Accurate Financial Reporting: Matching Revenue and COGS for MSPs

Accurate financial reporting is essential for managed service providers (MSPs), especially those involved in hardware and software reselling. Ensuring that revenue and the cost of goods sold (COGS) match within the same month is crucial. Only by doing this can financial reporting reflect a business's true financial health. This alignment directly impacts the accuracy of profit and loss (P&L) statement and the accuracy of accounts payable on the balance sheet, which are vital tools for performance assessment and informed decisions.

For MSPs, the complexity of managing multiple revenue streams and fluctuating costs can make financial reporting challenging. Financial statements may provide a distorted view of profitability without precise matching of revenue and COGS. This can then lead to potential missteps in business decisions. This guide will explore the importance of accurate financial reporting and provide practical tips for aligning revenue and COGS to ensure reliable P&L statements.

Understanding Revenue and COGS in MSPs

Revenue comes from multiple streams in an MSP business. These often include streams like monthly managed services, projects, and software and hardware sales. Aligning the revenue generated with the COGS in the same accounting period is essential to managing finances effectively.

COGS refers to the direct costs associated with producing the goods and services that a company sells. For MSPs, this includes expenses such as software licenses and SAAS fees, hardware costs, and other materials directly tied to goods and services delivery. Many MSPs book direct labor as a COGS as well for the portion of MSP staff whose job is delivering services to clients. Matching these COGS with the corresponding revenue in financial reports gives a true picture of profitability.

When revenue and COGS mismatch, it leads to inaccurate financial reporting. This discrepancy can distort the profit and loss (P&L) statement, making it challenging to assess the business's actual performance.

This discrepancy usually arises if COGS are booked as expenses on a cash basis when they are paid 30 days or so after clients are invoiced for those goods. If clients are invoiced at the beginning of the month or at the time of a product or project order, and bills due to suppliers are not due until 30 days later, this causes COGS to be reported the month following the associated revenue. Ensuring that these elements align in the same month is key to accurate financial reporting.

In addition, the amounts due to suppliers may not be reported as a liability on the balance sheet if they are not booked until paid. This would understate liabilities that the MSP owes and make cash flow planning more difficult.

accurate P&L statements are essential for MSPs to understand their true financial health and make informed decisions. These statements summarize revenues, costs, and expenses, highlighting whether a company is profitable or needs adjustments. Recording revenue and COGS in different periods distorts profitability and leads to poor business decisions. Ensuring these elements match correctly is vital for reliable financial reporting.

Accurate and timely financial reporting is crucial in managing a business, enabling MSPs to assess profitability, manage cash flow and distribution amounts to avoid cash crunches, and plan strategically. Accurate reports also help identify cost-saving opportunities. Finally, they boost credibility with lenders and investors and prospective acquirers of the MSP.

Challenges in Matching Revenue and COGS

For MSPs, especially those involved in reselling hardware and software, matching revenue with COGS presents significant challenges. The process often becomes complicated due to the timing of revenue recognition and the associated costs, which can create mismatches in financial statements. Below are key challenges MSPs face in managing this process:

• Timing discrepancies: The most common issue arises when recording revenue at the time of a sale, but the corresponding COGS does not receive a record until later. This can happen with delayed invoices for hardware or software sales or when the MSP posts the expense at the time of payment rather than at the time of billing. This is especially common when the MSP uses vendor auto-pay set to charge the MSP’s credit card or bank account on the due date.
• Complex purchase orders: Another challenge occurs when multiple vendors and products are included within the same transaction. In such cases, matching revenue to its specific costs becomes more complex. This is especially true if products come from different sources or require different payment terms. Or if a supplier’s bill contains products sold to multiple clients and might be tedious to parse out across a bunch of clients. This complexity can lead to mistakes in financial reporting and missed opportunities to optimize cost management.
• Deferred revenue and expenses: When MSPs provide services or products with deferred client payment terms, tracking COGS and revenue can become difficult. For example, if a company recognizes revenue over time for an annual service contract but the COGS is purchased upfront, this mismatch can distort the financial performance of the company if accrual accounting principles are not applied.
• Inaccurate or delayed data entry: Manual entry of expenses and revenues is prone to human error, leading to mismatches between revenue and COGS. If data is inaccurate or delayed, financial reports can reflect incorrect information. This can further complicate the decision-making process.

Addressing these challenges requires careful management and often some degree of automation to ensure revenue and COGS align. Implementing best practices, such as automated tracking and standardized processes, helps MSPs maintain accurate financial reports and avoid costly mistakes.

