Stuart Crawford Talks With Growthforce’s Stephen King About Using Data To Make Rock Solid Business Decisions
Growthforce is an industry leader in outsourced, cloud-based financial services such as bookkeeping, accounting, and complete financial management. Stephen believes in solid, data-based financial decisions to power business growth, which is why he is easily the best person to be talking with about this topic.
My conversation with Stephen was interesting, to the least, and we got to discuss how Managed Service Providers (MSPs) can use financial data to get out of the red line and actually increase their profits.
1. Many Firms Seem to Be Struggling With Making Decisions Based on Data
Stephen is a self-proclaimed data junkie who loves to rely on hard data to make forward-looking business decisions. Having worked with hundreds and thousands of businesses and MSPs in particular, he has observed the power of data to influence business success and growth.
Stephen gives an example of two MSPs in the same state, both serving the same target audience with the same range of Microsoft Suite services. However, one was wildly successful, while the one was struggling with cash flow problems.
Having both companies as his clients, he was able to analyze their financial records and realized what two factors made the winning MSP different:
- Financial management strategy — using financial intelligence and real-time data to make meaningful business decisions
- People strategy, because people drive revenue and growth
2. Don't Rely on Financial Reports: They are a Rear View Mirror
A lot of businesses today still rely on financial reports such as income statements and balance sheets, but these only contain historical data. These kinds of reports were designed for compliance purposes. In fact, they are designed to be used by external users such as banks or the IRS, the board, or the investors.
An avid baseball fan, Stephen gives the example of a baseball game box score. He also cites the movie Moneyball, which shows how the Oakland As relied on data-based sabermetrics to find undervalued players on a budget and use that team to ultimately win the 2002 American West title.
In the same way, underprivileged business organizations need the equivalent of a Billy Beane, someone who is forward-thinking and is willing to rely on hard data to make a decision.
3. How to Use Management Accounting to Make Business Decisions
Management accounting, or cost accounting, involves looking at the cost of work that you do and comparing it against your revenue. Then, break down this cost to the unit.
The unit is what you will include in your invoice to charge clients, whether that's the number of seats, billable hours, number of people on a break/fix contract, etc.
This kind of unit economics approach allows you to calculate and continually monitor the cost of delivering one unit of each of your services. You've got to understand the difference between above the line and below the line costs because the single most important metric for making business decisions is the gross profit percentage or profit margin.
That is why in Shark Tank, they always ask, "how much are you selling your product for, and how much does it cost you, fully loaded?" For an MSP, it's the same thing. You need to take your gross profit margin and subtract the cost of services provided. Income — Cost of Services Provided = Gross Profit. With these costs in mind, you have the data you need to start making data-based day to day decisions.
4. Profit First Approach
The costing approach is important because it can be used to make sure that your business is always profitable. Mike Michalowicz wrote about it in his book Profit First: Transform Your Business From a Cash-Eating Monster to a Money-Making Machine.
In the book, Mike talks about how costs are one of those windshield metrics that can help you to run your business profitably on a day-to-day basis.
5. The Five Decisions That Help You Increase Your Profits
If you are not happy with your bottom line, there are five questions you need to answer.
- Where do you spend most of your time? That's your most valuable commodity
- Pricing: Are your margins good enough from the get-go?
- Which clients or products should you fire or re-price?
- How do you spend money to make more money?
- How do you increase the productivity of your people?
Looking at many MSPs in the industry, the big majority are making 5 or 6% margins. The well-run companies can manage up to 15%, while the marketing leaders are cutting 20% in margins. It's all about managing costs to increase profits.
6. Top-Line Revenue Has Nothing to Do With Your Bottom Line
The bottom line is not about how much you earn but how much you can keep, so any clients who aren't meeting their share of the costs are pulling you back. Point #3 is especially important for MSPs, and Stephen says that the first thing that Growthforce looks at is the bottom 15% of the clients.
This brings us back to the same issue of unit costing. You need to be able to track exactly how many units of resources each client is taking up. For example, if you use a ticketing system to track client requests, can you calculate how much time is spent on each client per day/month?
Even if you don't have an automated system to do this for you, you can use feedback from your employees and feed it into your Professional Services Automation (PSA) system.
When you have accurate unit costing, you have the power to price your services accordingly. Stephen talked about fully-loaded costs, which means you have to think about 401k, taxes, insurance, recruiting costs, and others that can inflate your overheads by 30% or more. It is one of the biggest reasons why many companies have cash flow problems.
- Look at your gross profit as a percent
- Consider net income percent as the second most important number
If, for example, you want a 10% margin, you will then look at how much overhead you have. Take both your total profit goal and overheads and divide that by the total number of units. For example, if a $10MM company has a $1MM profit target and $2MM in overheads, they need to have $200 of overhead costs and $100 of profit priced into every unit.
To ensure that you remain competitive and don't overprice your services, make sure that you use value-based pricing. For that, you have to really specialize in your particular niche and ensure that you are providing absolutely unique value that clients will pay for.
8. Deal With Your Bottom 15% Clients
Once you have figured out which clients are not profitable, you need to re-price them or replace them with higher-paying clients. One strategy that always works is to have a candid conversation with them. Let them know that the services you are giving them are way over their package value, then give them three options:
- Calculate the costs that are out of scope and offer to bump up their package price to cover them.
- Cut off those extra services that are out of scope. Options 1 and 2 are agreeable 85% of the time if the client really likes your services
- You can also offer to transition the client to another service provider
Stephen goes on to give the example of one of his clients based in Queens who had Apple as one of their biggest clients. Making up 40% of the revenue, Apple was obviously a big deal for them, but it was not covering its overheads.
After 6 months of trying everything else to increase profit, the management finally agreed that it was time to have a conversation with Apple. Luckily, Apple agreed to the new plan and the company went on to make $1MM in profits that year.
9. Where Do You Spend Your Time?
Growthforce has a one-page scorecard designed to help clients look at the five most important business drivers: gross revenue dollars, gross profit dollars, gross profit percentage, net income dollars, and net income percent. You can then look at your trends over a 12 or 24-month period and figure out whether:
- You have a top-of-the-line problem, meaning you need to increase your revenue
- You have an above-the-line problem, which means your margins are not good enough to let you make a profit
- You have a below-the-line problem, which means that you have too many overheads
You can always visit Growthforce.com and find downloadable tools to help you carry out all these forecasts and business calculations. Stephen also mentioned how integrating people management strategy with financial management strategy is important for growth, but I believe that is a subject for another talk.
To learn more about what Growthforce does, connect with him through email (firstname.lastname@example.org), Twitter (@skingGForce), or LinkedIn (StephenKingCPA)
If you are an MSP in the US, Canada, or Australia who needs help with your marketing and revenue growth, Ulistic is here to help. We specialize in MSP marketing and are leaders in the digital marketing space. Schedule a complimentary discussion with me, Stuart Crawford to learn how Ulistic can help you fuel your MSP business growth.