If you are a part of the SaaS world, you must have heard the term revenue leakage. Though it is frequently linked with the sales process, leakages can happen at any point in the customer life cycle. It doesn’t start showing impacts during the initial years, but slowly it can collapse your business. When left unchecked, revenue leakage can seriously hamper your overall business efforts.
In this guide, we will understand everything about revenue leakage and how to identify and prevent measures.
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Understanding revenue leakage
Revenue leakage is the revenue earned by your business but not collected or lost. Imagine a bucket full of holes, and you try to fill it with water. What happens? Some water drains out of the bucket.
Now imagine, if something similar happens to your business, your hard-earned money will leak out of the company. It usually occurs due to human errors, inconsistencies in the accounting system, relying on spreadsheets, billing issues, or poor supervision. Such leakages disturb the business’s cash flow and harm the overall profitability.
However, if you pay keen attention to revenue leakage, implement strict standards, and adhere to best practices, you can save your company revenue.
Top 6 reasons for revenue leakage
1. Manual processes
If you are using manual invoicing, can you prepare the invoice simultaneously with the closing of the sale? Mostly, it’s not possible. This creates inaccuracy in revenue data as you can miss out on add-on service details. It is more chaotic for subscription-based and software-based companies where your customer uses automated renewals as their standard process.
Manual setups for invoicing and billing are prone to human error resulting in revenue leakage.
2. Using spreadsheets
Manual data entry is susceptible to human errors, and you can miss out on some data or do a wrong calculation. For example, if putting down the time taken by a person to complete a project is inaccurate, it will result in underbilling.
3. Ambiguous or missing policy information
Sales in a business are highly dynamic, and the salesperson must have immediate company details at their fingertips. When there is no clear information, salespeople may charge too low a rate for a product or are unable to speak about a service.
4. Unenforced contracts are harmful
Several businesses have yet to digitize their contracts and don’t understand what to enforce on customers and suppliers.
Are your customers legally confined to a yearly subscription? If yes, you can bet they won’t speak out to inform you they haven’t reached it when you enforce such points on the contract.
Revenue weekends can also be a result of unenforced supplier contracts. For example, if your supplier breached their agreement and you haven’t enforced a penalty, you will lose money.
5. Don’t practice poor accounting processes
Tax leakage can occur when accounting gets complicated. It’s essential to implement good accounting practices in your business and ensure you pay the right amount of tax to HMRC. Overpaying taxes may result in revenue leakage, while under pain can trigger fines and penalties.
6. Not taking approvals before offering high discounts impacts revenue
Sales and finance department doesn’t always go hand in hand. Businesses want to increase sales quickly, but finance focuses on securing the most favorable commercial terms. Therefore, taking approvals for discounts and other commercial terms can help you eliminate revenue loss.
How to identify revenue leakage?
Revenue leakage is not an unavoidable expense of conducting business or a necessary evil. Business managers and accounting teams can identify the primary reasons for revenue leakage and implement methods to control them.
Company executives usually understand when their business is not collecting all the due revenues. To identify revenue leakage, you must look at the invoicing process and revenue operations.
· Invoicing process
Look into how you are invoicing your customers. Does it require manual tasks, and if yes, how much and why? Think if half of these tasks can be automated and implement the process.
· Revenue operations
Revenue operations answer questions related to companies’ revenue. Here are a few questions that they can reply
- Are your sales representatives forecasting accurately?
- Are sales leaders tutoring representatives effectively?
- Are sales representatives following the correct steps to close the deal?
- What do statistics say about your opportunities?
- Are your sales declining every quarter? If so, why?
How to prevent revenue leakage?
You can stop revenue leakage by restructuring or enhancing your current processes. Some processes are easier to improve than others, and let’s start with the easiest tasks first.
1. Reduce manual data entry by integrating your business tools or using a single accounting system.
2. Introduce revenue operations tools in the business.
Do an internal audit of your tax return for the previous few years to ensure no tax leakage.
Ask for discount approvals before implementing to reduce the frequency of discounting and prevent revenue loss.
Automate your invoicing process.
Send reminders to customers making late payments with an automated invoicing system.
Digitize your customer and supplier contracts to make reviewing and updating them easy and automatic.
Give your team members access to corporate policies.
Compare recorded revenue with forecasts and investigate any variances.
These improvements in your business reduce manual processes and their related errors. Thus reducing revenue leakage.
Regardless of company size and type, revenue leakage can affect all if not identified early and handled correctly. You generally encounter such issues due to faulty processes and bad data. However, the most frequent reasons are manual invoicing, unenforced contracts, and high discounting policies. Speak with an expert before it is too late and you lose all your business revenue.