Best Practices for Ensuring Accurate Financial Reporting

Accurate financial reporting is the foundation of sound financial management for MSP. To ensure that profit and loss (P&L) statements reflect the business's financial health, it’s essential to adopt best practices aligning revenue with COGS within the same month. Implementing these practices enhances accuracy and provides the insights necessary for strategic decision-making.

Implement a PSA System

MSPs should implement a professional services automation (PSA) system alongside their accounting tools to ensure accurate financial reporting. PSA systems track revenue and expenses closer to real-time, allowing MSPs to monitor financial activities and maintain clarity on revenue streams and associated costs. This streamlines project management, integrates billing, and depending on the system, may integrate or streamline purchasing and assist with accounting reconciliations for revenue and COGS.

While a CRM may handle lead generation and the new client sales process, typically the MPS uses a PSA system to manage ongoing work and sales once a customer is onboarded. By aligning the PSA system with accounting processes, MSPs can facilitate more efficient and accurate financial tracking.

Utilize Automation for Matching Revenue and COGS

Automation is a valuable tool for MSPs to improve the accuracy of matching revenue and COGS in financial reporting, but it requires the right processes and systems. One effective approach is using a purchase order (P.O.) process. By creating P.O.s that are linked to specific customers, MSPs can track expenses tied to revenue more easily. When bills or payments arrive later, match them to the corresponding P.O. This helps automate expense accounting because the P.O.s are pre-coded to customers, reducing the manual effort needed to track costs, and unpaid liabilities can be included in the month-end balance sheet.

Implementing an online expense reporting system can also simplify the process by allowing employees to code company credit card transactions directly to individual client names. This captures accurate information upfront by those who are placing the supplier orders, making it easier for the accounting team to process data without having to match purchases to clients after the fact.

Additionally, setting up bank feed rules in QuickBooks can streamline the separation of client resale costs from internal company expenses.

Finally, for MSPs with a larger volume of COGS bills that are paid on open credit terms, an accounts payable automation system like Bill.com with a bill image review and approval processes can assist the bookkeeping and accounting function with posting COGS to the correct month and client.

Combining these methods helps MSPs capture and code necessary payment information efficiently, automating key aspects of financial reporting and ensuring data accuracy throughout the business workflow.

Establish Clear Invoicing and Payment Processes

Another critical best practice for ensuring accurate financial reporting is to establish clear invoicing and payment processes. Timely invoicing is crucial to ensure revenue is recognized in the correct accounting period. MSPs should implement a standardized process for invoicing clients as soon as services are delivered or products are sold, or at least in the same month they provide their deliverables. This aligns revenue recognition with the actual delivery of goods or services and thus avoids the need for manual revenue accrual accounting.

Equally important are client payment collections processes to help ensure a steady inbound flow of cash and reduce bad debt risk.

Conduct Regular Financial Reviews

Regular financial reviews are essential for maintaining accuracy in financial reporting. These reviews involve reviewing the financial statements, identifying discrepancies, and making necessary adjustments. For MSPs, conducting monthly financial reviews ensures that any mismatches between revenue and COGS are detected and corrected early on, preventing them from impacting long-term financial reporting. Any process improvements or staff training that is needed can be done more promptly before more months go by without having more accurate reporting to manage the business.

During these reviews, it’s important to compare the recorded resale revenue and COGS to ensure they match up as expected, looking at gross profit margin percentage each month for each client. Any significant variances from the MSP’s standard resale margin should be investigated and resolved to maintain the integrity of the financial statements and correct and billing or payment mistakes that are found. Regular financial reviews also have a lot of other benefits besides managing product resale accounting from being able to timely understand the business’s overall financial performance and manage accordingly.

Train Staff on Financial Reporting Practices

Finally, training staff on financial reporting practices and underlying bookkeeping and accounting processes is vital for ensuring accuracy. All team members involved in financial processes should understand the importance of matching revenue with COGS and the impact this has on the company’s financial health. Providing training on the use of accounting software, automation tools, and financial review processes helps ensure that everyone is equipped to maintain accurate financial records.

Ensure Financial Reporting Accuracy for MSP Success

For MSPs involved in hardware and software reselling, accurate financial reporting can be can be especially challenging. By matching revenue with COGS within the same month, businesses can ensure that their P&L statements accurately reflect their financial performance. This accuracy is crucial for catching mistakes, informed decision-making, strategic planning, and having a soldi foundation to grow the business. Implementing best practices in financial accountging and reporting will help MSPs maintain the financial health of their business and achieve long-term success.

Looking to improve your financial reporting process? Contact us today to learn how we can help you achieve accurate and reliable financial statements.