As an IT MSP, you understand the importance of recurring revenue. It is basically the lifeblood of your business model, because it creates a predictable cash flow, provides long-term stability, as well as, naturally, builds business value. So, recurring contracts are your main assets, and your main tools for growing your business. Unlike one-time projects, these are the ones that you rely on in order to succeed, stay relevant and build a good reputation on the market, thus getting even more clients and ultimately being happy with the profits you’re making and the general performance of your business.
Of course, it is probably clear to every IT managed services provider that recurring contracts are their main asset. Yet, if you’re relying on those, you may have a different question on your mind. Basically, while these are essential, accurately tracking them can become a nightmare, especially if you don’t really know how to do this the right way. In short, this can be one of the most complex accounting challenges for all IT MSPs.
The good news, though, is that things can be learned. That goes for this as much as it does for anything else. And, you should absolutely get a better sense of how it is that you should track recurring revenue, so as to ensure that everything is done correctly, that you have a clear overview of your performance and profits, as well as that you are, of course, staying in compliance. So, that is precisely what we are going to be talking about today.
Below I will take you through the process of how recurring revenue should be tracked. And then, as you will see, I will propose quite a simple solution that can solve all of your accounting issues easily, including this one. Let us not get ahead of ourselves, though. Let us first talk about the actual tracking procedure.
The Process of Tracking Recurring Revenue
Most other businesses charge for their services as they happen. IT MSP providers, however, operate slightly differently, which is exactly what creates the challenges for the recurring revenue tracking. In short, they build their businesses around monthly or yearly managed services agreements, as well as subscription software licenses, maintenance contracts, and, of course, cloud service bundles.
This, among other things, means that the revenue has to be recognized over time, and not upfront. Furthermore, cash inflows are spread across months, and the same goes for profit margins. And, of course, there are metrics such as the Annual Recurring Revenue (ARR), or the Monthly Recurring Revenue (MRR), that are absolutely critical for proper tracking, financial planning, as well as evaluation.
So, the first thing you need to do is establish great policies for revenue recognition, as that is one of the biggest challenges you may face. Most usually, the revenue should be recorded when the service is delivered, and not when you actually collect the cash. So, having the right policies in place will help you recognize revenue and track it accurately and on time.
Another thing that you may want to rely on is automation. Automating the billing and invoicing processes can make things much easier for you as the IT MSP, as you won’t have to manually track all the contracts. Doing it all manually could lead to some serious mistakes, which can then erode your cash flow, and I am sure you would much rather avoid that.
Moving on, in addition to the two important metrics I’ve mentioned above, the ARR and the MRR, you should also track some other key ones. From the churn rate and net revenue retention (NRR) to lifetime value (LV). All of these will help you get a clear overview of your performance, your recurring revenue health, as well as the future cash flow, and I suppose you get how important those things are for the success of your business.
You should also remember to keep the recurring and the non-recurring revenue separate. After all, as an MSP, you could be offering some one-time services in addition to those recurring contracts. And, you need to keep records of these separate, so as not to cause any visibility difficulties and thus distort your financial performance.
Of course, it should go without saying that you should also do your best to stay in compliance with all the tax laws along the way. Your recurring contracts are sure to affect tax planning, and you need to keep that in mind, since different types of contracts can actually trigger different tax treatment. So, proper planning will help you avoid misclassifications, as well as timing issues, all of which could lead to overpaying in the end.
The Perfect Solution for IT MSPs
Okay, I’ve mentioned already above that I have a solution to propose to all your recurring revenue tracking challenges, as well as accounting challenges in general. To put it simply, the idea is for you to hire a great IT MSP accounting expert that will be able to do everything for you correctly, reduce errors, and ensure you are tracking the right way, while also staying in compliance. Working with experts is always a good idea, as it will ensure accuracy and lift a huge burden off your chest, making things easier and allowing you to focus on your core operations, instead of having to worry about all things accounting related.
The only thing is, naturally, you’ll need to do your best to choose the right partner here. That is, the right company that will provide you with the services you need. So, don’t jump into making any hasty decisions, and instead take your time to select the perfect professionals.
Find more of them online, or get recommendations from other MSPs. And then, research all the potential accounting experts in more details, checking their experience levels, their licenses, as well as their reputation before going any further. The key is for you to hire licensed, highly qualified, experienced and reliable providers that will also charge fair fees for their services. When you do this, all your recurrent revenue tracking challenges will become a thing of the past.