Andrew Jordan | The Financial Fundamentals Every MSP Needs

[00:00:09] Hey everyone, welcome to the latest installment of MSP Business School. As always, I'm Brian Doyle, here to help you navigate through today's episode. Today we're going to talk about some of your favorite topics, right? Because ultimately it ties into making money. But we're going to talk a little bit about finance today. And more than, you know, there's a lot of M&A talk we've had recently on this podcast, but this is more about how do we make money today? How do we make sure we're making money today?

[00:00:39] And do we have the right frameworks in place and guardrails in place to make sure that we don't find ourselves in trouble? So I'd like to welcome to the podcast today, Andrew Jordan, president of NodeWise CPA. Andrew, how are you today? Doing well, Brian. Thanks for having me. Awesome. Well, I really appreciate you taking some time to join us today. I always say, though, while I now know you, many people may not. So why don't you kick things off and share with people a little bit about your background and how you ended up in the crazy world of

[00:01:09] MSP? Yeah, that sounds good. So I'm a CPA. I started out in public accounting. And then kind of a common path in our world is you get hired away by a client. That's exactly what happened with me. I became the first CFO for a group of tech companies. We had a software programming company, like a high-end audio video company, and an MSP. And the MSP did all the normal stuff, like break-fix, cabling, all that kind of stuff. But it was this kind of conglomerate feel.

[00:01:36] Interesting that there was a lot of companies like that before that kind of had these different veins. You're seeing a lot of them consolidating it under one house. But certainly that means three sets of books, I assume, and that's always a bit of a challenge.

[00:01:50] Well, and I got an experience firsthand. After I was CFO, we bought a marketing company, like a digital marketing company. And it was a really good firsthand lesson of things that look good on paper don't usually work in real life. Like this audio video company also did Crestron controls. And the MSP did like a lot of cabling and telephony. And like, oh, there should be natural fit here. You can share employees. It's going to be all the synergy. Absolutely didn't work out that way.

[00:02:16] And I think, you know, that's one of the things, right? There's financial rules. And synergy doesn't always come into play there. Because, you know, theoretically, at least from when I was, you know, working as an MSP, and we had a sister company as well. When I wanted to use them, technically, they had to be subcontractors to me. And a lot of people forget to account for the time. They just do the natural crossover. Hey, I'm going to borrow Andrew for three hours, you know, that kind of thing.

[00:02:46] And there are pros and cons to that. The other thing is, and you tell me here, I used to always find it sometimes interesting, well, we're just putting some dollars in a big circle. Like nobody's actually earning the dollar. It's the same dollar that's being spent on the other side. And, you know, how does that impact the world?

[00:03:04] So, you know, those are a couple of things that were always questions for me. But let's maybe take a step back to what you and I were talking about before. And I'm a brand new MSP. And I'm looking to set up my books. So they're set up properly for the long term. What are the steps I should be taking?

[00:03:23] So I'll tell you the thing that we see, even with mature MSPs, when we start working with them, we're talking people who are grossing $5 million a year and have a team. And usually what we see is they don't have their cost of goods sold section built out. So like on the profit and loss, there's income and then cost of goods sold. And then there's a little line called gross profit. And then there's all your expenses and the net income. And everyone just jumps all the way straight down to net income.

[00:03:47] And so they miss out on the fact that cost of goods sold is like really importantly different than expenses. There's all money going out, stuff you're paying for, but it's broken up intentionally differently. And certainly when you get to the valuation stage, I mean, now we were just talking about brand new MSPs and now we're hopping up to the end of the rainbow. Gross profit is the margin they're looking at most often there too, because if it's a consolidation effort, they're going to assume some of that below the line cost is going to go away.

[00:04:16] In the merger. And even though that's not something they might pay you on necessarily, that's what they're looking at to really see, hey, what can we afford in this deal? Yeah, absolutely true. The gross profit is a lot about the health of your service delivery. And then when you look at your expenses and so your net income, that has to do with, I think you said how well you can run a business is kind of what that is. So you're overpaying for insurance, all those kinds of things. I think that's a good point.

