You can set the clients you want to review and the period to review.  From the pull down menu under Company, you can select any individual client or all clients in aggregate (see step 1 below).  

For time period, there is a Quick Set pull down where you can select Prior Calendar Years, Current Calendar Year or Trailing 12 Months (plus current month) (See step 2 below and Quick Set pull down menu below that).  If you would like to customize the dates, you can drag the starting and ending date boxes to the appropriate date. Once you change the selection, don't forget to apply the changes by clicking on the Filter box (step 3 below).

The layout of the screen includes the selected months across the top and specific metrics along the left side. These metrics include: Revenue, COGS, Contribution and some additional key metrics on the bottom.

MSPCFO has built in alerts to point out when there is a significant change. In the Client P&L, Contribution/hour, FFA E/R and FFA Efficiency may are highlighted in green if the corresponding metric increased 15% over the trailing 6 month period. These same metrics will be highlighted in red if it decreased 15% over the trailing 6 month period.

In this way you can look at overall company trends and/or trends for individual clients. If a metric is trending down you can look further into what the cause of the downward trend by looking at the individual components.

Note: the 15% and 6-month threshold defaults can both be changed in the Lookups. See Lookup section for more information on how to change the defaults. 

Here, we would like to draw your attention specifically to Contribution/Hour. We will explain Contribution/Hour and what makes up these numbers. This will naturally bring us through the Contribution, Revenue and COGS numbers. After that we will continue down to the other key metrics at the bottom including: FFA E/R, FFA Shadow Billable, FFA Efficiency and FFA Cost/Hour.

Contribution/Hour = Total Contribution divided by Total Hours Worked

Contribution/Hour shows the profitability per hour of the engineer's time. One of the key goals of any MSP will be to maximize the profitability of their engineers given the limitation of how many hours are in a day. 

What drives Contribution/hour? Anything that increases revenues without utilizing too much of the engineers time. For example:

1. Pricing servicing agreements efficiently
2. Selling products at a margin without putting in too much time
3. Pricing transactional business profitably.
4. Selling recurring cloud products that dont require servicing.

In the formula: Contribution/Hour = Total Contribution/Total Hours Worked, we know the total hours worked from our PSA, so let's take a closer look at Contribution. 

Contribution is another name for Gross Profit or Gross Margin. Contribution allows us to identify how much each client and/or all clients add to the profitability of the company.

Total Contribution = Total Direct Revenues less COGS (otherwise known as Total Direct expenses). From the screen shot below, we can see that Contribution has both a Product and a Labor component? Why? Because both Revenues and COGS can both be broken down by Product and Labor components which really allows us to scrutinize where our company successes and/or issues stem from. 

To understand Contribution more fully, we will first examine Revenues in great detail and then COGS which will culminate in a discussion about Contribution.

Revenue is first divided between product and labor.  Within each section there are several subcategories. Before we go into each of these sections and subcategories, it is important to note how Labor and Product Revenue relate to each other.

Total Direct Revenue less Product Revenue = Labor Revenue

MSPCFO backs into Labor Revenue because the other two components are easier to calculate or know directly. We know the total invoice amount and we know about how much we charge clients for products so the missing piece is the Labor Revenue which is not necesarilly and exact number.

Note: From the screen shot below, you can see a '+' next to Labor and Product Revenues and COGS (highlighted in yellow). This '+' acts as a toggle to expand/hide the subcategories within each component. The following screen shot will show the toggle as '-' and you can see the subcategories revealed.

Labor Revenue  

Expanding the Labor Revenue reveals four subcategories:

FFA - FFA is the revenue from the labor only portion of the Fixed Fee Agreements.

Project (Open) - Revenue from projects where the final close date of the project is after the current date, Projects are billed on an accrual basis as the work is performed.

Project (Closed) - Revenue from projects where the final close is before the current date. Again, projects are billed on an accrual basis as the work is performed.

It is important to note here that MSPCFO helps you match your project revenues to your project expenses which are generally spread out across the duration of a project. This is done by accounting for the revenues within the month that the labor is performed (not when projects are billed).

T&M (also known as Break/Fix) -  T&M is revenue from transactional labor that is billed hourly.

