Picture your P&L with one line called G&A. It is a big number, it grew again, and if someone asked you what is in it, you could name the rent and your own salary and then start guessing. That is a hard place to manage costs from.
Here is the full list for an MSP doing about $3.6 million a year. The MSP model's example carries three overhead roles and eight overhead lines, and together they come to $646,602, or 17.8% of revenue. That is a lot of margin, and none of it is waste. The useful thing is knowing which part is which, so you can tell the difference between overhead that grew and overhead that grew wrong.
Who Is in Overhead?
Three people, and one of them is you. The model costs each at burdened pay.
| Role | Basis | Cost a Year | Share of Revenue |
|---|---|---|---|
| Owner, at a fair-market salary | $240,000 at 1.13 burden | $271,200 | 7.46% |
| Operations and office manager | $72,000 at 1.25 burden | $90,000 | 2.48% |
| Bookkeeper, half time | $50,000 at 1.25 burden, 0.5 FTE | $31,250 | 0.86% |
The owner's line is the easiest to leave out, and it is the one that matters most. Pay yourself a fair-market salary before you count any profit. If your margin only works because you are paid below what you would cost to replace, it is not a margin, it is a subsidy.
The operations manager is the other one that is easy to skip. At this size, somebody has to run HR, purchasing, vendors and billing administration. If it is not a person with that job, it is you, and you are the expensive option.
What Are the Eight Lines?
Everything else in overhead fits into eight lines. In the example, with 12.50 people on staff, they add up to $254,152.
| Line | Basis | Cost a Year |
|---|---|---|
| Rent and facilities | 12.50 FTE x 150 sq ft x $32 all in | $59,999 |
| Insurance: tech E&O, cyber, liability, property, umbrella | 0.6% of revenue | $21,808 |
| Accounting, tax and legal | 0.9% of revenue | $32,712 |
| Internal software and equipment | 12.50 FTE x $3,600 | $44,999 |
| Training, certifications and coaching | 12.50 FTE x $2,500 | $31,250 |
| Recruiting and HR services | 12.50 FTE x 20% turnover x $5,000 | $12,500 |
| Bank, card and payment fees | 0.4% of revenue | $14,538 |
| Office, telecom, travel and other | 1% of revenue | $36,346 |
Two things to notice. Half of these grow with headcount, not revenue, so every hire brings its own rent, laptop, licenses and training with it. And internal software is not the delivery stack. It is your own Microsoft licenses, payroll, accounting, phone system and the laptops your staff use.
Why the Example Runs Over Its Own Budget
Work backward from a 20% EBITDA target and the model leaves a G&A budget of 16.00% of revenue, or $581,538. The itemized list comes to $646,602, so overhead runs $65,063 over.
The example still earns its target, because delivery labor comes in $78,940 under its allowance. The service side pays for the overhead side. My view is that this is the normal state of a lean MSP of this size, not a failure, but it means your delivery margin is doing two jobs, and it is worth knowing that before you squeeze it.
It also explains why the honest list matters. A model that leaves out the office manager and the rent can show a margin several points better than the business will ever earn.
How to Build Your Own List
- Take last year's P&L and pull every expense that is not delivery labor, tools, product cost or sales and marketing.
- Sort each one into the three roles and eight lines above. Anything left over goes to the last line, and if that line is large, split it.
- Put your own fair-market salary in, even if you paid yourself less.
- Divide each line by revenue, and the per-person lines by headcount, so you can compare them with the table.
- Add it up and divide by revenue. Compare the total with 16%, the budget a 20% EBITDA target leaves in the model.
Which Lines Are Worth a Second Look?
Not the ones you would guess first. Insurance and accounting are small and buy you protection you need. The lines worth reading closely are the ones that move with headcount, because they rise every time you hire and nobody approves them as a decision.
And the one worth arguing about is the last line, office, telecom, travel and other. At 1% of revenue it is a lump. If yours is far bigger than that, it is probably hiding something that deserves its own name.
Overhead is not the enemy. Unnamed overhead is. Name every line, put a number beside it, and you will know which part of the next price increase is paying for whom.
mspoutpost.com/articles/the-overhead-lines-and-roles-a-3-6m-msp-really-carries
Written by Graham Whitfield
MSP Outpost publishes information, not legal, financial, insurance, tax or compliance advice, and reading it creates no professional relationship. For decisions about your business, talk to a qualified professional.