[00:04:41] Now, a lot of MSPs talk about profit margin, Andrew. What is a true MSP profit margin? You know, I hear guys say, I'm doing 40%, I'm doing 80%. You hear these big numbers coming around. Where do they get those numbers from if they're only doing 5% net? And the next thing is, what do you feel in your opinion is a good, healthy MSP margin with what you've seen now? Gosh, no. Okay, that's a loaded question, right? Because the answer, right?

[00:05:10] And in the CPA world, our favorite answer is it depends, in the tax world especially. And so if you sell a lot of Apple products, I'm going to tell you your gross profit margin is never going to be as high as someone who's doing, say, a focus on virtual CIO, some of the higher margin items. And so it depends a lot on your mix. And that's one of the things we see too. So like the evolution, usually we start working with an MSP and, oh, you're not even breaking your labor out into cost of goods sold. So you think your gross margin is 80%.

[00:05:39] And so what that means is like how much money should you be willing to spend on marketing? How much money can you afford to pay your new technician you're going to hire? When can you hire that new technician? You're going to get the wrong answer on all those because you think if I go and sell $100,000 more of work, I'm going to have $80,000 left over and you're not. And so splitting the labor is the big one that we see most often right off the bat. And I think, you know, you tell me if I'm wrong in my assumption here, but even when you're looking at how to come to your gross profit,

[00:06:09] number, there's line items within it, right? You just kind of touched upon it. Like I've got my product sales and I've got my service sales. And then obviously I have direct costs for each. So I'm sure you're going to tell me there's some value to knowing, yes, my overall gross profit might be 60%, but my services gross is 80% and my product gross is only 13%, right? And that is an important statement as well. And then how much of that mix belongs to each column, right? Right. Absolutely.

[00:06:39] And to answer your question, I wasn't trying to actually dodge the question. I should say, if you're looking at a blended overall gross profit and you got everything properly in there, you know, and if you're buying products, if you're paying for software, it's not in your software expenses, up in software, costs a good soul, all that kind of good stuff. If you're in the 30% to 40% gross profit margin, I think you're doing pretty healthy. Again, depends on your mix and all that kind of thing. But that's a pretty reasonable place to be, I often find. Yeah. Yeah.

[00:07:05] And I know a lot of the groups like service leadership and others in the industry are kind of touting that you want to be between 30 and 40 to be kind of operationally mature front of the leader. But I think it also goes back to some of the things that as you spend some time, you know, is when you control your SG&A costs, everything below that line, you hear oftentimes you want to try to keep that in the 20% range, give or take.

[00:07:31] I don't know what your feeling is, but the only way the numbers then will be positive really is if you do keep it in that 20 range of where we're at, where you are. And I'd say like we see, so we see the numbers, right? And we do the tax returns. And so like the numbers we see are like the actual numbers, not what people sometimes think the numbers are. And it is not impossible at all for mature MSP. And they're, you know, mature because when you're growing, you're spending a lot more money. Onboarding's expensive.

[00:08:00] Unless you charge separately for onboarding, you're taking kind of hit at the beginning, advertising's expensive. And so when you're in growth mode, it usually puts pressure, downward pressure on your profit. But we see firms that hit a 30% net profit. So if you're a $2 million firm, the owner's walking away with $500,000, $600,000. You know, and that's a strong net. You know, that's a strong net, which is great.

[00:08:23] And I think, you know, what this really is coming to is if you're a newer MSP or a younger MSP, you got to get help. And, you know, a lot of us struggle with, A, asking for help because we tend to be servants as well. I know when I started my MSP and, you know, Andrew, we talk about it a lot on the show. Most of us are accidental entrepreneurs. Something in our lives had kind of had us into starting to do this on the side. And all of a sudden it became a company.

