4 Solid Finance Management Lessons for Small MSPs
Any successful MSP business will tell you that it requires a strong combination of passion, drive, and unrelenting dedication to stand out in the overcrowded managed IT landscape. What they might forget to tell you is building and maintaining a strong MSP business also relies on best financial practices.
Small MSPs may often be busy addressing “high priority” tickets and service delivery needs, however, they still need to make tough decisions, starting with their finance practices. Thankfully in the last few months, we all have learned precious management lessons, albeit the hard way. These lessons can always be incorporated into your MSP’s DNA as you transition from operating under a crisis to a full-blown recovery.
1. Using key metrics to make important product/service decisions is important for robust risk management.
By now, it is clear that working at the speed of the customer is the only way to survive in the post-COVID business world. New customer buying habits and expectations are being recreated every quarter. MSPs that are analyzing these emerging trends and aligning them to their service portfolio are able to adjust faster to the global economy’s new normal. But to make an informed decision around adding, removing, or tweaking your portfolio, you must know where you stand, financially. You simply can’t make good decisions if you aren’t basing them on facts and real numbers.
Conduct a thorough review of your cash flow, budget, and expenses to know how much cash reserve your MSP has. Make a list of every ongoing expense and calculate the margin earned on each product or service. Using your accounts’ historical trending and client management call-based health check scores will also help you make key product/service decisions.
2. Having an effective business plan in place is always resourceful.
A well-written, well-timed annual business plan can always keep you focused and on track as your MSP grows. As you work on this plan in each Q4, include the budget for the next year by reflecting on the need of each department and conducting a thorough review of your cash flow, budget, expenses, and other resources.
If required, build a refocus plan, analyzing any “likely costs”. For any forecast or re-forecast, build different models for different scenarios. To cope with the unexpected, develop a point of view of about two or three integrated scenarios that encompass multiple eventualities. From a pure financial perspective, have operational models drawn assuming a 10%, 25%, and 50% reduction in expected revenue under unexpected circumstances. This will provide you additional insight into identifying the necessary costs to cut in the next step.
Perform a break-even analysis for any newly launched service or product to determine the cost structure. If numbers are not ideal, document actions (in the business plan) that you will take to protect the business, the liquidity situation, and earlier earnings commitments.
3. Accurate financial data leads to effective decision making.
Making important financial decisions based on inaccurate or incomplete data can be misleading and fatal in the longer term. On the contrary, if you base your actions on accurate information, you can determine which customers, services, and industries your MSP should focus on. You can identify the root cause of any pricing irregularity, reassess product pricing accordingly, and even know if these changes can help you increase your bottom line.
To clean up your data, have a diverse team of financial experts create, approve, and reconcile your business accounts. Ask your accountants to create monthly cash flow projections and customize your financial scorecard for monthly reviews, integrating your payroll and timekeeping information.
4. Having all finance systems automatized and integrated is important for minimizing errors.
Not automating key finance processes can increase your risk for fraudulent activities. For zero-touch automation, invest in a finance management system that offers a variety of automation tools. If executed properly, the automation can help you tremendously in invoicing emails, reconciling transactions, and instantly generating customer billing history statements.
A word of advice – the system you choose should also be able to help you integrate your CRM and accounting software. This way, your finance team will be empowered to eliminate double-data entry and reduce human errors between accounting and CRM.
Exploring financial data at a granular level, watching important metrics, and automating crucial finance processes are key to making sound business decisions. Learning from a crisis and implementing necessary change will not only help you multiply your profit but also provide an important safety net during and after a crisis.