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REVENUE LEAKAGE: CAUSES AND HOW TO STOP IT

Updated: Apr 29

Many professional service organizations don’t take revenue leakage seriously enough. It can take any profitable business and turn them into a significant loss maker. Revenue leakage is such a risk because without the proper knowledge, it can be hard to tell when a leak is occurring. What’s more, many businesses wouldn’t know the first place to start if and when a leak is eventually discovered.


It’s an extremely common occurrence and it’s experienced by businesses of all sizes. If you don’t have a foolproof method to identify and eliminate revenue leakage in your organization, then we’re here to help.


In this article, we’ll explain what revenue leakage is, its causes, and how to find and eliminate it in time so it doesn’t impact your business. In this guide, we’ll dig deeper into:



WHAT IS REVENUE LEAKAGE?


Revenue leakage is the money lost from your organization, which can often go unnoticed. These revenue leaks can be prevented, but since many slip by undetected, businesses often fail to execute measures that can stop them from happening in the first place. The more leaks that go unnoticed in your revenue generation process, the greater the impact of this accumulation on your revenue in the long term.


Tracking revenue leakage should be a high-priority activity for all professional services organizations. Without it, a company will show high profitability and growth on paper, but the issues will be hidden away until they become a real problem. A business with revenue leakage problems will find themselves putting out fire after fire and find ways of giving themselves more time using risky methods such as borrowing at high interest rates to manage operations. This will lead to much slower growth or even stagnation until new systems are introduced to alleviate the situation.


WHAT ARE THE MAIN CAUSES OF REVENUE LEAKAGE?


Revenue leakage can happen for a variety of reasons, and this is the first step in the process of eliminating these leaks. Knowing the causes gives you a better idea of how you can continue. Take a look below at just some of the main causes of revenue leakage.


Billing Errors


The first cause of revenue leakage is one of the most impactful, and that’s issues with a company’s recurring billing processes. It’s not hard to miss out on a lot of earned revenue if there are operational inefficiencies within your recurring billing process, which can be both manual and automated problems.


Manual errors can be as simple as entering the wrong total in a sent invoice. Automated problems on the other hand might stem from an invoice-generating system that selects the wrong data and charges customers the incorrect invoice amount. These are small mistakes, but they can cost a company majorly in the long run.


There are other inefficiencies that cause leakage in the recurring billing function, such as an existing system not being able to facilitate a complex billing cycle. With no efficient billing solution, people operating these systems will find it harder to upgrade the billing cycle. This can cause mistakes, which means your SaaS company can lose out on some of your earned income.


Involuntary Churn


When it comes to SaaS, involuntary churn is the process of losing a customer not because they didn’t value you and your relationship, but because of technical reasons instead, such as payment failures. Something simple such as your customer’s credit card expiring can even end positive relationships with no warning. In such an example, a backup payment method is vital to eliminating the risk of automatic cancellations, which has nothing to do with the customer intending to part ways.


If you rely on customer data to process payments that are sourced from multiple systems, this can cause you to get inundated with outdated customer information. As a result, you may not be able to collect any payment from your customers, which will surely lead to a revenue leak on your part, only made worse if you continue to provide your services to these customers.


Voluntary Churn


In addition to its involuntary counterpart, voluntary churn can be a significant source of revenue leakage. This type of churn tends to happen when a customer ends their subscription or downgrades their plan to a lower-tiered service.


The simplest way to avoid voluntary churn is to make sure that any problems within the customer’s journey is identified and resolved sooner so that the customer has no motivation to leave or reduce payment.


Poor Communication


Some of the most frustrating causes of revenue leakage are ones that are all too simple. A lack of internal communication is the perfect example of this. If your sales team isn’t fully updated on your pricing structure or key policies, they’re almost guaranteed to be selling blind. A risk with this is that your sales team might accidentally charge a lower rate, or even not realize that a certain service should be sold as an add on at a further invoiced cost.


With a consistent flow of communication between all teams, many of these costly mistakes can be avoided.


In some instances, revenue leakage can occur if misalignment exists between your sales and customer success teams. For instance, a customer is seeking an additional feature, making them the prime target for upselling in order to earn additional revenue. The client however has not been properly tagged between the sales department and customer success, and the customer may try a completely different application in order to find the feature they’re looking for.


Poor Project Visibility


If you don’t have clear and transparent visibility into invoicing and revenue-generating processes, it makes it incredibly difficult to manage them proactively and have an accurate measure of the performance of the services you deliver. This is sure to result in lost or delayed revenue.


Taking this a step further and looking into project management, if you can’t keep on top of key measures of success such as forecasting and pipeline management, there’s a number of consequences that could come your way, such as scope creep, delayed deadlines, and incorrect budget estimates, all of which will contribute to revenue leakage.