[00:08:50] And I wasn't planning on starting a business, but here I am. And that's a dangerous place because that really means we're not doing the forward projection and tax returns are historical by nature. So they're not going to help you with what you need to do and what levers you need to pull moving forward. They could be a, you know, a guideline, but they're not going to be the answer. You know, so what are the things that you feel, you know, I'm a new MSP. I've just started up. What are the things that I need to consider beyond gross profit, but really be aware of

[00:09:20] to ensure that I'm in for the long haul? Yeah, I think you make a really good point. You're technicians. CPAs are too. And if you look, a lot of CPAs are terrible running their business. And how I kind of got so much better at it was this experience being CFO. We ended up selling to private equity groups. So like so much experience there. But if I'd just been in the CPA world, like there's a lot of CPA firms that aren't well run themselves, just like there's a lot of MSPs because the focus is on service and on being a technician. And that's awesome.

[00:09:50] And you really want to do that. But man, I also want people to run their businesses better and, you know, be able to take time off on the weekend. Not to brag, but I went on a two-week trip with my family this year and came home not to a pile of emails. I wasn't interrupted while I was traveling. It was amazing. First time I've done that, we've built toward that. To me, like that's the goal of having a business. Well, they talk about that all the time, you know, the interdependence story and how not to let the business run you. Yeah.

[00:10:18] And I think, you know, a lot of MSP owners, you know, they, you have to understand your finances in order to do it. And I'll be very open and transparent here for the listeners. Like when we sold our MSP or actually we merged in with a larger firm and retained it, were retained as equity partners as well. And it was so much more interesting when we had a proper CFO sitting at the table because it really made you understand things like debt is not necessarily an enemy, but bad

[00:10:47] debt's an enemy, right? And how, you know, how's it being leveraged and how are you going to recoup it and how, you know, is it, is it truly freeing up cashflow to continue expansion or is it a drag? And those are the kinds of things that I think most of us don't have the knowledge of until you get the opportunity to sit with somebody proper. So, you know, that's where I think firms like you are wonderful because you can come in and really help be that missing piece, especially for a business that doesn't need a full-time performer.

[00:11:17] I think it's hard too for technical people. Engineers we see this with too. You're really smart and you're good at math. You know, IT people tend to be more that way, better than the average people in math for sure. And so it's frustrating when accounting doesn't make sense. But accounting is called the language of business. And so like I have a minor in Spanish. Learning accounting was way more like learning Spanish than learning calc, right? We do easy math. It's barely math. It's really about telling the story and reading it.

[00:11:45] And so like no matter how smart you are, you can't just read a foreign language. And it's that way with accounting. But it does throw people off because it's numbers. It's a numbers-based language. And you're good at numbers, but not these numbers. They're different. And so having a drink of water is help. You know, ask somebody to read a balance sheet and you'll really understand. And, you know, it is a different language, a different approach model, different way of looking at things. You know, a financial statement brings into other questions.

[00:12:14] And, you know, oftentimes it's not until somebody starts having a problem that they become aware of these things. You know, if I could tell you're saying new or younger MSPs, one thing to do, it would be to think of your books not as a means to the end. I got to do these to get a tax return filed. But think of them as like a really valuable tool of seeing where you're at, where you've been, setting goals, all that kind of stuff. And then the other thing is when you get that tax return back.

[00:12:41] So like we walk through with our MSP owners, either we'll do a video, we'll do a live meeting and we'll say, here's your tax return. Here's what it means. Because we know you're really smart. And we also know this doesn't make any sense to you. And so we walk through it together. And if you don't know what's on your tax return that you're signing, send to the government, like figure it out and see how it connects to your books. And, you know, those indicators are going to help you make decisions in business as well. When to hire, when to fire, you know, when to invest in training or more marketing, when

[00:13:11] to pull back. And, you know, obviously macroeconomics comes into play in that sometimes too. And, you know, if the market's talking, what's my burn rate if everything went wrong, right? There's so much wealth of knowledge hidden in that financial statement. Most of us can't interpret it, though. And that's where we really need the help. I think the other... Well, okay. So on this vein, and Brian, I think this is a safe place I can talk about video games, right? Is that fair? Yep. Oh, definitely. This is an industry that loves them.