Product Revenue

Expanding the Product Revenue reveals four subcategories as well:

Licenses and Subscriptions - This is monthly recurring revenue for product sales that have separate client agreements for the service. This includes resold services such as cloud services, anti-virus, domain registrations, backup services, etc..).Note that expenses for these are paid to a third party and are not included in the labor costs. 

FFA Additions - Same as licenses and subscriptions, but where the product sales are sold as part of a bundled agreement with FFA labor. These additions are line items within the fixed fee agreements. For example if a client is charged $150/user for services where $15 is for the product or license and the remaining $135 is for the labor. Anti virus and storage can be FFA Additions.

Note: FFA Additions and Licenses & Subscriptions may represent the same products for different companies, depending upon whether the sold items are part of a fixed fee agreement where the product and labor is bundled or where product is sold stand alone with labor under a separate agreement. 

Project - Revenue for products sold with a project. Projects have a finite scope of time and are billed at the time of invoicing.  Some examples are for upgrade hardware or set up of a new location that will most likely require new product purchases. This revenue is recognized on an accrual basis. ** Please note that this revenue is for management reporting purposes only and NOT to be relied upon for tax or other regulatory purposes.

T&M - Transactional products that are sold outside of an agreement like machines, software, etc.

Like Revenue, COGS is separated between Labor and Product with similar subcategories (see screen shot below).

Note that the Labor portion of costs are assigned based on actual hours worked (vs. billed hours).  The labor rate can be based either on the wage rates in your PSA or based on a salary or wages entered directly into MSPCFO. See How do I enter Payroll to see more details on this.

Total COGS is a much more direct formula than Total Revenue. Total COGS = Total Labor Expenses plus Total Product Expenses. 

Note that if you have followed our recommended practices, then labor expenses = 'direct costs loaded' and will not include overhead costs. Only costs that would disappear if the employee disappeared are accounted for like salary/wages, benefits, payroll taxes and the allocated portion of payroll processing. This way we can truly examine the profitability of our client relationships, the profitability of our agreements and projects and the productivity of our employees.

Note: You can see a '-' next to Labor and Product Revenues and COGS. This '-' acts as a toggle to expand/hide the subcategories within each component. The categories are expanded in the screen shot below. Click on the '-' to hide the subcategories.

COGS Labor

Expanding the COGS Labor reveals five subcategories:

 FFA - FFA is the expense from the labor only portion of the Fixed Fee Agreements.

Project (Open) - Expense from projects where the final close date of the project is after the current date,

Project (Closed) - Expense from projects where the final close is before the current date.

It is important to note here that MSPCFO helps you match your project revenues with to your project expenses which are generally spread out across the duration of a project. This is done by accounting for the revenues within the month that the labor is performed (as opposed to the 1st month of the project when projects are frequently billed).

T&M (also known as Break/Fix) -  T&M is expense from transactional labor that is billed hourly.

COGS Product

Expanding the COGS Product reveals four subcategories:

Licenses and Subscriptions -  This includes resold services such as cloud services, anti-virus, domain registrations, backup services, etc..).

FFA Additions - Same as licenses and subscriptions, but where the product sales are sold as part of a bundled agreement with FFA labor. These additions are line items within the fixed fee agreements. Anti virus and storage can be FFA Additions.

Note: FFA Additions and Licenses & Subscriptions may represent the same products for different companies, depending upon whether the sold items are part of a fixed fee agreement where the product and labor is bundled or where product is sold stand alone with labor under a separate agreement. 

Project - Expense for products sold with a project. Projects have a finite scope of time and are billed at the time of invoicing.  Some examples are for upgrade hardware or set up of a new location that will most likely require new product purchases. This revenue is recognized on an accrual basis. ** Please note that this revenue is for management reporting purposes only and NOT to be relied upon for tax or other regulatory purposes.

T&M - Expense for transactional products that are sold outside of an agreement like machines, software, etc..

To review, in the formula: Contribution/Hour = Total Contribution/Total Hours Worked.

Contribution/Hours is a key metric to examine as it expresses the profitability of the labor hours put into servicing your clients. Contribution/Hour changes month-to-month and even more client to client. These client shifts can be seen in the Segments Report (See Segments Report section)

In the Contribution/Hour formula, we know the total hours worked from our PSA, so let's take a closer look at the other component, Contribution. 

