Comprehensive Bookkeeping Guide for Managed Services Businesses

Omar Visram
Comprehensive Bookkeeping Guide for Managed Services Businesses
Table of Contents

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Spending time assisting your clients with ongoing IT support can take considerable time. So can a managed services business' bookkeeping needs. To grow a successful managed services business (alternatively, managed services provider), you must ensure that most of your resources are spent troubleshooting problems and handling operations and cybersecurity for your clients. Your bookkeeping is a task that should not be neglected. 

1. Set up your chart of accounts properly

A well-constructed chart of accounts can help organize the revenue flowing into your MSP business. Income categorization is necessary to monitor the trajectory of your business. 

Blending non-standardized revenue lines into your business will make generating a true and accurate picture of your business's valuation challenging. To avoid this, you should ensure that you have specific sub-accounts for expenses and costs of goods sold to identify your expenditures properly.

2. Track your expenses closely

To properly understand your margins, you need to ensure your costs are allocated appropriately. You must be able to allocate expenses to clients and specific projects or services to understand their profitability and identify areas that need a reduction in spending.

To do so, you can use expense management software like Dext Prepare. This will allow you to capture all of your expenses by taking a photo of your invoices and forwarding them to a dedicated Dext email address. The program will extract all of the crucial data from these documents, creating a transaction that can be exported to your accounting software, saving you time on manual data entry while you stay on top of your expenses.

3. Invoice promptly

The faster you invoice your clients, the faster you will get paid. If you have recurring invoices, it is best to send them automatically through your accounting software or invoicing system. This will get them to your clients quickly and ensure that you get paid on time, improving the health of your cash flow.

You also want to ensure that all of the information on your invoices is clear and correct. Any discrepancies can cause confusion and will slow down the payment process.

4. Use pre-authorized debit to collect payments

For managed service providers, you likely bill clients on a recurring basis every month for the services you provide. You can save time on collections and follow-ups by using pre-authorized debit to collect your payments.

Instead of losing money to transaction fees, you can utilize a tool like Rotessa to automatically collect payments from your clients. Implementing this process can speed up the payment process, eliminate the need to spend valuable resources on collections, and help improve your cash flow.

5. Follow-up on outstanding invoices

If you still have ongoing projects with clients, it is important to promptly follow up on outstanding invoices to ensure that the business continues to operate smoothly. 

Consider following up on unpaid invoices bi-weekly as part of your regular bookkeeping routine. Alternatively, you can send automated invoice payment reminders to clients a few days before and after payment is due.

6. Outsource your bookkeeping to a professional

Hiring a bookkeeper is always best if you don't have time to handle your books. However, hiring an in-house bookkeeper can be costly and may pose a risk to your business if they decide to leave at some point in the future. Outsourcing your bookkeeping to a third-party firm is a good way to get your books taken care of without dealing with turnover and managing another employee.

Also, if you were to stop working with an outsourced bookkeeping firm, there would be a much smoother transition process in place. They will be able to hand over all of the necessary information to your team with less risk of information loss.

7. Review your books regularly

Having a bookkeeper to keep your books up to date is important, but you also need to review your books regularly to understand the financial health of your business. Schedule time every month to review your financial reports. This will allow you to identify areas where you might be overspending or whether your business has sufficient cash flow to meet its short-term obligations.

Reviewing your books regularly will allow you to spot-check your numbers to ensure your books are appropriately managed. Take an in-depth look at your utilization rate, profitability by project, customer, service, liquidity, and cash flow to ensure your business is where it needs to be. You can also use this time to set metrics and review their data to ensure your business is hitting its targets.

Using these strategies for your bookkeeping routine lets you stay on top of your financial information. You will ensure that you have access to current information, allowing you to make sound financial decisions. These tips will also help you streamline your bookkeeping process, saving you significant time and money.

Bookkeeping Software for Managed Service Providers

1. QuickBooks Online

This cloud-based accounting software is a must-have for all managed service providers. It allows you to customize your chart of accounts and has numerous invoicing and billing features. It can easily send automatic, recurring invoices to clients, calculate sales tax, and quickly add billable expenses to invoices.

QuickBooks Online also has a project feature that is important for MSPs. This feature will help keep all of your information, such as invoices, expenses, transactions, and time tracking, relating to each client in one place. This makes it easy for you to see your overall profitability, get information on invoices that need to be billed, identify sales transactions and show any non-billable time as well.

