Income: High quality vs low quality
If you’re running an IT business, there’s no such thing as bad revenue. That said, it’s fair to state that not all income is truly equal.
The income your business earns can be broadly categorized as high quality income and low quality income. This may make little sense to you - so let me explain.
Low Quality Income
Low quality income can be defined as the kind of revenue that comes from one-off, non recurring tasks and jobs – things like hours billed as a result of dealing with break / fix issues.
While numerous companies have enjoyed success earning only this type of income, it can create some significant problems, namely:
Income like this is never guaranteed. Billing 100 hours for three months running provides no certainty whatsoever that you will bill any hours at all in month four.
2. Lack of Scalability
Unpredictable earnings make it impossible to accurately scale up a business without risking unaffordable staff costs.
3. Poor Business Worth
A business built on low quality income is very difficult to sell on. A potential buyer will want to know exactly how much can revenue can be guaranteed. Regardless of how much you bill in one year, you cannot offer any assurances it will be possible to repeat during the next.
So, what’s the solution?
High Quality Income
High quality income is earned from long term contracts that guarantee a certain level of monthly income. It is the very essence of the managed services model.
By selling IT services on this basis, you can rely on a predictable, regular income. You know, for example, exactly how much selling a contract to a new 100-user client will bring in. With this knowledge, you then know what staffing levels you can afford. Straight away, the business becomes scalable.
If and when you come to sell the business on, you can show a potential buyer exactly how much income the company is guaranteed, making taking over your company a far more attractive proposition.
So, what should you do if you recognize that much of your company’s income falls in the “low quality” column?
Think about exactly how you deliver services, and of ways to persuade your clients that moving to a monthly contract model is a good idea. If, for example, you have a long-term client who has always paid on a break / fix / hours billed basis, consider averaging their monthly invoices and offering them an inclusive service-based contract that saves them a small sum of money based on their historical spend.
While you continue to do the same work, you change the category of their income from low quality to high quality. You can depend on it every month, and the value of your company grows. By taking small steps like this, you can work towards a business built entirely on high quality income.