As good as companies are at selling their services/ products, they might not be as good at collecting revenue. Billing mistakes, penalties, and unmerited discounts that customers have been informed about but get waived imply that dollars’ worth of sales doesn’t result in the company’s expected revenue. Furthermore, when the issue happens over multiple SKUs, many customers, and even more transactions, this can end up in the accrual of losses. Such revenue leaks happen across different industries. As a matter of reality, revenue leakage is seen as a systematic problem by over 45% of executives in their organizations, as per a survey conducted by Boston Consulting Group.
So, how should you combat it? Well, companies may consider revising outdated processes, minimizing the usage of inaccurate or bad data, and approaching smarter software and cutting-edge technology. Organizations that turn to such steps can enhance their bottom line by 5%, as BCG demonstrates.
Before we set ourselves to laying forth the various ways to tackle the issue, here’s a rundown of what this means, its impact on your organization, and why you should consider resolving it at the earliest. Here we go!
What is Revenue Leakage?
In layman’s terms, revenue leakage means the wealth that has been earned through sales but not collected. Usually, that’s because of low awareness on the organization’s part. What triggers the situation are often faulty accounting & finance processes, like pricing errors, using spreadsheets, unbilled or underbilled services, and relying on invoicing systems that are incompatible with the company’s setup. However, commonly, revenue leakage is seen in transactions that entail contracts or existing buyer relationships.
Accumulating earned revenues that have not yet been realized due to a certain operation glitch is obviously not an activity that’s encouraged. However, it is an important discipline in which small and medium enterprises need to gain mastery, else bagging one’s goals and objectives would always remain a distant dream.
Identifying Revenue Leakage: Strategies to Consider
Here are some steps that can help you identify the places where revenue leakage is happening the most and thus, is dropping your company’s bottom line. Dig in!
1. Hypothesize where the leaks might be occurring
The leaks may happen in the company’s top accounts. However, the majority of the leakages happen on the accounts that hog the most complicated contractual terms. To form the hypothesis about where leaks might be occurring should be done by executives and by those who closely deal with revenue-collection and revenue-generation functions.
2. Based on Economic Value, Prioritize the Different Leakage Types
Once you’ve hypothesized the leaks, you need to rank them by economic value. That’s because every revenue leak varies in magnitude. So, it is pragmatic for organizations to begin with the leaks that might trigger the biggest impact. Thus, it is crucial to prioritize the leaks in accordance with the dollars lost or uncollected.
3. Test The Hypothesis
Now comes the step to verify the hypothesis made vis-a-vis revenue leakages. For this, the finance department can perform an audit while taking in those accountable for revenue generation. The audit would expose the issues with reliable data and processes. Also, it may involve the re-building of steps concerning particular revenue stages.
Fixing Revenue Leaks: Worthwhile Tips To Help You Rescue Your Business
Here are some steps that can help companies reverse revenue leakage. However, this shouldn’t be considered a secondary project but a crucial part of operational excellence.
1. Diagnose the issue:
The first step here is to make a correct diagnosis. Companies need to start by figuring out where revenue leaks may occur in their industry, then head on to enquire the employees who are responsible for revenue-generating roles, in case they have got any idea about the problem.
2. Substitute manual processes with tech solutions:
Technology is more efficient and less prone to making errors. It can also help companies address revenue leaks and issues that trigger them. A solid software renders it possible for the service staff to fill up a timesheet on the mobile devices within a few minutes of completing their tasks. This typically minimizes billing errors and can also help automate the creation of particular invoices, reducing the issue of underbilling or late billing.
3. Hold on to your pricing:
Offering too many discounts can hamper the goal of revenue enhancement. Furthermore, know that the lax enforcement of contractual terms doesn’t help. Enterprises need to have effective and clear rules to start, which then must be executed. At other times, companies may consider doing it systematically via software.
4. Centralize timesheets:
To increase the chances of getting precise and timely information, enterprises can program their billing systems. This is to send automated reminders. This is particularly important for companies that offer services, where revenues brought in often rely on billable hours.
5. Task a single person with revenue assurance:
It is unusual to see a company assigning a full-time staff to revenue assurance. The highest proportion of the companies in this category is small and medium-sized ones. Nonetheless, even if a company doesn’t have a budget for keeping billing analysts, it might be worthwhile to include revenue assurance in the brief of a senior executive.
The circumstances as well as the industry to which your enterprise belongs play a role in determining the financial impact of revenue leakage. An enterprise whose revenue leakages are higher than that of its peers may be at a loss in building new products or giving a boost to the business. Furthermore, such a company may also face other issues related to non-optimized cash flow, like higher rates of borrowing.