One of the real kickers brought about by poor visibility on a project is inaccurate billing. If your method for recording and tracking billable hours is not watertight, your team could potentially be providing services to the customer that goes beyond what they’re actually being billed. If this is being done by multiple members of your team, that’s some serious revenue leakage you’re facing which will likely not even be identified unless you completely change your approach.


HOW TO IDENTIFY REVENUE LEAKAGE


The first step in fixing revenue leaks is to know where they’re coming from. From that point, only then can you work out how to prevent it from happening again. Let’s delve into how you identify the sources of revenue leakage.


Form a hypothesis on where the leaks are coming from


Many companies go straight to their top accounts to look for leaks. This is indeed where leaks are sometimes, but more often than not, the biggest leaks don’t occur on the biggest accounts, but on those that have more complex contractual terms. Creating this hypothesis should be done not just with hunches, but also by the people closest to the function revenue generation.


Rank the leaks by economic value


Some leaks are more disastrous than others. It is wise for companies to begin with the leaks that are causing the biggest problems. As such, it’s crucial that an organization prioritizes the various leaks based on the dollars lost. If you detected five minor leaks, each causing you to lose $100 a month, but found a much more substantial one costing you $2,000 per month, it’s clear you need to devote all of your resources to the latter and fix the other ones once the big-hitting ones have been eliminated.


Test the hypothesis


Organizations need to verify their hypotheses surrounding revenue leaks, which can be done by the finance team via an audit, along with assistance from those responsible for revenue generation. This audit would examine issues with data and processes, and it might include a retrace of steps relating to specific revenue moments.


HOW TO STOP REVENUE LEAKAGE


Resolving revenue leakage should never be considered a project on the side, it should be a key part of operational efficiency. No two companies are alike, so your solutions for tackling revenue leakage will be different from your competitors.


However, there are some tried-and-tested methods that can eliminate revenue leakage that can be used by almost every SaaS business, and these are below.


Make time tracking easier


Employees are usually happy to track their time, they just sometimes want to avoid the hassle of doing it. Making time tracking easier for your whole organization can go a long way to stopping revenue leakage caused by unbilled hours. A powerful, centralized software platform is the key, as it can allow your staff to track their time from any location, whether it’s on a customer site, in the office, or when they’re working from home.


This is just one of many examples of a great software tool simplifying many processes that are otherwise tedious, and can almost guarantee that revenue leakage can be reduced when implemented.


Automate billing and invoicing processes


One of the most important methods of preventing revenue leakage is to automate many of your systems and processes, especially when it comes to billing and invoicing. By utilizing tools such as an automated recurring invoice software, you can integrate this into your existing operations and strategies allowing you to prevent many of the inefficiencies and human errors that so often pump the brakes on your recurring invoicing process.


If you’re eager to see how automation can help you maximize efficiency, Precursive is the answer to automate invoicing. We can help you reduce the admin time for your finance team with a much improved billing process. Set billing periods and automatically generate invoices with the right T&E included.


Improve workflows around leaked revenue


Many of the workflow issues can be fixed when it comes to areas of the business where revenue is commonly leaking. SME’s may not have the resources to conduct a wide-scale investigation into processes and workflow issues, but they can often create solutions to these problems quickly because they move at such a speed. For example, if service reps aren’t billing for every bit of work they do at a customer site, an organization could use an average-time-per-service estimate to identify any instances of unbilled services. Although not a major change, this added scrutiny can lead to the recapture of previously lost revenue.


Use different rates for different roles


Small businesses will often have team members who have their fingers in a number of pies. This could mean that you’re paying a creative $100 per hour to carry out administration work, which is a guaranteed way to cause a revenue leak. With role based rates, you can pay your resources different amounts, depending on the role in which they’re working. This eliminates the chance of under or over-billing your staff, ensuring that the per-hour rate fits the role and task at hand to plug any gaps in your income stream.


Enforce pricing


Throughout the cycle of a client engagement, there are many points where items may not be billed properly for the service you’re providing. Discounts may be handed out where they shouldn’t be, or subscriptions aren’t being sold at the correct rate for the service a customer is signing up for. Billing accurately will be a giant leap towards cutting out a significant proportion or revenue leakage. The best way to do this is to employ strict tracking measures when it comes to customer contracts and invoicing at every stage of the customer journey.

 

WHAT NEXT?


You should now have a much better understanding of how to identify revenue leakage, and take steps to tackle it. A powerful PSA solution can be your savior, as it can do much of the work in combating revenue leakage through automation of a number of processes. This can be a lifesaver for professional services businesses of all sizes. Want to see it for yourself? Book a demo today to see how we can help you and your organization with revenue leakage.


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