Remember, Contribution is another name for Gross Profit or Gross Margin. Contribution allows us to identify how much each client and/or all clients add to the profitability of the company.

Again: Contribution = Total Direct Revenues less COGS (otherwise known as Total Direct expenses). Within Contribution, we can see there are both Product and Labor components. Why? Because both Revenues and COGS can both be broken down by Product and Labor components which really allows us to scrutinize where our successes and/or issues stem from. 

Let's take a look at and example below.

Contribution Labor = Labor Revenue  - Labor COGS  

                  7,292 = 8,542 - 1,249

Contribution Product = Product Revenue - Product COGS

                  468 = 2,340 - 1,872

Total Contribution = Labor Contribution + Product Contribution

                 7,760 =  7,292 + 468

The percentages under the contribution numbers equal the margin percent of revenue. So in our example:

                 Labor Contribution: 7,292/8,542 = 85%, labor contribution accounts for 85% of the labor revenue.

                 Product Contribution: 468/2,340 = 20%, product contribution accounts for 20% of the product revenue.

                 Total Contribution: 7,760/10,882 = 71%, total contribution accounts for 71% of the total revenue

MSPCFO has built in alerts to point out when there is a significant change. In the Client P&L, Contribution/hour, FFA E/R and FFA Efficiency are highlighted in green if the corresponding metric increased 15% over the trailing 6 month period. These same metrics will be highlighted in red if it decreased 15% over the trailing 6-month period.

In this way you can look at overall company trends and/or trends for individual clients. If a metric is trending down you can look further into what the cause of the downward trend by looking at the individual components.

Note: the 15% and 6-month thresholds can both be changed from these defaults. See Lookup on how to change these defaults. 

At this point, we have reviewed almost the entire Client P&L. We can now look further at the key metrics on the bottom and explore what they are telling us.

FFA Hours: The hours worked towards a fixed fee agreement. These numbers are pulled from your PSA system or are manually entered.

Fixed Fee Agreement Effective Rate is a measure of the effectiveness of how your agreements are priced and tells you what you are basically being paid per hour. The formula: FFA E/R = FFA Labor Revenue divided by FFA Hours worked.  

Since Revenue in fixed fee agreements is fixed, but hours worked vary month to month, the amount you are actually being paid per hour varies.

Note: this metric counts every hour equally, which may not always hold true. One client may utilize top engineers to help solve complicated systems issues while another client may be utilizing a help desk for lower level questions. While your labor costs would be quite different, the FFA E/R can still be the same. This means that while two clients may have the same effective rate, the pricing efficiency of the agreements may be different. This will be illustrated below, under FFA Efficiency.

In the example below the effective rate is $6,205 / 34 hours = $182/hour (and in this example, the $182 is highlighted in green which means it happens to have increased by 15% over the trailing 6 months.

Shadow billable applies to the Fixed Fee labor that is delivered.  MSPCFO calculates what would have been invoiced to clients for the Fixed Fee Labor if it had been billed on an hourly basis.  It is a measure of the value delivered to clients.  While billable rates are not indicated on the invoices to clients, the billable rates do exist and are a function of the type and role of the work for each time entry. However, shadow billable can vary from this inherent billable rate. If one client uses a resource that bills out at $125/hour, their shadow billable for 10 hours would be $1,250. If a second client uses a resource that bills out at $200/hour for 10 hours, their shadow billable would be $2,000.

In the example below, looking at April, the client was charged $6,205 for the 66 hours of fixed fee labor. The client would have been charged $9,770 if billed at the billable rate for each of the employees who worked on the agreements.  These billable rates are the wages and/or salary entered into MSPCFO.   

Note that the amount invoiced on fixed fee agreements is fixed. But the work that goes into each month is variable based on the time and billable rates of the employees that work on each agreement. Therefore it is possible to see equal hours with a varying shadow billable (as is the case with February and March in the example below. Both months had 27 FFA hours but the Shadow Billable varies.) 