2. Rotessa

Collecting all of your payments is essential for managing your cash flow. However, credit card providers usually charge a fee, and cheques can take a long time to arrive through the mail and an even longer process. Rotessa is a pre-authorized debit payment collection software that can help you significantly expedite the payment process and improve your cash flow.

Pre-authorized debits are helpful for recurring charges because instead of waiting for the client to pay you, you can easily schedule the payments to be withdrawn directly from their bank account and deposited into yours.

3. Dext Prepare

Tracking receipts and invoices is key to understanding expenses and profitability. You want to ensure that all expenses are captured and accurately recorded in your accounting software. Billable expenses should also be allocated to the correct client or project.

Dext Prepare is expense management software that can help with this process. This tool lets you take photos of your receipts and invoices with your smartphone. The program automatically extracts important data from these documents and creates a transaction that you can export to your accounting software.

It also saves a copy of the image to the cloud. This leaves an easy-to-follow audit trail and means you don't have to keep a physical copy of the receipt or invoice. Plus, it's great for managing all of these documents while you're on the go.

4. Plooto

Many MSPs work with part-time contractors for specific projects and deal with different vendors to deliver their services. You need to ensure that these individuals are paid on time to keep them working with your business.

Instead of writing cheques, you can pay them using Plooto. Plooto is a payment platform that can help you manage your payables. It can automate your payables process, sending automatic payments with a click-of-the-button approval process. Plooto can handle all of your electronic payments, even international ones.

5. QuickBooks Time

As an MSP business, it's important for you to track the time your employees spend on various clients, projects, and tasks. 

QuickBooks Time is an excellent tool for time tracking. It integrates with QuickBooks Online, so you can view your time tracking data on the project feature. It also allows you to bill clients for your hours worked, and you can use the data it provides to analyze the efficiency of your delivery team.

With the advancements in accounting and bookkeeping technology, numerous excellent software and tools are available on the market that can help your MSP firm. 

Cash Flow Strategies for Managed Service Providers

Cash flow is a company's lifeblood. It allows you to ensure that you can afford to give your clients the level of service they expect and that you can invest appropriately in your business. By improving your cash flow, you can cover all of your expenses, pay your wages, and ensure that your business has all the funds required to continue growing and expanding.

1. Automate your collections

Ideally, you want to ensure your business is always in a favourable cash flow situation. However, you can't achieve this if you spend more money than you collect. Most Managed Services businesses bill clients regularly, which is good because it gives you a constant and predictable cash flow. If you don't invoice your clients on time or they pay late, this could affect your cash flow.

To avoid this, you can automatically send invoices on an ongoing basis to clients through accounting software like QuickBooks Online or Xero. You can also set clients up on pre-authorized debits using tools like Rotessa. Once a contract begins, payments are automatically withdrawn from the client’s bank account on a predetermined date. This decreases the amount of time between client payments, improving your cash flow.

2. Renew legacy client contracts

When you first start your MSP business, you might have charged your early customers a reduced price. As your business grows, these legacy contracts may eat away at your margins

You need to renew these legacy contracts to guarantee margins at your current operating costs. You should renegotiate these contracts and charge your current going rate.

3. Stop working with bad clients

Some of your clients may be notorious for late payments, regularly request out-of-scope work, or are simply a bad fit for your business. These clients might eat up your profits as they take up more of your team's time than what is allocated. 

Instead of hanging on to these clients, consider dropping them. This will give you the time to work with clients who are a better fit for your company.

4. Review your expenses

One critical step in improving your cash flow is to have a complete audit of your expenses. Review every payment you make each month, determining what it is for and whether or not it is necessary. 

You may be paying for software subscriptions or additional licenses you don't need. Your main priority should be reducing unnecessary expenses to reduce the cash flowing out of your business.

5. Renegotiate your vendor contracts

While you are reviewing your expenses, you may also want to consider renegotiating your vendor contracts. MSPs contract various technology vendors for tools they use internally and as products for resale. 

You want to review these contracts before they renew and see if you can get better pricing to lower your costs and boost your margins. Alternatively, you can shop around for those services to see whether other vendors can provide better pricing.

6. Outsource non-core tasks

Payroll is a major expense, and hiring in-house employees comes with several additional costs, such as benefits, vacation pay, training, and more. You can reduce your expenses by outsourcing non-core tasks like bookkeepingpayroll, help desk assistance, and marketing, to name a few.

Outsourcing helps to save your business a significant amount of time and money, freeing you up to focus on the more essential tasks of your business. When you outsource your bookkeeping, you ensure that you always have access to the most current financial information at all times, giving you the ability to make sound financial decisions for your business.

