Stop Those Leaking Profits!
Many entrepreneurs can tell you how hard it is to grow sales revenue these days, but few can tell you how much of the revenue they generate disappears before it reaches the top line of their income statement. According to experts in the arcane art of finding and fixing revenue leaks, entrepreneurs may be missing out on 2 to 20 percent of their revenues-revenues that, in many cases, will drop right down to the bottom line if recovered.
Revenue leakage occurs when a salesperson neglects to send an invoice, when a billing computer rejects a bill that has a comma in the wrong place, when a customer's change order is implemented but never charged for, and countless other reasons. "Sometimes things just drop out and get lost on the floor," says Randy Browning, a PricewaterhouseCoopers partner and co-author, with Sameer Kumar, of To the Max: Revenue Maximization-Capturing the Opportunities Within (PricewaterhouseCoopers).
Sandra Pundmann, a revenue leak expert with accounting firm Deloitte & Touche, defines stopping leaks as "a process to identify the beginning-to-end completeness, accuracy and integrity of capturing, recording and billing all revenue-producing events, from customer acquisition through collections." She compares it figuratively to putting a container under the revenue stream. "You don't really understand how much revenue is leaking out of the pipe until you put a bucket under the pipe," she says.
The lost revenue is often considerable. Health-care and Web service providers typically drip away 5 to 10 percent of revenues, Browning says. Telecommunications and utility companies lose up to 5 percent, and hospitality and financial services firms lose 1 to 2 percent. Wireless phone companies have the most porous pipes, according to Browning, losing 5 to 15 percent of revenues. Across all industries, an average of 2 percent of revenues may be lost.
Start finding revenue leaks by sitting down with a pencil and diagramming the processes you use to capture, bill and collect for sales. Try to identify places where revenue may leak. These are usually points at which information about a revenue-generating event is handed from one person to another, such as when a salesperson turns a purchase order over to a billing clerk. Then focus on that area, measuring how many sales are going in and how much revenue is coming out.
Technology can help. Automated billing systems are less likely to make mistakes than manual ones, Browning says. But computers aren't foolproof, and their errors are often harder to catch. "We call it the black-box syndrome-records in, bills out, but nobody knows what's going on in between," says David Dague, former vice president of marketing for Sentori Inc., a Laurel, Maryland, seller of leak-stopping software for telecommunications companies. Sentori's solution for small wireless phone companies costs $25,000, although bigger firms may spend up to $1 million. Dague says payback usually takes four to six months. "It's pretty quick and very quantifiable," he says.
Pundmann says she's never worked on a revenue-leak project that didn't pay for itself. In fact, you'll very likely earn far more than you invest. "You never see less than a 3-to-1 payback," says Browning. "I've seen companies get 40-to-1."
You can use these figures to estimate how much to invest in revenue recovery. For instance, if you have annual sales of $1 million, you're likely leaking $20,000 per year. Based on an expected payback of 3-to-1, you could justify spending about $7,000 to recapture the revenue.
Start small, with a single product line or business unit, Browning recommends. Then use gains from a limited program to justify-and even pay for-expanding the effort. Whatever you do, don't assume you're not leaking revenue or that scrambling for new sales is the only way to grow revenues and profits. "In most companies, you can find ways to enhance your revenue stream," says Pundmann, "and get what you are rightfully entitled to."
Mark Henricks writes about business and technology for leading publications and is the author of Not Just a Living.