Have you heard the boiling frog story? If you put a frog into boiling water, it will immediately jump out. But a frog in room-temperature water that gradually gets hotter doesn’t notice the danger it's in, and eventually, you’ve got a boiled frog.
While it might sound a bit gruesome, the boiling frog story is exactly what can happen to your business if you aren’t paying attention to revenue leakage. All businesses take little hits here and there. But if you aren’t on top of every penny coming out of your revenue, you risk losing much more than you bargained for. You might look up one day to realize that those little hits have become much stronger and more difficult to fix – and then you’re in hot water because of it.
Thankfully, many causes of revenue leakage are preventable as long as you know what to look for. By monitoring key areas of your business where revenue could leak from, you can quickly identify causes for concern and minimize the chances of revenue leakage.
What is revenue leakage?
It may sound obvious that you should avoid losing revenue. The tricky part of revenue leakage, however, is that the losses can be very small and easy to miss. Checking for any leaks in your revenue should be a standard part of your financial strategy.
If one month, for example, a customer pays you late by 5 days, it might not impact your bottom line. But what happens if more than 50% of your customers are paying late and taking even longer to resolve those late payments? If you didn’t catch this in time, your revenue could take a serious hit.
A slippery slope
If you find that there’s a leak in your revenue, you have to do more than just fix the immediate problem. You also have to make sure that leak is “patched,” so it doesn’t cause more problems down the line. Otherwise, it’s a slippery slope from the first trickle of revenue leakage to major financial issues within your company.
Let’s say you discover that late customer payments are consistently causing revenue leakage every month. You can chase those late invoices and make sure you receive all the revenue you’re owed. That might work in a single instance or a few times, but how scalable is it so late payments don’t consistently cause revenue leakage?
Maybe your revenue is taking a hit because underqualified buyers are being approved too often. credit management team is approving the wrong type of buyer. In this case, you’ll want to make sure you enforce your credit policy while also educating your sales team so they know which types of companies to target and you’re not signing deals with companies that have a history of paying late.
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Preventing revenue leakage increases your bottom line
Once you’re on the lookout for revenue leakage, your business should feel the positive impacts quickly. Of course, collecting late invoices, for example, will give you an immediate boost in cash flow. But the benefits of preventing revenue leakage are actually more widespread than that. By being proactive about finding and fixing sources of revenue leaks, not only will your business enjoy increased revenue, you’ll also be able to better safeguard your revenue for the future. You’ll gain a better understanding of who your customers are and their own financial situations, which means you can make decisions about contracts based on the customers who pose the least risk to you.
When you start prioritizing preventing revenue leakage, you’ll also better understand which invoices will be most straightforward to collect. Taking action on those contracts gives your bottom line an instant boost.
5 causes of revenue leakage that are preventable
Disconnected data
Synchronizing with your team is key to making data-driven decisions. You likely use data every day to make smart decisions about the people you work with, the strategies you implement and the direction your business takes. Before you can feel confident about working with a new customer or supplier, you should examine several different data points. How has their revenue grown over the last 12-24 months? Have their operating expenses increased or decreased? How long do they take to pay their suppliers?
All of this information paints a clear picture of a business’ financial health and their overall risk to your business. But if everyone on your team is getting their information from different places, your revenue is at risk. You could miss important information about a supplier, for example, or extend credit to a customer likely to pay late.
How to prevent it: You need one single source of data truth to work from – otherwise, some people on your team could be left in the dark. If everyone on your team is making decisions from one consistent data source, they can better identify potential late payers and avoid revenue leakage issues before they even come up. Not only will that help prevent revenue leakage, it can improve your cash flow to boot. Make sure you can connect all of your platforms and workflows to a single source API.
Everyone on your team will be able to access the same information, which reduces the risk of flawed data analysis and helps you make more accurate and reliable credit decisions.
Human error
At the end of the day, everyone on your team is a human being. What’s one thing all humans have in common? Our ability to make mistakes. Even with the best team in the world, your employees can still make errors in their work. Missing invoices, delays in processing, or even something as simple as bad handwriting in a credit application can all contribute to revenue leakage. Keeping your data clean and straightforward is one way of reducing the risk of human error, but with 62% of businesses sending more than 100 invoices to customers every week, revenue leakage from simple invoice errors becomes an even more pressing threat to your business.
How to prevent it: Technology is your best friend when it comes to preventing revenue leakage. Using a digital credit application, for example, automates data gathering and helps you make faster decisions, saving you time to direct your attention to higher value or issues. Technology can help streamline your accounts receivable process and prevent errors, duplications and delays in processing invoices, giving you faster access to your revenue and a more secure cash flow.
Late customer payments
Remember what we just said about everyone making mistakes? Unfortunately, the same applies to your customers. Late customer payments can be a major source of revenue leakage – and one of the most dangerous ones, at that. One or two of your customers paying their invoices a couple of days late isn’t necessarily cause for concern, but if you let payment behavior like that go unchecked, it could get much worse and your business could leak so much revenue that it impacts your own ability to pay invoices in good time. Our recent study found that missed payments are becoming a serious problem for businesses. Only 14% of our respondents said most of their invoices are paid on time, with 46% saying customers are paying an average of 31-60 days past payment terms. With the research pointing to late customer payments rising across the board, you need to be extra vigilant in preventing revenue leakage from late payments.
How to prevent it: You need to be on top of the risks your customers pose to your business. Running a credit check in the contract stage is a good start. But you shouldn’t stop there. You also need to regularly monitor your customers’ business credit reports throughout the customer lifecycle to be able to catch when things change (i.e. DBT increases drastically in a single month, percentage of late payments increases over time, credit limit drops drastically, risk score drops). Knowing this information means you can then create a more in-depth analysis of your customers – to segment them by risk level, payment patterns and other factors. Based on this analysis, you’ll want to prioritize which customers to collect payments from and determine whether you need to make adjustments to a customer’s credit terms going forward.
Poor due diligence
It can be difficult to perfectly predict what will happen to your customers and their businesses in the future. You can’t know for certain if their revenue will dip and when it will dip. You can’t know if their operating expenses will increase drastically in a short period of time due to other factors. But you can take advantage of credit risk data available in their business credit reports to understand if their revenue has increased or decreased over the last 24 months, if their operating expenses have increased or decreased over the last 24 months, if they have a poor track record of paying their suppliers on time, if their credit limit has been reduced or increased and how long it typically takes them to pay their suppliers. This is the kind of information you need to know. The more you know, the less likely you are to be caught by surprise if something changes (i.e. revenue dips, operating expenses rise, debt rises, etc.).
How to prevent it: Make it a part of your on-boarding process to thoroughly analyze a potential customer’s financial health and payment behaviors. Scour their business credit report, paying attention to key metrics like Days Beyond Terms, or DBT, which tells you how late a business has paid their debts recently. If you notice a recent spike, or wild fluctuations, it could be a sign that the business is in bad financial straits and they may be too much of a risk for you to work with.
Bad contract management
You should be vetting your own contracts just as closely as you’re analyzing your customers. What payment terms do you default to? If a customer asks for E extended terms of payment, how closely do you look at their financial situation before agreeing? Poor contract management can lead to revenue leakage because you could be letting late payers or other bad actors into your revenue flow. Your contracts won’t always be “one size fits all.” You should instead analyze each new contract and each new business from the ground up.
How to prevent it: A good credit application tool can be the first step in your revenue protection process. Automated decisions free up time for your credit management team and help you validate decisions faster. If you have a strong credit policy in place, a credit application tool can create workflows based on your existing system and help you better manage contracts.