[00:13:41] So I am a Sid Meier civilization fan, right? If you know the turn-based strategy game, and it's you're charting the civilization through history, and you have all this data at your fingertips, right? And you can see all of the details and make decisions with like full knowledge of production and research and all the different numbers. And if you're a strategy video game fan at all, and you're used to kind of that view, that's what your financials can give you.

[00:14:09] But if you can imagine playing a game like that completely blind, that's kind of what a lot of business owners are doing. And, you know, it's not their fault, right? And that's where, you know, where you can come get help. So, you know, maybe let's talk a little bit about Andrew. What can somebody expect if they wanted to enter into a fractional CFO type style relationship? So I would encourage you if you're exploring this or, you know, a CPA in general, right?

[00:14:37] Because there's a lot of overlap there, exactly what services you're getting, those kind of things. But do you like the person? Do they have a personality that you like? And the reason I think it's so important is when you talk about money, and research has borne this out, but also like common sense if you think about it, it's such an emotional topic. People have all this baggage from how they were raised, and if they had money growing up or a lack of money growing up, and they have all these preconceived ideas, but also it's like a very emotional thing.

[00:15:05] So if you're looking for a partner to chart with you through the growth of your business, gosh, you better be on a similar wavelength with them. You got to like them. You got to at least be on pretty good terms with them, I think, to get much value out of the relationship. And, you know, once a year, you're preparing a tax return. That works fine if you're an employee for someone else. I think if you've got a business, especially a business you're trying to grow and scale, because it gets a lot more complicated, especially when you get past like the million dollar

[00:15:32] mark, things start getting a lot more complicated, and you need someone who will, you know, you want to listen to. And we end up doing a fair amount of coaching. I have clients who regularly tell me, I feel like it was just a therapy session, because they don't, you know, who else do you talk to about your struggles with your new manager you just hired and all those kind of things? Hopefully not your spouse, because they usually get tired of it after a while. Very quickly. Maybe you're a therapist. Who knows?

[00:15:59] I mean, I'm also a big fan of, I think people should have therapists, I think people should have coaches, you know, at least you got to have someone on your side to talk to yourself. Well, I think that's it, because we've talked about it a lot here. You know, I'm sure you've experienced it yourself as you're growing the company from the start. Being a solopreneur, starting a company can be quite lonely. And even if you've got some employees, a lot of times, especially in the MSP world, the first couple people you're hiring are techs, not, you know, peer executives.

[00:16:27] You're hiring people to fill the needs that you need to deliver to your customers. And it can be a very lonely spot sometimes, because you really don't have somebody. And the voice in your head is always going to tell you what you want to hear, right? So it's good to have advisors that are out there helping you grow. Absolutely. When my favorite point of the journey of a business, so when we were, when I was CFO, we started with 30 people, we were 75 or so when we exited with equity.

[00:16:54] And so I have hit every painful bump along that journey, right, of scaling. And I feel like the pot of gold at the end of the rainbow is not so much money. For me, it's you get to the size where you now can have a leadership team. And oh my goodness, it's more fun. Having other people that you can talk to who are better than you are at certain things. Because for a long time in your growth journey, you're literally better at every single bit of your business than anyone else's.

[00:17:23] And when you start getting to the point where you've got people that like, well, they're actually a better technician at networking than I ever was. And then you especially get those leadership people that you can talk to and you're no longer alone. For me, that's a huge, huge milestone. No, it is. And things usually progress faster because, you know, people are coming with their own particular skill set. You know, I was blessed, as I mentioned earlier, when we merged in with a data center firm when we were an MSP. They wanted to cross over to that.

