You might be surprised (or not) to learn a lot of business owners don’t know how to budget for an MSP business. Of those, many avoid it altogether. We get it, budgeting can be overwhelming and often seems like it’s not a priority. We put together this guide to help you overcome this hurdle and leverage a budget to build a stronger business.
Why Does Budgeting Often Get Overlooked by MSPs?
Many owners have grown their business organically. Maybe you started out managing your business via cash, with minimal forecasting. Planning budgets for months at a time may be new (and overwhelming) territory. Couple this with the fact that many MSP owners are still fully operative in their business. They spend the day running around putting out fires.
It’s not enough to simply look at the financial statements from the previous year and assume it will be a wash, rinse, and repeat. Instead, you want to start thinking ahead and start tracking business performance against your projections.
The Disruptions Will Keep Coming.
Your budget is not etched in stone
Many MSP owners express fear that their spending decisions are set in stone once they commit them to a budget, with no opportunity to deviate. This is not the case. Yes, accountability is important as it is a key part of budgeting, however, budgets should be somewhat fluid. They have to be adjusted based on changing business environments and new opportunities. Think about 2020. Whatever you would have budgeted at the outset was upended in March by the pandemic and business shutdowns. You wouldn’t have wanted to truck on with the budget you had in that case – you’d need to adjust.
The value of a budget is that it gives a benchmark for future spending (and earning) decisions and gives a deepened level of visibility that is instrumental to planning and leads to proactive, as opposed to reactive, decision-making.
Our Guide: How to Budget for MSPs
Here are a few strategies to get your business started on its budgeting journey.
Be realistic about your sales targets
For starters, budgeting is a critical tool to accurately plan for growth and set realistic sales targets. Budgeting can help you understand your growth to date, which gives a clearer picture on what is achievable going forward. It can be tempting to set aggressive targets; who doesn’t want to hit $15 million in sales next year? Doing so without the concrete data to back up your targets only sets your company up for failure.
Plan for smart growth
Smart and sustainable growth requires realistic targets and a realistic understanding of the impacts of your intended momentum on operations and resources.
Furthermore, aligning investment decisions with actual growth will ensure that you are getting the best return on those investments. There is no point setting your company up with the necessary resources to manage the capacity that comes along with $15 million in sales, if the reality is that $15 million in sales is still many years away from being achievable.
Look to your budget to answer these critical questions
As your organisation aspires to increase sales, a well-executed budget will help you project how to best get there. Consider some of the pertinent questions that a budget can illustrate for your leadership team:
- Where are your strongest organisational niches?
- What products and/or services are performing best?
- What activities are driving new business?
- How are your recurring revenue numbers performing and where have you been successful in increasing that revenue?
- Which clients are generating the highest margins for your bottom line?
- Are there clients that you are subsidising more than you should be?
Data tell stories, and budgets are rich with these critical insights that can help your organisation to formulate its next chapter.
Identify the resources needed for success
In particular, MSPs need to be realistic about their labour costs. Labour is the biggest expense line item for MSPs, so being realistic about your needs here (including both employees and offshore contractors) is a necessity.
Tying It into Your Personal Financial Health
Another reason that MSP owners (and, really, all business owners) need to be mindful about budgeting is that their organisational financial health is ultimately so closely aligned with their personal financial health. If you are not budgeting for your business, you are not setting yourself up for optimal personal financial success.
Consider the salary you’re drawing from the company. Is it sufficient to compensate for the stress and complications associated with the role you play? If an owner is only drawing an annual salary of $100,000, and particularly if the MSP is not in a growth phase, they could easily make that money and more by simply working for another IT company – without the myriad of pressures and risks that ownership entails.
Next Steps in Securing Your Financial Future
Budgeting can feel daunting. But it doesn’t have to be.
Sea-Level Operations provides MSP coaching that makes a measurable difference. With one of our passionate coaches, all of whom are former C-level MSP executives and owners, we can help you navigate everything from budgets to operations.
Contact us today to get started.