Companies aren’t always as good at collecting income as they are at selling their goods and services. Unearned discounts, billing errors, and penalties that customers are informed about but are waived mean that a dollar’s worth of sales does not always result in a dollar’s worth of income. The losses can quickly mount when the issue affects dozens of stock-keeping units (SKUs), hundreds of clients, and thousands or tens of thousands of transactions.
Revenue leakage occurs in a variety of businesses. However, a Boston Consulting Group 2020 survey shows that 45 percent of CEOs regard income leakage as a systematic problem for their firms. Companies can address income leakage by rethinking outdated processes, limiting faulty or erroneous data use, and adopting smarter software and better technology. According to BCG, companies that take initiatives like these can add up to 5% to their bottom lines. This blog will reveal the golden secrets of preventing revenue leakage! But first, let’s explain what exactly this revenue leakage is.
What is Revenue Leakage?
The loss of revenue for any firm is referred to as revenue leakage. As the term implies, it entails the avoidable loss of revenue from your firm due to poor Finance and Accounting processes. Revenue leakage is typically caused by faulty or inaccurate client billing, but depending on how your organization runs, these losses can arise from various sources. Despite rigorous inspections by in-house financial teams, modern ERP, and robust audit processes, enterprises across verticals face the challenge of revenue leakage.
According to research, these leakages are frequently caused by a misunderstanding between departments, insufficient controls in business software, and other financial flows such as inventory management, margin calculations, tax handling, etc.
It can be difficult for a company to pinpoint the exact reason for any preventable revenue loss. However, every forward-thinking company has begun to show interest in comprehensive SaaS-based revenue assurance solutions. According to MGI Research, 42% of organizations experience revenue leakage, and EY predicts that every company should anticipate losing 1% to 5% of realized EBITA to leakage.
What Is the Importance of Revenue Leakage?
Cash flows fuel everything small and medium-sized businesses do, from providing high-quality customer service to enabling expansion and promoting innovation to assisting them in competing for talent. There is no profit if there is no revenue.
This is why some businesses have rituals for closing on new business, such as ringing a gong in a central area when a large new contract is signed. The gong serves as a reminder of the importance of income generation – new and repeated sales are the enablers of everything.
Collecting income that has been earned but has not been realized due to an operational error is not a glamorous activity. However, it is a discipline in which every small and medium-sized business should become an expert. A non-important corporation will soon be unable to do some of the things it desires. Moreover, Record-to-report (R2R) services under Finance and Accounting services help companies improve efficiency while reducing defects and meeting reporting goals.
What Causes Revenue Leakage?
The first step toward limiting revenue leaks is to understand how they occur in the first place. Realizing the potential vulnerabilities in your system and processes can help you reduce the loss due to revenue leakage. Here are some common sources of revenue leakage:
Manual Processes Are Prone to Errors and Inefficiency
Manual invoicing is a particularly serious issue. It means that invoices are not generated simultaneously as sales are closed. When an invoice is delayed, add-on services may be omitted, or the time entered for them may be underestimated. Manual billing is especially difficult for subscription-based and software-based organizations, which should employ automated renewals as their default procedure.
Spreadsheets Won’t Help You
This is a variant of the first issue: a lack of automation. Spreadsheet data is often entered manually and may contain errors or omissions. For instance, a person’s time on a project may be underestimated and wrongly entered, resulting in underbilling. Furthermore, most spreadsheets’ data must be connected with a billing system. This may result in additional inefficiencies due to incompatible technologies.
Incorrect or Out-of-date Consumer Information
Assume that data is uncoordinated or must be patched together from many systems. In that instance, a vendor may lack reliable information about how much volume it is doing with a certain consumer. This is true whether we’re talking about a product maker or a seller of digital goods.
Supporting a customer with, say, 100 mobile phones or 100 digital subscriptions but charging for just 85 of them is a waste of money. Expired credit cards are another type of inaccurate data that can lead to nonpayment or delayed payment.
Policy Information That Is Unclear or Inaccessible
In certain types of firms, the sales function is highly dynamic, and salespeople must have instant access to information. Assume the information is not readily available. In that situation, a salesperson may charge too low a fee or fail to recognize that a certain service they’re including is an addition that should be invoiced.
Underbilling can be a concern when a company’s service revenue is a substantial part of its total revenue. Service staff may be unaware that a service they perform at a customer site is billable due to inadequate information flow. Work discussed in the office to answer a specific client request may not be correctly billed.
This is another issue caused by inaccurate data. Pricing mistakes might take the shape of promotional pricing that persists after an introductory period has ended. Another price issue that causes leakage is when an existing client falls below the required threshold for a volume discount but still receives the discount.
Unenforced Policies, Including Fines
Many firms impose fines for certain consumer activities, such as early contract termination or a new membership or identification card request. When these penalties are not enforced, revenue is lost.
Ways to Stop and Prevent Revenue Leakage
Put Timesheets in One Place
Using a central system to manage timesheets can help you automate how your team fills out timesheets by sending out reminders when timesheets aren’t turned in. This also helps make sure that time is tracked to the right task on the right project, which makes it less likely that mistakes will happen.
With mobile timesheets, your employees can easily enter time while on the road without logging into their desktop version. The data is automatically synced with the central system for even more accuracy.
Rules for a Business
When team members can quickly get to the company’s policies when needed, it’s easier for them to know what to do. Questions like, “Can I charge for this task or not?” How do I find the rate? Integrated Knowledge Management makes it easy for people to share this right now.
Managers need to be able to track and confirm how much time is spent on billable projects vs. non-billable work, and they need to do this quickly so they can fix any problems early in the cycle.
Setting up a system that can automatically ask for and record approval from management will make sure that things are done right and on time. It will also give the accounting team the confidence to send bills right after the end of the month.
Maintain Your Pricing Stance
Salespeople with broad discretion to offer discounts can obstruct the ultimate goal of revenue maximization. Lax enforcement of contract conditions is another factor that does not help. Instead, companies must establish clear, effective regulations and then enforce those standards – which can sometimes be done methodically using the software.
When timesheets are centralized, automated, and approved in real-time, invoices can be sent to customers at the end of the month. No more waiting for information to be gathered and looked over, closing the pay gap for better cash flow.
When you think about how much money you bill in a year, it’s easy to see how an automated timesheet and billing system will help you get back a lot of that lost money. But, to get it right, all stakeholders, including the people doing the work, those who approve the work, and the accounting departments that bill for the work, must agree and buy-in.
As can be seen, revenue leakage is primarily caused by defects, errors, or ambiguities in billing-related processes. And, until you automate your entire billing and invoicing process, you have very little control over the situation. The best-automated billing systems eliminate all such dangers and help you optimize client billing cycles and business revenue.
But, most importantly, allows you to detect and avoid such leaks shortly. When you outsource Finance and Accounting services, the possibility of revenue leakage could be reduced.