How to Effectively Manage and Bill For RMR (Recurring Monthly Revenues)

“Knowledge isn’t power…the right knowledge at the right time is power.”

Brad Dempsey - Background

• Founder of Solutions360 Inc. in 1988• Primary architect of Q360 ERP platform• 33 years of international project and financial management

experience• Spend at least 50% of time consulting on business process

automation and financial controls• Started career working for computer companies TRW Data

Systems, Prime Computer, Apollo Computer and Sequent Computer

Our Market

Technology Integrators

Telephony Integrators

IT Integrators Life/Safety Integrators

A/V Integrators

Introduction

RMR – Recurring Monthly Revenue, is a new area of growth for many technology integrators.

It is revenue that is contractually based over a period of multiple months.

The focus of this seminar is from the operations and accounting perspective.

The Sales Hand-Off

Overview

1. Managing Contracts / Agreements

2. Managing Cash Flow

3. Managing Revenue and Expense

4. Final Goal - Profitability

1. Managing Contracts

Common types of RMR contracts– Warranty service– Managed services (Monitoring/Remote management)

IT managed services (Nable, Kaseya, Level Platforms etc.)

Alarm monitoring (burglar, fire etc.)– Labor or Parts only– Discounted services– Consulting / Education– Hybrid

RMR ChallengesImproper coverage can be very costly– Servicing equipment that should not be can be costly– Providing out of hours service can be costly

Revenue and expense model is vastly different from T&M– Misunderstanding the relationship between cash, revenue

and expenses can be catastrophic to a business

RMR ChallengesInvoicing and coverage periods can be complex– Invoice date, due date, start of coverage, end of coverage

Contracts can include initial setup costs that affect profitability– There can be significant labor or material costs up front– How do those affect cash, revenue and expense over the life

of the agreement?

RMR ChallengesIn some cases SLA reporting to a principle vendor may be required

Coverage may be sub-contracted for services such as backups, anti-virus etc.

Reporting to your customer, so they understand the value of the services

Contract Example

The “Gold Plan” service contract sells for $1,200 per year– You are covering the materials and labor to service 3

boardrooms– You get paid quarterly– Coverage includes material and labor– Exclusions for vandalism, natural disasters, training etc.– Guaranteed response time– Contract covers 3 sites, with 1 in a different time zone– Labor costs for out of coverage items discounted at 15%

Contract Example

Key Data Points

Contract should have quick access to:– Financial overview– SLA– Products covered– Block time / amounts– Labor time billing– Invoicing history– Attached documents (P.O.’s etc.)– Service history– Profitability

Contract Example

1. Effective start date of the contract

2. Billing frequency – (Monthly, Quarterly, Annual etc.)

3. End date of coverage

4. Renewal Type

5. Bill in advance days

6. Contract type

7. Current status

SLA – Service Level Agreement

What does Premier coverage mean?– Response vs. resolve time– Time zone management

Contract Cancellations

Capture rates of new vs. lost contracts

Reason codes will help product evolution

Spend as much or more effort keeping contracts as acquiring new ones

Service Visibility

Notify dispatch or customer service with alerts

Service Visibility

Notify dispatch or customer service in real time about coverage

2. Managing Cash Flow

RMR has a very different model for cash flow than traditional project and service work

There is no link to actual expenses incurred, like in project job costing

Many types of agreements put the cash in your bank before services are delivered

This can give a false sense of security

Understanding and forecasting cash flow becomes even more important in a company with significant RMR

Invoicing vs. Coverage Dates

The invoice date is the posting date of the invoice and the starting point for calculating the due date

Coverage dates represent the start and end date for service

Coverage dates are not only important for the customer, but also for accounting

Invoicing

Automated invoicing is a mandatory requirement

Automated delivery is a bonus

Invoicing ProjectionInvoice billing projection

Invoicing ProjectionInvoice billing projection

May = $16,233

June = $12,944

July = $17,921

August = $98,396

Cash FlowCash in the bank will lag by your average pay days

Knowing your upcoming invoicing and average pay days is the first step in cash flow projection

3. Managing Revenue and Expense

Managing the deferred revenue for contracts is one of the most difficult tasks for many companies

Prebilling vs. Current period billing vs. Post billing can be difficult concepts for staff to manage

These concepts must be mastered to accurately ascertain the profitability of an agreement

Managing Revenue and Expense

RMR is normally time based

Key concept – It is the relationship between the invoice date and the coverage dates that creates a deferral

If the invoice date is in a period before the coverage date, the revenue should be deferred

If the coverage dates span multiple periods, the revenue should be deferred

Time Based Example

The “Gold Plan” service contract sells for $1,200 per year– You get paid up front– Coverage period is 2014-01-01 to 2014-12-31– $1,200 gets credited to your RMR liability account– At the end of January, RMR revenue is credited $1,200/12

($100) and RMR liability is debited $100– This leaves a liability of $1,100

Different accounts for RMR liability and project liability

Invoicing RMR

Invoicing RMR

Revenue ProjectionRevenue projection should also take un-billed into account

Revenue ProjectionMonthly totals

What About Expenses?

Service tickets should be linked to agreements

Material, Labor, Subcontract and Misc expenses are posted at time of use

If labor is performed outside your service system, hours must be tracked and linked

Initial costs must be captured against the agreement, and may need to be amortized

What About Expenses?

T&M revenue and expense should be able to be viewed with or without the agreement revenue and expense

Final Goal - Profitability

What is the profitability of the agreement?

Final Goal - Profitability

If revenues and costs are correctly allocated, you will be able to pick any two points in time, and measure profitability

Contract / Agreement profitability should be compared with the customer’s overall profitability

Contracts can also be compared across types, geographic areas, vertical markets etc.

What Your ERP System Should Do

Automate invoicing and coverage periods

Automate invoice delivery

Allow easy reconciliation of contract billing periods

Invoicing projection report for at least 12 months

Automate release of revenue for coverage periods

Allow easy reconciliation for your deferred revenue balance sheet account

Give visibility into the contract’s profitability

What Your ERP System Should Do

Give visibility customer’s profitability across contracts and business units

Provide a recurring revenue forecast

Provide feedback to service and dispatch for contract coverage

In Closing

“RMR can be the silver bullet, but you still need to make sure you are ready, then aim and then fire, in that order.”