Some call MRR ‘cash for life,’ like that lottery that pays winners a set amount of money each month. While the IT services version offers no such guarantees, doesn’t require luck, and income levels can rise (or fall) regularly, monthly recurring revenue is that ‘fortune’ every MSP should be seeking.
Of course, income expansion should be a goal for every organization. Even non-profits and government entities depend on a regular infusion of revenue that equals if not surpasses expenses to ensure the entity’s long-term viability. That baseline cash flow helps keep lights and heat on and prevents paychecks from bouncing, and if all goes well, it will generate a larger balance in their bank account.
For MSPs, that latter part is crucial to the current and future health of the business. If MRR is not growing, at least on an annual basis, IT services firms often struggle to hire and train skilled people and expand their portfolios to meet the rising needs of their clients.
This metric measures the company’s financial health and value and serves as a key indicator for suppliers, investors, and potential M&A partners. According to most industry financial experts, MRR is typically the first thing venture capitalists look at when assessing prospective MSP acquisition targets. While buildings and vehicles are tangible assets, a better indicator of an IT services firm’s stability and value is the number of long-term clients under contract, especially those that deliver a robust stream of recurring revenue.
M&A considerations are just one of the many reasons providers need to keep a close eye on MRR. Those who can nurture and grow income from existing clients, as well as new customers, will be able to invest more in their future. At the end of the day, that capital helps ensure that MSPs can fund the sales and marketing engines that drive prosperity and financial stability.
A predictable pipeline of income helps you avoid financial roller coasters. The profits derived from one-time activities like server installation projects and hardware refreshes are fantastic, but an overreliance on those events creates volatility in cash flow. It takes only one client delaying payment on a single large invoice to cause a ripple effect across the company’s balance sheet.
If an MSP fails to collect a deposit before commencing the work, they may get stuck paying for expenses with no guarantee of recouping those costs. Significantly delayed payment will further eat into their profits.
MRR removes that risk and stabilizes an MSP’s cash flow. That recurring payment stream allows you to maintain financial stability and increase revenue even in months when the sales team fails to land new business. Every time your clients add a new employee or increase the level of various services, MRR rises. When those organizations thrive and expand, it can have a similarly positive effect on your firm’s bottom line.
Recurring revenue is typically tied to some form of subscription service. Those income streams may come in any time increment; weekly, monthly, quarterly, or annually, but most companies typically prefer the option where they can control and adjust the budget every 28-31 days. That lets businesses add and drop employees to meet the ebb and flow of their personnel needs without making a more massive budget commitment.
Those contracts usually cover cloud suites like Microsoft 365 or individual offerings such as email and hosted VoIP platforms or specific line of business applications. MRR can also apply to a myriad of other support options that MSPs deliver on an ongoing basis. Those offerings may include procurement and refresh programs, Hardware as a Service (HaaS), general IT consulting, DR planning and testing, and cybersecurity monitoring. With a little ingenuity and a good financial partner standing by, MSPs can convert virtually any of their offerings into a monthly recurring revenue model
Each of those deliverables creates a periodic payment that boosts cash flow. Those steady revenue streams allow MSPs to be more selective with projects and new clients.
MRR is essentially an insurance policy that lets you take time to assess potential new business opportunities rather than rushing into ventures out of financial desperation. When cash flow is stable and growing, there is less pressure to take on unprofitable clients or projects, so you have more time to negotiate or find better prospects.
MRR is essentially a strategic financial solution for businesses. With assured and stable income, MSPs have more freedom to build and execute aggressive long-term growth plans without stretching their resources to the limit. A constant flow of business income translates to fewer borrowing needs.
Why pay interest to use other peoples’ money when you can recoup more of your own? That is the type of freedom MRR provides MSPs.
Is your sales team doing everything possible to drive recurring revenue? MRR is one of the essential metrics MSPs should be tracking and emphasizing in management and sales meetings, which is why tools like Zomentum are so critical to long-term success.