Your Gross Margin Is Misreported and Misunderstood

Daniel Welling of The MSP Finance Team on the gross margin number most MSP owners are reading wrong, what a new client really costs, and the US expansion that broke on delivery.

Show Notes

If you are still delivering work yourself, the gross margin on your screen is probably not telling you the truth.

Daniel Welling ran an information technology services business for 12 years, took it to around £1m a year in recurring revenue with 200 customers and 15 to 20 staff, then sold it. He now runs The MSP Finance Team, doing management accounting and fractional finance direction for MSPs, which means he spends his days inside other people's books.

In this one he gives the benchmarks straight. Best in class blended gross margin sits in the 40% bracket. Most MSPs are somewhere between the early 20s and the mid 30s. And the reason so many owners think they are doing better than that is the same every time: they never load their own delivery time into cost of sales, they pay themselves mostly in dividends, and dividends never touch the profit and loss statement at all. So the number says 90% and the owner thinks they are a genius. His words: it is a misreported, misunderstood number.

The bit that stings is what hides underneath it. The real cost of delivery and account management, he says, is totally masked by the enthusiasm, the energy levels and the work ethic of the owner. The business looks profitable because someone is quietly working for free.

He also does the arithmetic almost nobody does out loud. Once acquisition is properly delegated, so not the owner and not a referral from a mate in the pub, winning a client can cost £20,000 to £30,000. Put 10% of a £1m business into sales and marketing and that buys you four new clients a year, which is probably not the growth you had in mind.

The back half is the expansion that went wrong. He took the business into California chasing follow-the-sun support, the acquisition he had agreed collapsed, he built it from scratch anyway, closed new business on his first trip, flew home thinking he had cracked it, and had already made the mistakes that killed it. Commercially it worked. Delivery is what broke.

What we cover

• Starting an IT services business in 2002, before the term MSP existed
• Why he left the operator seat and went into finance instead
• The three finance mistakes he sees most, starting with reporting on a cash basis instead of an accrual basis
• Why one blended gross margin line hides everything that matters
• Labour-loaded gross margin, and the dividend problem that makes UK owners misread their own business
• How the UK 40% benchmark compares with the US, where the numbers run higher
• What a new client actually costs to win, and what that does to a sales and marketing budget
• Taking a UK MSP into America, and the difference between the commercial side working and delivery failing
• The Master MSP model: delegated delivery, turning on cost only when you turn on revenue
• The phases of ownership, from engineer to salesperson to leader to shareholder
• Why he is taking the finance business into a US market he reckons is 10 times the size

Find Daniel on LinkedIn. It is the only channel he names on the episode.

What is Play It Smart?

Play It Smart is the show where Alexej Pikovsky sits down with MSP operators and business owners and takes apart how they actually do it: winning clients, pricing, staying lean, using AI, and building toward an exit worth having. Season 2 is dedicated to MSP operators. Past guests include Rand Fishkin of Moz and SparkToro and the founders of Chili Piper, Flowchat and 3DLOOK.