliver growth, profit, and a work-life balance?
When they start out most MSP owners look at their accountant, initially help fill this gap.
Outsourcing: Do You Need an Accountant?
This can work if you happen to stumble across one of the few forward looking accountants that are business consultants first and accountants second. These very rare accountants will actually spend some time getting to understand your business, connect with you every month and offer some worthwhile advice to get you started. The trouble is they are very rare and most accountants are able to build profitable practices by focusing on the easier and predictable annual compliance work such as filing annual accounts and corporation tax returns. Getting to know your business takes time and they have such a diverse set of clients with anything from plumbers to vineyards so its nye on impossible for them to truly understand what you do let alone offer strategic business advice.
Most MSP owners therefore do their best to learn the basics over time. Understand the differences between cash and profit, the basics of cashflow needs and provisioning for VAT and taxes. More informed owners will start to focus on developing out a meaningful granular chart of accounts and home in on margin analysis of their products, agreement line items and key ratios like service gross margin. But often it is difficult to know what to measure, how to measure it and what good really looks like. This naturally leads on to non-optimal decisions around pricing strategies, when to hire, and how much to invest in sales and marketing – which leads to poor profits and/or stagnant growth.
What About Bookkeeping? The Pros and Cons
Often this starts out being taken care of by the owner. After all in the early days there’s just a few supplier invoices to process, some client invoices to send and an occasional bank reconciliation – not exactly difficult. Xero and other cloud platforms all calculate the VAT automatically for you. In any case if there are any errors, or it’s a bit messy, the accountants tidy it all up at the end of the year and then tell the client if they have made a profit and how much tax they’ll have to pay. The trouble with this approach, is the owner has absolutely no idea of how the business is performing from one month to the next and getting just a basic overview a year later is not good enough to adequately plan and make financial decisions. At best this could mean some missed opportunities, at worst bad debts, unhappy suppliers and unbudgeted VAT/tax bills.
The next step up is normally to delegate the bookkeeping to their accountant (if they provide a bookkeeping service), a local freelance bookkeeper they met from the networking group they belong to or quite often a close relative; perhaps their spouse.
The outcome from this can be variable. Just like MSPs, there are good bookkeepers and there are bad bookkeepers. It’s wrong to assume even an experienced bookkeeper will provide a month end close procedure where by the month is closed down ensuring a clear cut off point to review the financial position of the business. This is often considered an accounting task by many bookkeepers and outside the remit of standard bookkeeping which just records transactions and reconciles a bank account. Secondly, there is usually no one else checking the quality of the bookkeepers work which naturally leads to errors and over time left unnoticed those errors can compound to create significant headaches or difficult conversations with clients. So, with all that said,
Our Top 9 Tips for MSP Financial Confidence:
1. Don’t outsource your bookkeeping to a close friend or relative UNLESS they are qualified bookkeepers and belong to an accredited body.
2. Ensure your bookkeeper insists on completing a month-end process ensuring your accounts are bulletproof from month to month and accurately reflect the performance of your business
3. Outsource your bookkeeping to a larger agency/practice and confirm how the bookkeeping work on your account is quality controlled and checked.
4. Use an external service to provide additional support and monthly quality checks if you hire a bookkeeper on a full or part-time basis.
5. Enquire about the SLAs and expectations on support and ensure their services are uninterrupted when your designated bookkeeper is on leave.
6. Ensure you get a clear monthly management information pack each month on the key KPIs that are most for your MSP to help you track your performance against your forecast and enable course corrections as necessary.
7. Consider working with an accountant who knows your PSA and configures it accurately to reveal all the margins for your projects, monthly recurring revenue, and client profitability.
8. Consider paying for an external audit of your books and processes if you’re unsure if your financial team and bookkeeping are running optimally. This should reveal any shortcomings and prioritize the quick wins you can make.
9. Consider hiring a part-time FD-level finance professional for businesses to make a step-change in growth or profit, acquire or sell, have acute cash flow challenges, or need a board-level ally to help drive the business forward. Make sure that they know the MSP business model and its unique challenges.