Three Pillars of MSP Profitability

In today’s competitive landscape, managed service providers (MSPs) face several high-stakes challenges. These concerns all can impact profitability, and to top it off, MSP owners need to keep an eye on their cash flow—a staggering 69% of business owners fear they’ll lose their business due to a lack of available cash.

It’s no secret that cash flow and profitability are both essential for different reasons. While cash flow refers to money that flows into and out of your business, profits are what’s left over after deducting all expenses from total revenue. Here’s why having a healthy a cash flow is important: 

Most businesses are unified by one crucial goal: maximizing profits, preferably at best-in-class levels. However, as important as profits are to building a healthy business, profitable businesses can run out of cash to pay their bills. This happens when an MSP sends invoices to their clients, the amount owed in the invoices count as revenue; but until the client pays the invoice, there is no cash flow back into the MSP. 

MSPs have bills to pay to equipment and software vendors, landlords, employees and employee benefits, and much more, all of which must be paid on a schedule. If those bills are not paid, the MSP will not be able to order more hardware and software for clients, will get evicted, and let’s face it, no one is going to work for free no matter how much they love their jobs. So, in this all-too-common example, an MSP could show great revenue on their books and still run out of cash if their invoices are not paid quickly enough by their clients. 

More often, though, it is the MSPs that are unprofitable that run out of cash. After all, when expenses are higher than revenue, moving cash around or borrowing money to pay the bills only goes so far. Ultimately neither scenario is unsustainable unless the MSP can become profitable. As simple as it sounds, boosting profits comes with unique challenges. 

Five common obstacles that could threaten your profitability

1. Underpricing  

Think about how much it costs you to perform your services when you look at all costs that go into them. Does your current pricing model stack up and provide you with sufficient Gross Margin (Gross Margin is the price to the client minus cost of tools you need for the client and compensation of your techs and others for their support of the client) to make best-in-class profitability? Or are you knee-deep in an all-consuming price war in your market, offering steep discounts to win or retain your clients?  

Best-in-class MSPs carefully evaluate their real costs and desired profit margins to optimize pricing. Because they prioritize the value of their services and how to explain the value to clients, they rarely offer discounts—especially when it comes to new or infrequent clients. Looking to sharpen your strategy? Our comprehensive pricing guide can help. 

2. Project delays and client non-payment 

Delays affect every step of the process—including payment. When delays occur due to the client, it doesn’t matter to the vendor who needs payment from the MSP. Because this will impact your cash flow, you may want to consider implementing partial pre-payments on projects, milestone billing, or delay penalties and modifying your service-level agreements accordingly.  

Non-payment after payment is due is another issue altogether. Depending on the situation, consequences to your business can be substantial—which is why the right response is critical. 

3. Unexpected expenses 

Maintaining an emergency fund is a tried-and-true personal finance strategy. For MSPs, this tactic is equally useful, ensuring stability in the event of unanticipated expenses.  And while you can’t anticipate what those expenses will be, you can always anticipate that there will be unanticipated expenses. 

4. Macroeconomic events 

The pandemic has transformed businesses in unprecedented ways. For example, if you’ve lost a large client or you specialized in a vertical that was particularly affected, you may need to reimagine your approach to customer retention and sales. To navigate economic uncertainty, stay ahead of the curve and protect your profits in the process. 

5. Inflation 

In March 2022, the annual US inflation rate skyrocketed. And thanks to growing demand for tech labor, salaries have increased—a conundrum for MSPs everywhere, considering wages don’t typically rise with inflation. A more costly workforce could spell disaster for your cash flow and profit margins. It also reinforces the importance of understanding how many and what level of employees are needed to effectively service your clients. 

For many, these obstacles are more than mere setbacks. The good news is there are things you can do to help increase profits. 

Three must-have pillars of profitability in today’s fast-paced business climate

1. Quarterly benchmarking 

You can’t get to where you want to go until you have seen where you’ve been and you know where you are today. Benchmarking gives you insights into how your business is really doing. When you start to compare your financial performance on a quarterly basis to the best-in-class MSPs, you will have an accurate picture of how you are doing compared to your peers and where you need to improve your profitability as well as your cash reserves. 

2. Best practices 

Looking to elevate your business? Adopt the best practices of the top performers. By emulating top performers, you will get even closer to your desired results. These best practices will vary by business model and operational maturity. For example, some MSPs might find they need to streamline their onboarding process, while others may focus on budgeting. The good news is there is a tool that can provide you with the best practices you need to take your business to the next level. 

3. Technology 

Innovation isn’t just an advantage—it’s a necessity. According to a new ConnectWise industry report, automation is exploding, with an expected growth rate of 100% over the next three years. To turbocharge operations and growth, MSPs are turning to professional service automation (PSA) and remote monitoring and management (RMM) software, among other powerful automation tools. 

For businesses everywhere, being profitable and having a healthy cash flow is critical to the success of their company. By partnering with ConnectWise, you can leverage all three pillars through a single, centralized software suite—a best of both worlds win for your business. In today’s unpredictable environment, who wouldn’t want the best of both worlds? 

ConnectWise provides fully customizable and flexible IT solutions, helping MSPs upskill their teams, protect their clients, and drive profitability.

Tools to maximize MSP profitability:

Peter Kujawa is vice president at Service Leadership, a ConnectWise solution, and Brian Troy is senior director of product marketing at ConnectWise. Read more ConnectWise guest blogs here. Regularly contributed guest blogs are part of ChannelE2E’s sponsorship program.