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The American Recovery and Reinvestment Act (ARRA) has some good stuff in it for small businesses. You should take advantage of it in your marketing messages to your clients:
The ARRA extends the 50% bonus depreciation created in 2008 until the end of 2009. This means that businesses making capital investments (computer systems!) can take and immediate 50% depreciation for their taxes.
Businesses can write off up to $250,000 on total purchases up to $800,000, that’s up from $125,000 with a phaseout at $500,000 in 2007.
Net operating losses can be carried back five years, instead of the usual two-year period. This applies to companies with average receipts of up to $15 million.
Remember, selling managed services is more about understanding the clients’ business challenges than it is about understanding technology. This is exactly the kind of information that, when properly used in your pitch, can make you seem like a business advisor.
I met with some good friends in the managed services industry this Friday while traveling to New York City. We had a discussion about their business and took a look at their financial statements.
Two important lessons came from our discussion, and they both have to do with keeping a very detailed profit and loss statement. Most small businesses - including managed service providers - keep way too general of a P&L; leaving the owner without the visibility they need to effectively manage their business.
The first lesson we covered in the “Do it profitably” section of MSP Coach. The lesson is that by keeping a detailed P&L you are much more able to manage to profitability. When you are able to very clearly see the revenues and costs associated with each of your products and services, you will find ways to increase your profitability. Without that detailed clarity, you’ll miss many opportunities because they’ll be buried deep within your numbers.
The second lesson is one we had not yet covered in MSP Coach, but that is absolutely critical for everyone to understand. By keeping a very detailed P&L that separates out all of your products and services clearly, you will have a clear demonstration of the equity value of your business.
What do I mean?
In our industry, different types of revenues are valued in the marketplace very differently. For example, hourly break-fix revenue is valued at roughly 30% of sales, while managed services revenue is valued at nearly 100% of sales. If you didn’t have these broken out clearly, a potential buyer of your business would have no choice but to discount the value of your business due to a lack of understanding about your revenue streams.
Let’s use some real numbers to see how this might impact the perceived value of your business. Let’s assume that you have $1 million dollars in revenue last year, and you have it presented on your P&L as:
Revenue - $1,000,000
COGS - $600,000
While these look like healthy numbers, as a potential buyer of your business, I don’t know enough to give you as strong of a valuation as I would if your numbers looked like this:
Recurring revenue - $500,000
Non-recurring revenue - $500,000
Recurring COGS - $200,000
Non-recurring COGS -$400,000
Why is this second set of numbers that different? A few reasons:
I can now clearly see that fully half of your revenues are recurring revenues with nice margins, which I will assign a much higher multiple to than I would non-recurring services
I can now also see that your non-recurring revenue doesn’t have good margins, which allows me to investigate the cause and determine if I could improve the situation
In the first scenario, because of the lack of visibility, I would have no choice but to assume that all of your revenues are non-recurring, resulting in an artificially low valuation of your recurring revenues.
Please don’t overlook the value of this lesson - get your P&L set up properly so you can track the details. If you don’t, you are going to rob yourself of both immediate profits and longer term equity value.
We send a lot of time educating our key employees on the finances of the business (we utilize the techniques in the great game of business) and we get fantastic results as an organization.
When only Mike and I are thinking about cash flow, gross margins, expenses and net profits we certainly have the ability to affect them but as all of our key people start to be aware of and think about these things we see a fantastic result. In fact we see things happen that we didn’t anticipate or think about our selves.
We work to provide everyone a steak in the outcome of the financial health of the business and we talk evey week with the whole company about the companies gross margin goals and where we stand as a team.
I have pasted some cost control tips from a good e-myth article Mike forwarded to me the other day. I hope you find them helpful in controlling costs during these tough economic times.
Josh
Set a good example. Cost-reduction starts at the top. In good times and in bad, always show your employees that you are personally involved in reducing costs.
Keep yourself accountable. If you can’t hold yourself accountable, how do you expect to hold your employees accountable? Good leaders have systems in place to track and monitor the progress they make towards achieving the company’s objectives-objectives such as finding less expensive ways of doing things.