[00:17:51] It was the early days before, you know, the AWSs really took over. So we were doing a lot of private cloud work and they had this data center piece. But really what it brought together was four decent managers. And understood, you know, a technical leader, a sales leader, a business leader and, you know, and then kind of a jack of all trades who could at least kind of give feedback across all spots in a perspective with enough context.

[00:18:18] And it was amazing what we were able to do in a very short period of time because everybody knew their role, knew that they could talk. Of course, everybody understood everybody else's roles as well, but everybody knew what lane they were driving and they were responsible for. And now, you know, went from like the four cylinder engine to the eight cylinder engine at that point. Right. You know, kick it on all gears, riding smoothly. You know, there's a lot of like imaginary synergy, like I talked about between these two companies and they never clicked.

[00:18:47] They never got good synergy going. But one of the exceptions that really is a multi-wire is once you get even your first person where it's just not you totally alone. But yeah, you get a group of three or four and it's really. You know, when you talk a little bit about having multiple companies. I think part of the challenge there is because each one's running their own P&L as well. They have their own stressors and their own requirements. Right. And, you know, we ran into an issue because we did have a sister company where, you know,

[00:19:16] they almost didn't like doing work for us because we always had to do it on such a discount. But yet we were tying up resources, you know, almost full time. And that was just continuing, you know, killing their profit margin. And they finally came to us and said, we can't keep doing this without raising our rates. And, you know, fortunately, we had a CFO that kind of oversaw all of us in the middle because we were like, well, we don't want to pay more. That's the benefit of having this sister company. But the truth is, if all part, you know, if everybody's not being made whole, it doesn't

[00:19:46] work. And that's why sometimes I'm always curious when people keep things separate. I know it's easier for the acquisition and merger moments, but it hurts on times on culture. It can absolutely hurt on culture. And the other thing is, you know, accounting is a story. It is a story of what has happened with your numbers. And if you aren't careful, you can end up really skewing those numbers. You know, if you had increased those fees by 20%, they start looking really good. You start looking a lot worse, but that might not be reality.

[00:20:16] And so you can, the allocation of costs across, especially different companies or different units or whatever is a really important thing to get right. Or you're going to be, I would say that the only thing worse than no numbers, you know, the only thing worse than never actually looking at your books is looking at your books and them having misleading numbers. Yeah. Awesome. Well, we're getting near the end of our time today, Andrew. This is flying by, but, you know, is there any other, you know, burning messages that

[00:20:44] you want to share with our audience? Is there anything that you feel that would be critical for them to know before we wrap up today? I would say this, like, I consider myself a pretty smart person and I can do some IT stuff, but I can't do any actual IT stuff. You know what I mean? Like I can, I can add a user in Office 365 and that's about it. And so I rely on my MSP to help me get through all those technical things. And I think there should be no shame in asking for help on the accounting side.

[00:21:11] I think you should be having a partner there who is giving you advice and helping guide you through how to read your numbers. And also it is a, it is a journey, right? Like if you don't have anything in cost of goods sold, if you want to look to your P&L and you're like, yeah, my cost of goods sold is clearly wrong. Well, that's like step one. And then step two can be figuring out which profit line, you know, breaking out different ways so you can figure out which profit line is profitable, which employees are profitable. All those things come later, but it's, and that's the thing that's fun about business. Like it's always just this continual journey.

[00:21:41] There's always new stuff to do, always new problems to fix, but they absolutely become more fun problems to fix when you're successful later on. That's awesome. Thank you for sharing that. So listeners, as always, we're going to make sure that we have Andrew's LinkedIn address as well as a link to, to NodeWise CPA so you can engage with them there. Certainly I'm sure if you have some questions around, um, you know, accounting as a whole and, and, um, you know, looking to engage with somebody, Andrew would love to hear from you.

[00:22:09] Andrew, thank you so much for joining me. Uh, the show notes will have those links both on YouTube and anywhere you get your podcast and we'll see you all again next week. Thanks, Brad. Thank you.