The Key Performance Indicator, or KPI for profit is not revenue minus expenses. A KPI is a reflection of an important aspect of your business. KPI’s can be built around number of clients, tickets, staff members and practically anything you can measure. KPI’s are the flag that pops up and gets your attention.
A KPI can tell you when you need to hire, or when you need to cut costs. You will know before your customers complain that the techs are too busy or when you have to skip paying yourself. I’m going to review a few basic KPI’s that just about everyone will need to keep an eye on in their business.
Before continuing I will share that I searched many times online for a set of KPI’s to just use as my own. In nearly every case, they just didn’t provide the information I needed, or it was inaccurate. Every KPI for profit has to be developed within your business for your business. Developing them yourself means you know how they work, and you better know what they mean.
When to run KPIs
Measuring your performance if your business fluctuates a lot can be difficult. Some MSP startups will transition between break-fix labor charges and a flat fee for a suite of services. Others will not charge anything for labor but roll it all up into a flat monthly fee.
The more variable your business revenue is, the more you should consider longer trends to apply your KPI for profit against. For a long time, we had a hybrid model where we still had a lot of labor hours paid for by clients, which made for some interesting sales cycles.
It’s not what you Expect…
When we start a new business, we operate from some reasonable assumptions. We assume we have a product or service clients want or need. The product or service is valuable to the clients so we can charge for it. Client will pay to have these products or services delivered to them by you.
Well, that does seem reasonable, however it is not always the case. Most entrepreneurs fail at the first marker. They assume they have a product or service people want or need. This may not be true, or true for some clients, or true for clients in a particular location. Good market research should get you clear of this one.
A product or service that is valuable to a client is another standard which further reduces the size of your market. I think for practically every type of business out there, you’ll find a client that doesn’t find it’s worth paying for. Many more will find that it’s not worth paying much at all for. This is where your target market comes in. You’ll narrow down the niche you need to operate in with some more good work in planning.
The last one seems like a slam dunk, but this is where a KPI for profit can come in. Many business owners assume clients pay the bill on time. There will always be a few who don’t. Unless you are actively ticking off invoices against payments whenever they come in, you probably won’t notice someone getting behind until your credit card is maxed out.
Having a report of clients who regularly pay late or near the end date of the terms you extend can provide a warning. It can tell you that your cash flow is at risk. Knowing this, you can take corrective action before a problem occurs. This one is a true KPI for Profit.
Are you too busy?
You might “feel” busy but is it really true? From a revenue-generation perspective, you should be as busy as you can be. You then document your hours and bill the client. Once you begin to grow your business, you’ll need employees. They will probably tell you when they’re getting busy or not. It’s possible that you can hire and release with the ebbs and flows of business. For a good MSP however, having longer-term employees can be an important value to your clients.
We need to more closely monitor being busy with how much revenue we’re bringing in. This is something that is easily done from your Profit and Loss. We’re going to compare our revenue against our payroll. This one works well when your other expenses are low, and if you are turning a profit. This will be our Payroll to Revenue KPI. Take your Gross Profit (which is after you pay for anything resold) and divide by your payroll. If the number you get is greater than 2, you could probably hire.
This obviously has another feature as well – warning you if you have too much payroll for revenue. If my Payroll to Revenue KPI is less than 1.5 I should probably look to let someone go before we start losing money.
This KPI for profit is simplified. You might need to adjust this factor if you have higher expenses, or your revenue model doesn’t exactly make this work out. As we grew, I had to move the hire number up to about 2.2 before it made sense.
Important MSP KPI
One of the foundational descriptions of an MSP is that we’re offering services on a recurring monthly revenue model. Those services imply a certain amount of unbilled labor. This is labor we might tell the client is “covered under contract”. One example is if you resell Microsoft Office software. Your agreement might say they don’t have to pay for help with problems setting up a signature in Outlook. Perhaps some update removes account information, and you have to help them enter that in again.
When managing employee’s time and determining utilization you can’t always go from a revenue vs. hours calculation. In fact, you need to get some idea of their utilization. This one is fairly simple; you add up the hours they put on tickets for a particular period and divide that by the timesheet hours they turned in. This works well if you are paying them full time instead of per-job or by hours recorded in tickets.
If you have a 160-hour month, and an employee put 140 hours on the tickets they worked, you’d divide 140 by 160 and have an 87.5% utilization. What does that really mean though?
You will hear a number of different takes on what the best utilization is. Clearly 100% isn’t good because that means you are probably letting tickets sit while work is being done. Equally so, your employees are probably being run ragged and you aren’t going to keep them for long.
At the same time, a low utilization is no good because it probably means you could probably spend a lot less on staffing. So where is the happy medium for the MSP startup?
To start, use it as a guide. Keep track of the number and see how it moves with the other KPI’s you have set up. Your business model may show that you thrive between 60-70%. If you are profitable, and people are happy (a happy employee is a happy customer), that seems like a good place to be. Then when you get over 80 or under 50, you’ll know there’s something you need to look more deeply into.
Here’s a list of the KPI’s we use to manage our business. They fit what we do and how we do it quite well. These might work for you, may need tweaking, or aren’t relevant. Feel free to adapt to your business as you see fit. If you have questions or want to share ideas about creating your own KPI’s, please reach out!
The colors referenced are for a handy dashboard you can develop to highlight good and bad metrics.
- Profit Margin (Costs like wages have the biggest impact against profit. Reduce costs, improve profit).
- Net Profit: Red: Under 15%, yellow 16-24%, green 25+%
- Gross Profit: Red: Under 50%, yellow 51-69%, green 70+%
- Client Concentration (Revenue/client as a % of total. More clients sharing our revenue load, the better we can manage downturns) Prefer each to be <20%, Yellow 21-24%, Red 25+%
- Revenue (gross profit) to Wages ratio (MRR is a good positive impact on this metric) Goal is 2.5x W2 to hire = GREEN
- Cost per Endpoint (recurring COGS, overhead. Not a great metric as a $ amount. Better at indicating trends.)
- Utilization: Billable Time vs. Clock hours (The busier, the more profitable. This is different than the employee review metric) – Goal is over 42%, Yellow 41-35%, Red less than 34%
- Monthly Recurring to Revenue (gross profit) (add more MSP clients, upsell them to Enterprise, the better we do) – Goal is over 30%, 29-20% = Yellow, 19% or less, Red
- MSP Sales to Wages: Ratio of how much payroll is represented by total MSP Sales. Goal is under 1, yellow is 1.1-1.5, Red is 1.6 or more.
A necessity for an MSP Startup’s financing is having a KPI for profit, and just about everything else. You can’t’ know what isn’t measured and measuring your business will help ensure it remains profitable and your clients are content and happy.