Your sales team is telling you one thing, your finance team is reporting another, and your cash position doesn’t quite add up. This scenario is incredibly frustrating and concerning as a business leader. As a Board member, I found this situation to be more common than you’d expect, and it was usually a red flag for underlying issues. Often these were symptoms of underlying weaknesses causing revenue leakage—a common yet often overlooked challenge.
Revenue leakage – it sounds like something you probably want to avoid, but what is it exactly? And how should you be thinking about it?
In this article we’ll be giving you a rundown of what it is, common causes, how to identify it and some potential solutions. An estimated 42% of companies experience some form of revenue leakage, and for B2B businesses I would guess that that figure is probably closer to 60%+.
What is revenue leakage and some of the most common causes?
Revenue leakage refers to revenue lost due to inefficiencies, from the initial quote stage through to receipt of payment. Most commonly it refers to revenue that has been earned but not collected due to operational errors and weaknesses in systems. It can also refer to lost potential revenue due to inefficiencies in the sales funnel e.g., lack of systematic follow-ups with hot leads or failure to follow account management processes. Revenue leakage is likely to be a bigger issue in B2B businesses, especially those with multiple products and/or complex sales structures.
Revenue leakage can be subtle and often go unnoticed. It’s like a dripping tap, happening in little bits, but with the potential to add up to a significant amount over time.
Some common causes of revenue leakage are:
Pricing, discounts, and promotions that aren’t centrally managed: e.g., introductory pricing going on for too long, discounts that aren't necessary to get or keep customers (just check how often your sales reps are applying their maximum permissible discounts), extra services being thrown in for free.
Contractual pricing not being followed: e.g., not tracking and charging clients’ volume and usage patterns, unenforced penalties, undercharging for billable time as part of services revenue, not applying contractual annual inflationary prices increases.
Manual processes, especially manual invoicing, leading to data entry errors, incorrect billing, services being omitted or delays between sales closing and invoicing.
Poor data management: e.g., sales spreadsheets not integrated with billing systems, inconsistent data entry, inaccurate customer information.
Gaps and inefficiencies in the sales pipeline: e.g., delays in sending quotes out or slow approval processes leading to lower conversion, renewal reminders not being sent out, upsell opportunities being missed.
Poor handover between teams: e.g., marketing leads not being followed up with by the sales team, information from sales conversations not being captured and passed on to customer services.
Incompatibility between systems – this is often the case in businesses that have undergone M&A or have legacy products alongside a newer business unit e.g., billing systems not linked to original proposals and contractual terms, different billing systems for different parts of the business.
Why focus on revenue leakage?
Revenue leakage may not sound particularly strategic, but it can be a significant value driver and should be on the Board’s agenda at least once a year. These are four key reasons management teams and investors should be thinking about revenue leakage:
It has a direct impact on profit – revenue that hasn’t previously been collected, and suddenly is, tends to fall directly to the bottom line. Research shows that most companies lose 1-5% of EBITDA to leakage annually.
It can be a key lever for growth during difficult macro-economic periods. Addressing revenue leakage typically requires operational changes rather than relying on increasing market share or tapping into a growing market.
Optimised revenue leakage is usually linked to a ‘well run business’ which can have a positive impact on overall valuation - diagnosing the causes often uncovers inefficiencies in processes and systems, manual interventions, and poor data management. Addressing these should not only increase revenue, but also improve operational efficiency and can lead to other benefits such as better data, improved visibility, and cash flow management. During a sale process these are all ‘green flags’ for a well-run business which can add to the valuation multiple.
Improved customer satisfaction. Unnoticed errors which lead to revenue leakage can also lead to frustration for customers (for example dealing with billing errors), make companies seem unreliable and unprofessional, and can damage customer relationships or a company’s reputation.
Questions to ask your sales or finance director to identify revenue leakage issues
Revenue leakage can be tricky to spot due to the fact it may exist in small pockets and below the level of detail of management reporting. If you want to assess the potential impact of revenue leakage in your business, here are a few suggested areas to ask about:
Process – What are the steps in the current sales and billing funnel where is there potential for manual errors, system incompatibility, or missed conversion opportunities?
Pricing – Are average prices and year on year changes consistent with the stated pricing strategy? One diagnostic approach is to conduct a review of a selection of customer accounts and compare prices in the system with the amounts that clients actually paid over the past years.
Cashflow forecasting, late payments and bad debts – How accurate is cashflow forecasting? Are late payments and bad debts in line with your industry? Are they growing? Is there an understanding of the root causes?
These are common signals for poorly managed billing and invoicing. As an investor I’ve been in situations where this started off as what seemed like a small issue but a definite red flag. When management dug into it, it turned out to be the tip of the iceberg and uncovered a whole tangle of legacy billing issues. It is much harder to get customers to pay up if you’ve been sending them erroneous invoices for the past 2 years!
Pipeline – How accurate is your pipeline and revenue forecasting? Is there a big discrepancy between initial estimates and final quotes?
Conversion – Are there noticeable ‘holes’ in the funnel where conversion is lower e.g., certain teams, products, channels to market?
We think most companies would benefit from putting ‘Revenue leakage’ on the board agenda at least once a year. Ask the CFO to do an audit with help from the sales team - this might involve walking through the steps in the current processes and identifying potential areas for errors. They should also form and test hypotheses based on the indicators above e.g., check the largest accounts, accounts with late payments, legacy clients, accounts with the most complicated contractual terms.
What are some solutions?
Simplify your billing and invoicing, keep it consistent and automated where possible. Try to avoid too many tailored pricing options that create leeway in the sales team.
Implement clear approval processes for pricing; regular account reviews, check client profitability regularly e.g., with timesheet or allocated direct cost data.
Implementing automated billing systems not only reduces manual errors but also streamlines cash flow management, a crucial aspect of profit maximisation.
Centralise processes and automate data capture as far as possible – this will help reduce manual errors and enable real-time monitoring, approvals, and tracking.
Proper use of a CRM like Salesforce can be invaluable. Of course, it’s critical to ensure the quality of the data entered. Remember, garbage in – garbage out!
With your sales funnel data integrated in a central source of truth, you can use automated reporting or AI to spot discrepancies and opportunities, such as differences between quotes and agreed contracts or salespeople that regularly ‘undersell’ certain add-ons.
Conduct regular financial audits, monitor customer accounts, and tighten financial controls to identify discrepancies, errors, or fraud. Improved systems and data capture should provide better visibility and insights into data like cashflows, pipeline and resource utilisation.
Train your employees, especially those in sales, customer support and finance, in revenue management processes and contract compliance. If you are asking people to change their behaviour, especially around CRM use, pricing, or enforcing penalties, it is critical to provide them support from the top in implementing this.
As you can see, revenue leakage can be a broad umbrella for many issues. Hopefully this post gives you a starting point for assessing your own business and some ideas for where to look. Beyond the P&L impact, we believe that addressing causes of revenue leakage can lead to a more efficient and well-run business which makes it an important value creation lever.
If you’d like to discuss whether revenue leakage might be an issue in your business and how to approach it, please Contact Us.
All views expressed in this post are the author's own and should not be relied upon for any reason. Clearly.