(republished from Huffington Post)
In my career, I have owned five service companies. It wasn’t until I owned my fifth company that I learned the difference between project billing and MRR (monthly recurring revenue). When we were project-based, we took large deposits up front. We set other payments to milestones, effectively giving full control to our clients. When clients would delay sending information back due to internal issues, it would slow our progress and force us to spend our time following up in order to move forward. This added time wasn’t billable and resulted in small (if any) profitability left in the project. MRR means a world of difference in the service business for three main reasons.
It forces a budget. When you have monthly recurring revenue, you are forced to budget time and expenses accordingly. When we used to get large deposits, we would dump a ton of resources into a project only to find out that those resources needed to stay on much longer than anticipated due to client changes or other unforeseen issues. When we switched to monthly billing we were forced to be smarter with the contractors and time allocated to projects. This budgeting system helped to keep expenses and profitability in line.
It keeps the client on the hook. I can’t tell you the number of times we would build a website for someone, take half of the deposit up front and ask for the other half when the site went live. Invariably, some sites wouldn’t go live for sometimes one or two years. This killed our profitability. We’d done 95 percent of the work, but only collected 50 percent of the bill. We lost money on every one of those projects. Today, we split projects out into monthly equal payments. Because clients have to pay in increments, they are also able to supply us with needed information and help get the project over the finish line.
It helps you manage staff costs. In 2014, we had some months when we billed over $150,000 and some months when we billed $80,000. These swings in revenue cost us virtually all our profit; we were often paying for people to sit in our office without anything to do. Setting up recurring billing for a project allows you to project when projects payments will end and when you will need to scale up or down. It’s worth taking less cash up front to know what’s coming in six months. We used to only know 30 days out — now we know 12 months out and can make strategic business decisions accordingly.
Monthly recurring revenue (MRR) is predictable and enables good accounting and cash practices in business. It has helped us to dramatically drive profitability and allows me to sleep much better at night. It changed our business almost overnight and provided a foundation that continues to grow stronger. Before this billing methodology, we were struggling to stay afloat. Today, we have two months’ payroll in savings and a large amount of cash flow so we can have a lot more fun. And isn’t that what we do this for at the end of the day? I’ll never own another business that doesn’t have MRR.