What are Revenue Leaks?

Companies are usually focused on marketing their products and services, making them known and selling them to an interested target group. Less in focus is the problem that the sales delivered or made are often not correctly accounted for - and to a systematic extent: Be it incorrectly granted discounts, errors in invoicing or conditions granted to the customer without the prerequisites being met; the list of possibilities why an earned euro may not necessarily have the real equivalent value of a euro is long and will be discussed in our contribution to the Causes of Revenue Leaks  is treated as a separate item. Although nominal sales are recognized, these are consumed to a not inconsiderable extent by the transactions described above. 

This phenomenon is called "revenue leakage", which translates into German as "Umsatz-Lecks". Just like a leaky pipe that constantly loses a little, revenue leaks: According to studies, the losses caused by the leaks are far from negligible, and over a longer period of time they add up to considerable amounts. This means that cash is lost that is lacking in other places. 

According to a survey by the Boston Consulting Group, 45% of business leaders see these leaks as a systematic problem for their company. Revenue leaks are estimated to reduce companies' earnings before interest, taxes, depreciation and amortization (EBITA) by 2% to 5% - year after year (see "Achieving Rapid Topline Growth with Revenue Assurance," Boston Consulting Group study, 2020)

Revenue leaks occur not least because of a lack of awareness of the problem on the part of the companies; money is earned when products and/or services are sold, but it is not collected. This means that revenue is generated through sales, but not to the extent that would have been possible under correct conditions. This does not mean deliberate discounts or rebates. Rather, the revenue leakage results from the miscalculation the contractual agreed Conditions.

 Revenue leaks are a growing problem because, on the one hand, business models, customer needs and markets are becoming increasingly dynamic. On the other hand, the underlying IT systems and landscapes are becoming increasingly complex. The business models and market realities are not mapped loss-free in the systems. Reality and internal "processing" diverge. Software errors occur, which have to be paid for in hard cash.

The reasons for revenue leaks are manifold and vary depending on the industry. They often occur when guidelines for contractually agreed discounts or receivables management are not managed centrally. For example, sales employees may grant their customers discounts that either would not be necessary according to the terms of the contract or are even already being used. Similarly, additional services may be offered free of charge even though they would only be available for a fee. In addition, revenue may be lost as a result of incomplete contract management if, for example, contractual penalties become due but are not claimed. This case occurs primarily when complex contractual terms have been negotiated, the customer violates them, but the corresponding violation is not even noticed.

Here, the sources of error are to be found primarily in the handling of the corresponding software systems with which the respective employees work. These are complex and must be constantly expanded and reconfigured to maintain product bundles, conditions, prices, delivery terms, etc., simply to reflect the realities of business models, customer needs and sales tactics. Such activities are always associated with a high administrative effort and are to a large extent monotonous and repetitive, so that errors can quickly creep in as a result of carelessness.

Variations in the design of goods and services can also lead to confusion and errors by the responsible employees, for example, when an offer is sold at a lower price that was intended only for a certain variation of the product.

Management is therefore well advised to eliminate the revenue leaks in order to ensure optimal revenue protection. In order to effectively address these causes, it is first necessary to identify them in the first place. Normally, those responsible have a good sense for sources of error. Here, management should also provide support to the finance department.

At this point, it is particularly advisable to take a close look at those customers whose contract terms are the most complex. Suspicion may initially fall on the customers who generate the largest share of revenue, but this need not always be the case: In the case of revenue leaks, the contract terms are more important than the figures describing absolute revenues.

As part of this investigation process, provided it is carried out thoroughly, it is to be expected that more than one revenue leak will be identified. Therefore, these should be sorted according to their business relevance and the sources of error that have the greatest negative effect on revenue should be eliminated first.

Once measures have been implemented that appear suitable for counteracting revenue leakage, they should be evaluated after a while. For this purpose, it is not only suitable to take a look at purely economic key figures; a review should also be carried out with the finance department.

The following methods, among others, are suitable for reducing revenue losses due to the leaks:

• Analyzing and adapting work processes is a measure that has proven effective in optimizing revenue assurance. For example, confusing price and discount lists can be made simpler and/or clearer to reduce sources of error. Occasionally, a company's employees may over-discount or over-discount for a variety of reasons. The reasons for such behavior need not lie in an attitude on the part of the employee in question that is contrary to his or her duties; it is possible that he or she merely had a particular improvement in customer relations at heart that he or she wished to achieve by being especially generous.
• Wherever possible, manual processes should be replaced by software solutions. This also means that transfers of invoices and other documents that are in paper form to EDP solutions are prone to errors and instead the aim should always be to achieve an office that is as paperless as possible. The individual departments should be networked with each other using computer-based solutions to enable the best possible reconciliation between the individual parts of the company.
• Employees should be encouraged to enforce contract terms consistently. Companies with a dubious reputation for defining but not enforcing contract terms may tempt customers to violate contractual obligations on a regular basis because there is no serious risk of sanction.
• Larger companies in particular can create a (full-time) position that is entrusted with so-called revenue assurance.