For more information see Fixed Fee Shadow Billable

The final metric on the Client P&L is the cost/hour. This is the overall hourly expense for labor for the fixed fee agreements. The formula is: FFA Cost/Hour = FFA COGS Labor/FFA Hours. In the example below, $792/34 hours = $23 per hour

The FFA efficiency is the ratio of what was charged vs. what was delivered (shadow billable) or a measure of the pricing effectiveness of our fixed fee agreements. The actual formula looks like this: FFA Efficiency = FFA Labor Revenue/FFA Shadow Billable.

In the April example above the FFA Efficiency is $6,205/$9,770= 64%.  Clients were billed 64% of the value that they received.  If this becomes a trend, we might want to look into either our agreement pricing and/or how much time we are spending on our agreements. The previous months had a higher efficiency which is what you are going for.

For more information see FFA Efficiency

All revenue that is recurring and governed by an agreement.  This includes both labor and product transactions.  Revenue is generally fixed.  On the MSPCFO reports, the labor portion is labeled as FFA (Fixed Fee Agreements)

Also known as "Transactional Revenue" - All revenue that is excluded from MRR.  Includes items classified as Project or Time and Materials (T&M)

Cost of goods sold.  Includes both labor and product costs.  COGS is the cost required to directly provide the product that is sold.  For the labor portion of COGS, MSPCFO looks at the actual hours worked by an engineer and uses the wage rate from the PSA or the wage rate calculated by MSPCFO.

(Also know as gross profit or gross margin) - Revenue less COGS.  MSPCFO wants users to think of profitability as two distinct tasks.  The first is to maximize the contribution from clients.  This is done by looking at direct revenue less direct expenses for servicing the clients.  Step two is to minimize overhead so that the contribution from all the clients is sufficient to cover these costs and create profit.  MSPCFO focuses exclusively on the first task.  In doing this, we will examine the profitability of your client relationships, the profitability of your agreements and project and productivity of your employees.  

Fixed fee labor income divided by fixed fee hours worked.  For managed services clients, the amount of money you bill on a monthly basis is fixed, but the hours worked are not.  As such, we can determine what your effective hourly rate was for each client and for your whole business.

Shadow billable is a measure of the value delivered for servicing the fixed fee agreements.  The amount that will be invoiced each month is fixed, but the work that goes into it is variable based on the time and billable rates of the employees that work on each agreement.  See the examples below.  The hours worked are the same in both cases, but the shadow billable is significantly different based on the value of the work performed.

Fixed Fee Labor revenue divided by Fixed Fee Shadow billable.  It is a measure of the pricing effectiveness of your fixed fee labor agreements.  In plain English, it is the ratio of what was invoiced to what was delivered.  For example, if you invoiced a client $2,000 for labor and delivered  $2,500 worth of service (shadow billable) your efficiency would be $2,000 / $2,500 or 80%.

The monthly portion of Fixed Fee Agreements for which the COGS is only labor.  MSPCFO allows you to separate the product from the labor in agreements that bundle both together.

Stand alone agreements for which the client is only charged for a resold service, such as backup, spam software, etc.  If the client is charged under an agreement for both the labor and product that is sold, the revenue will be recognized in the FFA additions line.

In an agreement where there is both labor and product, MSPCFO allows you to separate the two components.  Any line item on the agreement that has a unit cost will be considered to have at least a component that is a product.  

FFA Additions and Licenses and Subscriptions may represent the same products for different companies.  The distinction is whether they items are sold as part of an agreement that bundles product and labor or if the product is sold on a stand-alone basis, with the labor sold under a completely separate agreement.

Projects can be difficult to account for due to the mismatch of the timing of the revenue and the expenses.  MSPCFO makes understanding the profitability of the project business easier by using an accrual system to recognize the revenue.  Keep in mind, this is for management reporting purposes only and not to be relied upon for tax or other regulatory purposes.

Projects frequently bill in the first month and then expenses will accrue for several months after that as the labor is performed.  By looking at it only on a cash perspective you will see high profitability in the first month (all the revenue and very little expenses) and low or negative profitability in future months (little to no revenue and all the labor expenses).  Using accrual accounting allows us to provide better matching of the revenue to the expenses.

Labor revenue is earned in the month that the labor is performed.  For example, if project generates $6,000 of labor revenue and is completed over the course of three months with equal labor done in each month, then the labor revenue will be evenly divided over the three months or $2,000 a month.  When labor is not performed in equal installments, MSPCFO takes into consideration the value of labor performed in each individual month.

