Is Revenue Leakage Hurting Your Business?
Revenue Operations Alliance defines revenue leakage as “a loss of revenue due to weakness in a business’s revenue management processes or other unnoticed causes.” The exact causes of revenue leakage vary, from incorrect billing to overdue debts. According to Accounting Seed, late payments and invoicing are a common cause of revenue leakage, particularly when companies rely on manual systems.
In some cases, the amount of lost revenue is small enough that businesses overlook it. However, revenue leakage can add up quickly. When that happens, it may hurt your business. For example, EY says companies lose up to 5% of earnings before interest, taxes, and amortization (EBITA) due to issues with their contract management and payment follow-up processes.
Think about that: inefficient payment follow-up processes could be costing your company 5% of its revenue. That’s a significant amount of money and means you have to work even harder to achieve business growth.
Revenue leakage is about more than just uncollected funds. It can also include the cost of customer churn, missed opportunities, or higher customer acquisition costs caused by weak revenue management systems.
How Does Revenue Leakage Happen?
No company wants to lose money. However, many common practices contribute to revenue leakage. Consider the following scenario:
You’re running an apartment building with 15 units. Tenants are supposed to give you a check (either by handing it to you or by slipping it through the slot in the secure rent collection box) by the first of the month. There’s a late penalty for any payments you receive after the fifth of the month.
One of your tenants is Abigail, a young woman who has never caused any problems, except that she frequently forgets to pay her rent on time. She has the money – she just forgets to give you the check on time. As a result, she has had to pay the late penalty five times in the last 10 months.
This has caused her financial problems, and she’s becoming frustrated. She knows she should pay rent on time, but she also thinks you should make it easier for her. At the same time, the late payments are causing cash flow issues for you. You have bills to pay, too.
Abigail’s lease is up for renewal, but she decides not to renew. Finding a new tenant will cost more money, and you’re worried you’ll have a hard time finding anyone as pleasant as Abigail. You wish she had just paid on time.
Revenue Leakage Hurts Your Reputation
It might seem unfair, but your company’s reputation could suffer as a result of revenue leakage.
In the example with Abigail and the late rent payments, Abigail was unhappy about having to pay late fees. In other cases, late and missed payments may be even more disastrous. For example, imagine you’re running an auto insurance company. One of your customers misses a premium payment because he’s distracted by his upcoming wedding. You mail him a notice warning that you will be canceling his policy if he doesn’t make his payment – but he doesn’t see it because he’s on his honeymoon. By the time he comes back, you have canceled his policy, but he doesn’t know this. He gets into an accident and doesn’t have insurance coverage. He blames your company and posts scathing reviews about how you canceled his coverage while he was on his honeymoon.
How Can Businesses Stop Revenue Leakage?
To stop revenue leakage, businesses need to identify its sources and take action to address the root causes.
If you’re losing revenue due to late and missed payments, new payment processes may alleviate the problem.
- Offer convenient payment options. If making payments is a hassle, your customers are more likely to put off paying, which may lead to missed and late payments. Provide a variety of convenient options, including modern digital payment channels and the capability to pay by phone.
- Enable automatic payments. For recurring payments, it’s often easiest to set up automatic payments. This way, your customers don’t have to think about making payments every month or worry about forgetting when life gets busy.
- Boost payment engagement. Sometimes, people need a reminder. Leverage payment engagement tools to send reminders by email and text.
Would you like to reduce revenue leakage? Tranzpay offers a suite of convenient payment solutions that empower you to take control of your revenue management systems. Learn more.
