How to budget for double-digit growth
As a managed service provider (MSP), creating an accurate budget is crucial to achieving sustainable growth and increased profits. In this blog, you’ll learn the four necessary steps to set an aggressive yet attainable budget for your business.
1. Define your value creation strategy
The foundation of your budget is tied to your value creation strategy (VCS). Your VCS starts with asking these three questions:
- Do you know how much stock value you want to create?
- Do you know when you want to have it created by?
- Do you know how you will extract it (i.e., how you will sell the company)?
If you answered “yes” to all three, you are at Operational Maturity Level™ (OML™) 5, the highest maturity in this aspect of the business. As it happens, companies that can answer “yes” to all three of these questions are most often those who attain higher and material value and most often attain the value the owner has determined they need. As evidenced by their answers, these companies have a VCS.
If you answered “no” to all three questions, you are at OML 1, the lowest maturity. You have answered the same way as the companies who most often fail to create higher and material value for their owners. These companies do not have an actionable VCS.
The good news is that even if you don’t have one now, you can always create a VCS. As mentioned above, VCS outlines how much you want your company to be worth in a certain number of years and how fast you need to grow to achieve that value.
For example, if you need $400,000/year in passive annual income in your retirement, your company would need to be worth $10 million, assuming a 4% return to achieve this ($10 million X 4% = $400,000) If you are currently at $5 million in valuation, using the “rule of 72,” which provides you the growth rate needed to double your business simply by dividing the years to double the business into 72, can give you some additional guidance. By doing this calculation, you’ll gain the insight that you need to grow at 14.4% annually to reach $10 million in value if you have a five-year timeframe.
2. Evaluate your past performance
Review your financials over the past three years to determine your current growth, profitability, and revenue trajectory. It’s critical that your budget is aggressive enough to drive your needed growth while still remaining realistic and attainable.
Compare your actual performance to the growth rate needed to achieve your VCS. For example, if you’ve been growing at 9% annually but need 14.4% growth, you’ll have to make significant changes to reach your goals.
Next, look at your revenue growth over the past three years and the incremental increases needed to achieve your VCS. For example, if you’ve grown 8% annually but need 12% growth, aim for 10-11% revenue growth in the first year.
Be sure to analyze your costs and see where you can gain efficiencies to improve your profit margins. The goal is to develop a budget with numbers you believe you can actually achieve while also setting expectations for improved performance.
You can use tools like the Solution Provider Value Creation Planner™ found in the SLIQ™ or the Service Leadership, Inc.™ online OML progression tool to model different growth scenarios and see the impact on your value.
3. Review your assumptions
Once you have a draft budget, scrutinize all your assumptions to ensure they are realistic. Consider factors such as labor costs, non-labor expenses, client attrition, new client size, and sales conversion rates. Make adjustments as needed to create the most accurate budget possible. Also, be sure to get input from your leadership team, as they will be responsible for executing the plan.
4. Take action and track your progress
With your budget in place, set incentives and key performance indicators to keep your team accountable for meeting that budget. Once finalized, don’t change it. Review your actuals versus budget monthly and make adjustments as needed. As you gain experience, your budget will become more precise. The key is to start developing a budget, even if it’s not perfect—you can build on your knowledge over time through practice.
In summary, creating an effective budget is a learnable skill that all MSPs can develop with time and practice. If you follow the steps outlined here, you’ll be able to build a budget focused on achieving your value creation goals and driving sustainable business growth. With consistent tracking and adjustments, your budgets will become a key tool for strategic decision-making and increased profitability.