Manage your time. Don’t waste time. If you can’t manage your own time, you can’t expect your employees to manage theirs. Time wasted is a huge drain on profits. For example, if you come in late and/or leave early, if you are consistently late for appointments, or you don’t pay your taxes on time, etc, there are serious repercussions. Remember, your employees notice everything. So, consider reducing operating expenses by managing your time well. Your employees will follow.
Never abdicate control of your finances. As a business leader, you need systems in place to ensure you personally review financial information on a timely basis. Never give control of your finances to someone else.
Build a culture that values cost control. As your people begin to follow your good example, they will start to find new and more effective ways to reduce cost. Be sure to lavish them with praise and reward their efforts.
Refine your negotiating skills. If you don’t negotiate well, make refining your negotiating skills a priority. And remember, negotiating is not about “beating up’ your suppliers. Negotiating is about understanding your needs, their needs, the attendant market conditions and coming up with a win-win solution.
Perfect your recruiting and hiring process. A bad recruiting and hiring process can cost you dearly. You need to be very clear about the results you want from both processes.
One of the most damaging statements every made in the history of business is:
“The customer is always right.”
Why is this one of the most damaging statements ever? Because too many people take that statement and expand it in their minds until they think that they have to do anything and everything for every customer.
Not all customers are created equal!
We’ve all had customers that want everything in the world, but don’t want to pay for it. We’ve also all had customers that won’t actually listen to our advice, then get upset when they haven’t had their problems solved.
These customers are called Killer Customers, and you need to learn to identify them and deal with them appropriately, or they will suck the life out of your business.
This idea - that I could run my business without bowing down to every demand of every customer - was a revelation to me. I first grasped the concept when I read the book Killer Customers: Tell the Good from the Bad–and Dominate Your Competitors. It’s a great book; you should add it to your business library.
The point of the book is that you should get really good at telling the good customers from the killer customers, and then ditch the killer customers so your competition can have them and get bled to death (that may not be how the author would summarize it!).
How to segment your customers
In my experience, the keys to customer segmentation are the following:
Know your target customer very well
Train your salesforce to find target customers and provide incentive to make sure they don’t sign killer customers
Have a process for continuously reviewing your customers to weed out the killer customers that you accidentally let on board
Have enough service offerings to match the various needs of your clients’ desired service levels
Doing any one of these things will help you out a lot, but doing all four will result in increased profits, happy customers, and happy employees - a combination that’s hard to beat.
And what happens when you weed out those customers that tie up all of your time, never listen to your advice, and pay you 60 days late consistently? If you execute on the three customer segmentation practices described above on a regular basis, you will see profits rise consistently over time.
In an economy like this, it’s prudent for all managed service providers to look at your expenses to determine where you can cut - even if you aren’t in any sort of financial trouble. It’s much more fun to be proactive about this rather than being forced to be reactive!
But cutting expenses needs to be done thoughtfully and strategically, otherwise you risk “cutting to the bone” as they say, and starving your company of the resources it needs to be successful.
How to do this? I read a newsletter article from the folks at the E-Myth today and thought is perfectly captured the key questions you need to ask yourself before cutting an expense:
Will you reduce your ability to compete effectively?
Will you reduce the quality of your product?
Will you reduce your client’s experience with your company?
Will you reduce the good will you have worked so hard to create?
If the answer to all of these questions is NO, then you can probably cut the expense and feel good about it. If the answer to any of these questions is YES, you’d better be very careful.
PS -Anyone that has spent any time with me talking about business knows that I’m a huge fan of the E-Myth. If you haven’t read it yet, pick up a copy today - The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It - and get started. It’s a very quick and easy read, and it will change how you think about operating your company.
I’m sure many of you have heard of the recent presentation from Sequoia Capital to the companies it has invested in telling them that this economic downturn is for real, and that they had better act like if they hoped to survive. I had not seen it myself, however, until Michael Beecher from CoreIP Systems sent it along to me.
It’s a good presentation, and no matter what you think about how bad the economy is actually doing and how long it will last, it has some great ideas about how to run a company in tough times - regardless of the specific cause.