Threshold: You can change the threshold to filter out smaller clients. Clients need to have at least the Threshold amount of revenue per month times the number of months (in the date range) to be included in the report.  For example: If a the Threshold is set at $1500 and the report date range is set for 12 months, clients will need at lease $1,500 X 12 months = $18,000 in revenue over the 12 month period to be included in both the Revenue Distribution section and the Stack Rank section of the report.  

Start Month and End Month: The start and end month can be selected by using the "Quick Set" pull down or by dragging the start/end date boxes to the desired dates  The Start month cannot be the same as the end month, i.e. the chart does not show one month periods.

Only Recurring Revenue clients : Check the box next to 'Only Recurring Revenue Clients' to report on only those clients that have some sort of recurring revenue. The recurring revenue can be from FFA labor, product licenses and subscriptions or product FFA additions. All other clients will be excluded if this box is checked.

Exclude Aggregate Sub Clients: If you have created an aggregate client, you can exclude the sub companies in the report so you can see how the whole relationship is working out.

If any changes are made to the Filters, do not forget to press 'Filter' to apply those changes.

Another name for Segments is Quintiles. MSCFO takes the number of clients that fit into the threshold and date filters you set and divides them equally among 5 segments or quintiles. Each quintile will have the same number of clients. Of course if the number of clients does not divide by 5 equally, some quintiles may have 1 or more clients than another. For example: if 25 clients fit the set criteria, each quintile will have 5 clients.

Quintile 1 includes clients with the lowest values of the metric you select. Quintile 5 includes clients with the highest values of the metric you select (more on this in the Stack Rank portion).

On the bottom half of the Segments Report you can see the Revenue Distribution by Segment. This is a bar chart that shows the make-up of revenues for each quintile. For example: you can see what percentage of revenue comes from FFA, T&M, Products and Projects for each quintile as a whole.

You can see the exact dollar figures and corresponding percentages for each category by placing your cursor over the quintile stack. For example: place your cursor over the Quintile #1 stack to reveal FFA $ and %, T&M $ and %, Product $ and % and Project $ and %.

Next we will discuss the top portion of the Segments Report, the Stack Rank section.

The top section of the Segments Report is the Stack Rank portion. You have the ability to select which metrics are included in the report and to select how the report is sorted and divided into segments or quintiles.

Click on the Gear symbol on the top right hand corner of the screen. This will reveal the available columns for you to select from to include in the report. Click the box next to as many or as few metrics as you would like. However, if you select too many, you will have to scroll to the right to see the numbers. We will review a few of the key metrics below. To see definitions of the remaining metrics, please refer to the Glossary.

Hours Total: Total hours of all clients in each segment.

Total Contribution: The Total contribution of all clients in each segment.

Contr/HR: Contribution per hour is the total contribution of all clients in a segment divided by the total # hours worked for the clients in that segment. This shows profitability of the engineer time.

E/R: The Effective Rate in the Segments Report is the $/Node divided by Hours/Node. A low E/R could mean the client is under paying (low $/node) or over utilizing your services (high hours/node).

Nodes: At setup, we look at the machine configurations at your clients.  For the managed devices, we assign an equivalency to managed workstations based on pricing and the time required to manage the machines.  For example, a managed server might be equivalent to 3 managed workstations.   The Node on the Segments Report is the sum of the number of workstation equivalents for each client and for each quintile.

FF Hours and FFA ($):  Based on the information in the client P&L MSCFO calculates the number of hours and dollars generated related to fixed fee labor for the defined timeperiod for each client and each quintile.

Hours/Node:  The hours per node is the number of hours utilized per node for fixed fee agreements.  This metric is useful in comparing clients to see who is utilizing more time than others.  By doing it on a per node basis, we can more easily compare utilization rates for big and small clients.

$/Node:  Dollars per Node is Fixed Fee labor $ divided by the number of nodes.

EV Opportunity: The sum of the expected values of expected future sales for clients and quintiles.

$ Labor: Total labor revenue.

$ Product: Total product revenue.

Cost Labor: Total labor COGS.

Cost Product: Total product COGS.

$ Total: Total revenue (product + labor).

