What is Revenue Leakage? Ways to Prevent it.

Revenue leakage is the loss of potential revenue that a business should have earned.

This occurs due to a variety of reasons such as faulty processes, miscommunication, and human error.

These losses can add up quickly and can significantly impact the bottom line.

In this blog, we will discuss some of the common causes of revenue leakage and measures to calculate it, and ways to stop it.

Starting Execution without a PO

One of the most common causes of revenue leakage is starting work without a properly signed purchase order (PO).

A PO is a legally binding document that outlines the terms and conditions of a project, including the cost and scope of work.

When a business starts work without a PO, they are putting itself at risk of not being able to bill for its services and losing potential revenue.

Timesheet Errors

Timesheet errors can also result in revenue leakage. For example, if an employee works extra hours but does not record it accurately, the company will not be able to bill for that time.

Similarly, if an employee records time for work that was not approved, the company may end up billing the client for services that were not actually provided.

Billing Higher Cost Resources at a Lower Rate

Another common cause of revenue leakage is billing higher-cost resources at a lower rate.

For example, if a business has a highly skilled and experienced resource working on a project, but bills the client at a rate that is lower than their actual cost, the company will not be able to recover the full cost of that resource. This results in a loss of potential revenue for the business.

Work Beyond the Agreed Upon Contractual Terms

Revenue leakage can also occur when a business does work outside the scope of the contract.

This happens when a business agrees to perform additional work for a client that is not included in the original agreement.

If the business does not bill for this additional work, it will result in a loss of potential revenue.

Billing Disputes

Billing disputes can also result in revenue leakage. This happens when a client disputes the amount billed for a project.

If the dispute is not resolved in a timely manner, it can result in a delay in payment and a loss of potential revenue for the business.

Project Closed without Full Billing

Another cause of revenue leakage is a project being closed without full billing.

This can occur when a project is completed, but the business has not invoiced the client for all of the work performed.

This results in a loss of potential revenue for the business.

Measures to Calculate Revenue Leakage

To calculate revenue leakage, a business must first identify the potential sources of leakage. This can be done by conducting an internal audit of processes and systems.

Once the sources of leakage have been identified, the business can calculate the potential loss by estimating the value of services provided but not billed.

Ways to Stop Revenue Leakage

There are several ways to stop revenue leakage, including:

1. Implementing a robust PO system to ensure that all work is performed with a signed PO in place.

2. Implementing a timesheet system that accurately records the time worked by each employee.

3. Reviewing the cost of resources and ensuring that they are billed at a rate that accurately reflects their cost.

4. Establishing clear lines of communication with clients to avoid misunderstandings and disputes.

5. Regularly reviewing and updating the scope of work in contracts to ensure that all work performed is billed.

6. Implementing a project closeout process that includes a final review of all work performed and a final invoice to the client.