I’m a big believe in the idea that you should always run your company as if you’ll never be able to raise another dollar - that’s a lesson compliments of Warren Buffett. Not having a big financial burden hanging over your company gives you the flexibility to take advantage of opportunities and the durability to survive tough times.
So take the suggestions from the presentation and use them when appropriate - they could be a lifesaver!
I am so frusrated with the craziness in the markets, because it’s just that - craziness. People are panicing and following the panic with more panic. The stats I’ve read indicate that over 90% of mortgages are still “performing”, meaning people are paying them every month even if their equity value is less than their mortgage value.
90%?!?! And the markets are reacting like this?! Very frustrating.
I read some quotes today in a Time article that I thought were just perfect:
“The markets have gone completely crazy, and are reacting in fear to a bad situation in a way guaranteed to make it far worse,” says Marc Touati, deputy executive manager of French economic and finance research group Global Equities. “We once had ‘irrational exuberance’ pushing markets ever higher; now have irrational pessimism running them into the ground. People have to calm down or we’re in for big trouble.”
“Irrational pessimism.” Perfect.
“We’re back to the most basic behavior of stock markets: people buy when they see everyone else buying, and the sell when everyone else is selling,” says Naudé.
Dumb.
Governments could follow the nerve-wracked Russians and suspend trading altogether, in a bid, as Touati says, to stop “markets from sawing off the branch their sitting on.”
I don’t think it could be better said than that.
“It will take courage to break from the herd,” Touati continues, “but those who do it first are the masters of the market down the line.”
Just look at what Warren Buffett is doing as an example.
I hope that you will read this and approach your days with confidence in yourselves, your businesses, and our country. That’s all we need - a dose of confidence - and this craziness will stop.
Don’t get me wrong - I know there are things in our economy that need to be fixed. But it isn’t broken, it’s just bruised. Our reaction will determine how bad it gets or how quickly it recovers.
Well, I can think of a few things, but the first thing I did was:
Examine my overhead expenses with a fine-toothed comb!
When you are working with a relatively new model - like managed services - and pressing for aggressive growth, it can be difficult to watch your overhead very carefully at the same time. I’m not suggesting that we got sloppy - we’ve always been a frugal company - but we did experience some “expense creep.”
By going through our P&L very carefully and asking “Do we really need this?” to every expense, we were able to add several points to our bottom line. That’s the kind of cushion you need during tough times, and it gives us more money to spend on sales and marketing efforts.
I highly recommend that you go through yours and be aggressive about making cuts where you can - it can make the difference between a healthy company and one heading for trouble.
I know this is a blog about the MSP industry, but the economy impacts all of us, and we should take the time to understand it.
This is a very interesting, informative interview with Warren Buffett, discussing today’s economic crisis. If you don’t read Warren Buffett’s annual reports and you don’t listen to his interviews, you are missing out.
Our economy is facing a crisis because of fear/lack of confidence. That is reflected in the markets, and it is reflected in our business in one way or another. The best way to get rid of the fear is to get informed.
Josh and I have been working on a project that I’m happy to say is ready to roll.
MSP Coach is an educational site for the IT service provider community, particularly those serving small and medium sized businesses and those that are interested in developing a managed services business.
We’ve really enjoyed blogging - we learn a lot from taking the time to write about what’s in our heads, and we’ve established some great relationships with many of our readers.
But we’ve realized in the process that we have a lot to share that is difficult to capture in a blog, and that there is a real hunger for good information on our marketplace about how to grow a successful managed services business. I say good information, because there is no shortage of information these days, but most of it is from vendors trying to sell you a product. A lot of that information is still good, but it’s definitely biased, and it doesn’t always come from a voice with experience in this industry.
We have experience as time and materials service providers, and we have experience building a managed services practice from scratch to several million in revenue over the course of a few years. We have a lot of valuable lessons to share - and we enjoy sharing them with the MSP community.
MSP Coach is free (for now anyway!), so we hope you sign up and take a look around. We are just getting it started and this is a “nights and weekends” gig for us, so please be patient - more content will be added as we are able to do so.
If you have suggestions or feedback, we would love to hear from you.
. It’s a great book; you should add it to your business library.
- and get started. It’s a very quick and easy read, and it will change how you think about operating your company.