Margin Labor: Labor Revenue less Labor COGS for clients and segments.

Margin Product: Product Revenue less product COGS for clients and segments.

Shadow Billable: What would have been invoiced for the labor hours had the client been billed at an hourly rate for each client and total clients within the segment. Shadow Billable = FF labor hours * billable rates of the employees that worked on each agreement (note: this value is not visible in MSCFO but is calculated behind the scenes).

FFA Efficiency: The FFA Efficiency is what was charged vs. what was delivered (shadow billable). This is a measure of pricing effectiveness of your fixed fee agreements. FFA Efficiency = FFA labor Revenue/ FFA Shadow Billable.

Again, there are additional column selections not reviewed here. For definitions, please refer to the glossary.

Once you have selected the columns/metrics to include in the report and click 'Save' the report will print. The next step is to sort the data. The little up/down arrows next to each metric are for sorting. The arrows act as a toggle to sort the data in ascending or descending order for the individual metric. For example, if you want to sort the data by Contr/Hr in ascending order, click on the arrows next to Contr/Hr. The first toggle click will always be in ascending order (quintile 1 first). If you wanted to see the data in descending order, click the toggle arrows a second time.

The data is sorted first by Quintile Total for the chosen metric and then within each quintile by client in the same order. Quintile 1 has the lowest values and Quintile 5 has the highest values.

In the example below, the data is sorted by Contr/Hr (as indicated by a single arrow vs. double) and in ascending order (as indicated by the arrow pointing upwards). I have revealed the clients within Quintile 1 by clicking on the '+' next to the quintile. you can see that within quintile 1, the clients are also sorted by Contr/Hr in ascending order.

Once you have revealed the client list, you can click on any client name to link directly to the Client P&L for that specific client.

Finally, you can download the Segment Report as a PDF file or as an Excel file by clicking on the report icons in the upper right hand corner of the report.

This is the sum of the expected values for your sales pipeline for clients and quintiles.

Expected value = Probability X Value.  If you have a 30% chance at a $10,000 sale, the EV will be 30% X $10,000 = $3,000.

For each segment, we calculate the total hours and the total contribution for those clients in that segment.  The contribution per hour is the total contribution divided by the total hours.

Monthly recurring revenue changes have four components:

MRR Growth - existing clients that have more MRR revenue than prior month

MRR Decline - existing clients that have less MRR revenue than prior month

New MRR Clients - clients that did not have MRR revenue in prior months

Lost MRR Clients - clients that had MRR revenue in prior months, but do not have any in current month.

n.b. MSPCFO can amortize revenue from non-monthly agreement (e.g. quarterly, annual, etc) to better reflect changes in service rather than changes in billing.

Target hours are the number of hours you expect to deliver to a fixed fee labor client based on invoiced labor and expected effective rate.

Example:  A client is billed $3,000 a month for fixed fee labor and the target effective rate is $150/hour.  The target hours are $3,000 / $150/hour = 20 hours.

Delta hours are the difference between what is actually delivered and target hours.

Example: A client has 20 hours at their target and during the month, only 15 hours were utilized.  That client has a 5 hour delta (positive).  That means that you gained 5 hours of time vs. what you expected to deliver.  Alternatively, had that client used 25 hours the delta hours would be -5 hours.  That means you lost 5 engineer hours to the client.

Month - Select which month you want to review

Sort - Rank clients by number of hours or target hours

Type - Show total number of hours or difference between total number and target hours

Don't forget to press apply.

Yes, you can.  The target effective rate can be set for all of your clients by using the Default ER field.  

Press the Plus under Custom ERs, select the client and the target effective rate.

MSPCFO separates revenue between Recurring and Non Recurring.  

Recurring revenue includes:

• Labor: FFA
• Product: Licenses and Subscriptions
• Product: Agreement Additions

Non Recurring Includes( also known as "Transactional"):

• Labor: Project
• Labor: T&M
• Product: Project
• Product: T&M

MSPCFO categorizes the agreements by the categories you use within your PSA.  We then need to apply functional categories to these descriptive categories.

Select the Edit Agreements button at the bottom of the tab.

For each descriptive categories, select the appropriate functional category.

Once all the agreements are set appropriately, press the Save Agreements button.  The tables will then all begin a recalc.