KPIs Managed Service Providers Should Track

KPIs are essential statistics or measurements that can help you identify, track, and analyze your business's success and potential expansion and allow you to make more informed business decisions.

1.  Cost per ticket

Your cost per ticket is an indicator of how efficient your service is. 

It measures the average cost incurred to resolve a single support ticket or issue reported by clients. This metric is essential for understanding the efficiency of service delivery and the support team's effectiveness.

Cost per Ticket is calculated by dividing the total operational costs associated with service delivery (including labour, overhead, and technology costs) by the total number of tickets resolved in a given period. 

MSP KPIs Cost per ticket

A lower Cost per Ticket indicates higher efficiency and cost-effectiveness, which can contribute to higher profit margins and better service quality. Conversely, a higher Cost per Ticket might signal inefficiencies or potential areas for improvement in processes, technology, or staffing.

One key to managing cost per ticket is to resolve each ticket as soon as possible and avoid unnecessary support-tier escalation.

2.  Total recurring revenue growth rate

Revenue is an important metric, and as a managed service provider, you want to focus on the core revenue generator of your business. 

MSP KPIs recurring revenue growth

Total recurring revenue growth rate is the current year’s total recurring managed service revenue minus the previous year’s total recurring managed service revenue, then divided by the previous year’s total recurring managed service revenue. Then multiply by 100.

Looking at your monthly recurring revenue, which excludes one-time transaction revenues, which are unpredictable, will show your company's growth rate for recurring revenue from one year to the next. 

3.  Recurring revenue growth rate (Top-line growth rate)

Your recurring revenue growth rate, also known as the top-line growth rate, indicates your total recurring growth in one year. In contrast to the total recurring revenue growth, the top-line recurring revenue growth focuses exclusively on new recurring revenue that was signed in a given year. 

MSP KPIsrecurring revenue growth rate

Top-line recurring revenue growth is valuable because it indicates the market’s current propensity to buy, the effectiveness of your sales team, and the perceived value of your offering.

This KPI focuses mainly on current revenue, so you can use this metric to measure the efficiency of your sales team, the market's willingness to purchase, and the value of the services you provide. A major red flag is a low growth rate or a major negative fluctuation in top-line recurring revenue growth year-over-year. Such a trend indicates a significant problem you must address, such as inadequate sales skills or offers in the market. 

4.  Recurring revenue retention rate

The recurring revenue retention rate is simply the amount of recurring revenue from the previous year that you could carry forward into the current year. 

MSP KPIs recurring revenue retention rate

It is crucial to track this to measure brand performance. A low retention rate means you are not carrying forward a sufficient amount of recurring revenue from the previous year. Your business needs to address its customer service levels and work towards creating a more loyal client following.

5.  Gross margin

Gross margin is often used to gauge profitability in the tech industry. In the context of an MSP, revenue includes all income from managed services contracts and other service offerings, while Cost of Goods Sold (COGS) encompasses direct costs such as salaries of technical staff who deliver the services, software licenses used specifically for client service delivery, and any direct expenses incurred in maintaining and supporting IT infrastructure for clients.

Gross margin is calculated by subtracting COGS from revenue and then dividing the result by revenue.

gross margin MSP

A higher Gross Margin indicates that the MSP effectively manages its costs and maximizes the revenue retained from its service offerings. Monitoring Gross Margin helps MSPs make strategic decisions about pricing, cost control, and service offerings to enhance overall profitability.

However, gross margin may not be the best metric to evaluate the profitability of a Managed Service organization because these businesses tend to rely heavily on indirect expenses like sales and marketing, R&D, and depreciation expenses. Despite this, many tech investors will still want to know your gross margin figure. 

6.  Net operating margin

The Net Operating Margin measures the profitability of a business after accounting for all operating expenses but before interest and taxes. This margin shows how effectively an MSP converts revenue into operational profit, highlighting the efficiency of its core business operations. Net operating income takes into account indirect expenses and is a more accurate measure of a business' profitability. 

MSPnet operating margin

This metric is more balanced than Gross Margin, which helps measure the firm's profitability rate. In the context of managed services, many indirect operating costs are necessary. These include Research and Development (R&D), General and Administrative (G&A), Sales, and Depreciation and Amortization. Therefore, managing these departments incurs extra expenses, which fall within the net operating income measurement. 

For more information on the metrics that your managed services business should monitor or to find out how we can help you manage your bookkeeping and financial visibility, contact Enkel today.

Need help managing your books? We can help!

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