Revenue Leakage: What Causes It and What You Can Do To Stop It
In a services organization, Revenue Leakage refers to the loss of revenue for your company. It doesn’t take a finance expert to know that this is not a good thing. It certainly isn’t called Revenue Gainage.
There are multiple reasons this can happen, and some of these may be difficult to control. For example when a project is delayed on the customer side due to changes in priority. There can also be a mismatch in what is expected vs what has been delivered, possibly due to poor implementation or miscommunication, causing payment delays. Read our blog post How to Manage the Handover from Sales to Services to learn how to close this gap in expectations.
But the focus of this article is on services hours that are either not billed or under-billed to your customer, and therefore causing a drain on company revenue and profitability. We take a look at different systems and processes that you have (or don’t have) to track, approve, and bill your people’s time, and the delays that may ensue. We then take a look at some practices you can implement to fix this threat to your profitability.
Spreadsheets are not your friend
Many organizations rely on spreadsheets to help manage time tracking for their organization. This is a cumbersome, manual process that relies on significant administrative overhead to ensure that timesheets are being entered in a timely manner and classed to the right task on the right project. Getting the data reviewed and approved and being able to generate meaningful reporting is an exercise in frustration.
This tedious workflow is exacerbated when the time captured in spreadsheets now has to be migrated to a billing system before any invoices can be sent to the customer, introducing another opportunity for revenue leakage.
To bill for travel or not to bill for travel?
Most organizations have rules around travel time, and how it should be billed. But this can vary from company to company. Some bill at full rate, some bill at half rate, some bill only one way, or not at all. Unless you have clear guidelines, clear communication, and a way to validate that your team is correctly following these billing rules, there is ample opportunity to underbill to monitor how your team is entering this information, it’s very easy for resources to under submit accurate timesheets. Any timesheet that isn’t correctly populated opens a risk for revenue leakage.
The average employee spends about 28% of their time reading and responding to emails, yet, up to 50% fail to track time spent reading emails. They also spend up to 5 hours per week in meetings, and another 4 hours preparing for them, yet almost 1/3 don’t fully account for the time spent preparing for and attending these meetings.
These administrative tasks can result in a significant number of hours that are underbilled to the customer, and become a significant source of lost revenue
Pre-sales: how much is too much?
Pre-sales can be trickier from a revenue leakage perspective. Services team members are frequently called upon to support pre-sales activities. And this is a good thing. Collaboration with services team members means better, more realistic proposals, which can, in turn, have a significant impact on customer success in the long term. Not to mention, time spent on acquiring new customers provides a future return on revenues.
The real question is when does it become too much and have an impact on revenue and profitability? There is no hard and fast rule how much time your team should be spending on pre-sales, instead, the takeaway is that managers must have the right tools and processes to review and asses how much time is spent on pre-sales, and executives must have business insights that help them be able to evaluate that information on a strategic level, and make the necessary adjustments.
There are many studies that show just how quickly our memory fades. The result of this is that the more time between when a team member completes a task and when they submit their timesheet, the more likely they will forget the details. “Did I spend 4-hours troubleshooting that integration issue, or 4.25 hours?” Guesswork is not the best option when you need accurate time accounting, the results on billable hours can be significant.
If a timesheet is submitted after a few days or weeks, the approver is less able to validate the accuracy of how much time actually spent and correct these errors, which then flow into the system, and reduce total billable hours.
A study by the Aberdeen Group found that manual billing has error rates of 12-15%. Inefficient, manual processes will directly impact revenue leakage.
Not only is there a risk of error, going from one system to another likely introduces delays in invoices being sent to customers, which in turn causes gaps in cash flow. A typical payment cycle for many services organizations is 30 to 90 days after the invoice is delivered. A two-week delay on the invoice may push out receipt of payment by another 30 days or more.
Four Ways You Can Stop Revenue Leakage
1 – Centralize timesheets
Managing timesheets in a centralized system can help you automate the way that your team enters timesheets, with pre-scheduled reminders when timesheets aren’t submitted. This equally helps make sure that time is tracked to the correct task on the correct project, further alleviating any discrepancies that may arise.
Mobile timesheets mean your workforce can easily enter time while on the road without having to log into their desktop version, the data is automatically synchronized with the central system for even greater accuracy.
2 – Share company guidelines
When team members are able to quickly access corporate policies, at the moment they need them, they are more easily informed to know what to do. Questions like: Is this task billable or not billable? What rate do I use? This is easily shared at at just the moment, with integrated Knowledge Management.
3 – Automate approvals
Managers must have direct insight to monitor and validate how much time is being spent on billable projects, vs non-billable work, and in a timely manner so they can correct discrepancies early in the cycle.
Setting up a system that can automatically request and capture management approval will ensure accuracy and timeliness. It will also give accounting teams the confidence to issue invoices as soon as the month closes.
4 – Automate invoicing
When timesheets are centralized, automated, and approved in real-time, customer invoices can be sent at month close. No more delays to consolidate and review information, closing the payment gap for greater cash flow.
Consider the amount of revenue that you bill on an annual basis, and it is easy to see how an automated timesheet and invoicing system will help you regain a significant amount of lost revenue.
Getting it right requires alignment and adoption from all stakeholders including the resources doing the work, the people approving the work, and the accounting departments who are billing for the work.