Revenue Leakage: How to Calculate It & 6 Ways to Stop It
by Julie Bennett on June 7, 2022
Got a revenue leakage problem? For professional services, revenue leakage usually means that precious billable hours are slipping through the cracks.
Unbilled hours and other unanticipated losses from revenue leakage, though perhaps in small amounts, add up over time.
Furthermore, businesses that are expanding their service offerings and scaling their operations are bound to experience some form of revenue leakage.
The negative cumulative impact on the bottom line is enough for businesses to take the time and resources to:
- Uncover where the leaks are happening
- Plug the leaks as quickly as possible
In this guide, you can quickly learn all about revenue leakage in professional services, including the most common examples. You’ll also discover how to go about calculating revenue leakage and 6 practical ways you can stop it now.
What will you find in this article?
What is revenue leakage?
Revenue leakage is loss of business revenue that is unintended, unnoticed, and preventable. Like a physical leak, revenue leakage allows income to slip through the cracks. Though a revenue leak may not be large, these small amounts build up over time to significantly impact the bottom line.
Your organization can unintentionally lose revenue in a million different ways. But revenue leakage has 3 major indicators:
- Unintended- Obviously, you don’t want your business to lose revenue. Perhaps you implemented a new system that just isn’t working, and you’re losing money now. Maybe your task management keeps getting clogged and is forcing you to take time out of your day to fix it. Whatever the reason, revenue leakage isn’t something anyone intends, unless of course in cases of theft or fraud..
- Unnoticed- This is really the big identifier of revenue leakage because it involves little ‘leaks’ that go unnoticed. This could be anything from missing billable hours on your service contracts to paying frivolous transfer fees, software licenses, etc. Like the leak in a ship, these small amounts of hours and payments may go undetected at first, but can turn into significant revenue loss over time.
- Preventable- You can’t avoid having to pay certain costs as a service organization to grow your business. These types of costs are not considered revenue leakage. On the flip side, loss of income from revenue leakage is always a preventable event. That means that wherever or however you may be leaking revenue now, there’s a way to fix it and prevent it in the future
What causes it? Common examples of revenue leakage
Here are among the most common causes of revenue leakage in the professional services industry:
This is the big one, the area where most consultancy firms experience revenue leaks. Billing errors rear their ugly heads in many ways, all of which are the fruits of shabby invoice management: unpaid invoices, unsent invoices, incorrect invoices, missing milestone payments, and the like. Without a solid invoice management process, money is often floating in space and errors caused by manual entry may allow revenue to seep through the cracks.
Time tracking errors
The worst thing for project managers is to have their consultants playing guessing games as to how much time they worked on a completed project. The result of errors from guesstimating or incorrectly tracking time is missed income on hourly contracts. With project-based contracts, you can end up making significantly less per-hour if your time tracking isn’t on point. Then there’s the hours spent on service that exceed what’s alloted in your agreement that often go untracked and uncompensated. At the end of the day, time tracking errors present a revenue leakage problem for businesses of all types, until a definitive process is put in place and adhered to.
Data entry errors in general
Apart from the havoc they wreak on invoicing and time tracking, data entry errors across the board– whether with contracts, budgets, what have you– can cause little revenue leaks that go unnoticed. Putting in the wrong data by accident can also negatively impact the profitability of your projects. For example, if your project budget was entered incorrectly and no one catches it until the work is in motion, you may end up having to eat those extra costs from the leak.
Contract renewal errors
In IT services especially, revenue leaks can happen when your contract management is lacking. If a client defaults on their payments because they missed their contract renewal, firms can incur a loss of revenue.
Virtually all types of businesses issue discounts to drive revenue and incentivize customers. Keeping track of all the promotions and discount codes for an online business can prove difficult, with revenue leaking in the process. For example, if you leave a sales banner up for too many days on your website after the sale is over, you’ll forfeit profits on those items you sell with the discount.
Packages vs line-item services
Lots of professional services firms offer packages that include a certain amount of services. In addition, many will offer line-item services at a lower price to let customers pick and choose. Generally, packages have higher margins, making them more financially advantageous for service organizations versus trying to push individual services. You might experience a revenue leak if you have tons of people signing up for your line-item services, meaning that your higher cost packages just aren’t converting. On the other hand, you could get into a weird situation in which your packages are actually the source of the leak, and it makes more sense to raise the price.
For global businesses who deal in different currencies, the exchange rate can ding you if you’re not careful. Fluctuating conversion rates may not get fully accounted for in your profitability calculations, causing little revenue drips that add up by year’s end.
Lack of profitability tracking
Do you know which of your clients are the most profitable? What is your average project profit margin? If you don’t know your margins in the first place nor keep track of the profitability of your projects, you’ll inevitably experience revenue leakage along the way.
Problems with service
Finally, this is the leak no manager wants to have, but it happens. Whereas the above causes can often be plugged with a simple solution, a revenue leak from clients repeatedly having issues with service is a larger problem. Since this speaks directly to the customer experience, revenue leaks caused by service issues should be addressed immediately.
How to calculate revenue leakage
For a smaller business, you can do your own revenue leakage analysis by getting a grip on how much your projects are actually making and your team’s processes are flowing.
Here are a few tips on how to go about finding and calculating revenue leakage in your business:
- Calculate the profitability of your projects/customers. Going through the process to figure out your project profit margins will alert you to any and all revenue hits you may take along the way. Take a good, hard look at your deal-to-cash pipeline. By examining everything you pay for down to the dollar, you’ll be able to see where any leaks are happening.
- Scrutinize your task management process. Now that you’ve got a good measurement of your project profit margins, it’s a wise idea to scrutinize your task management to see if there are clogs or kinks in the armor. You may find that certain tasks can be automated or certain steps may be eliminated.
- Evaluate your tech stack. Just as you scrutinize your task management to look for leaks, so you must do with your tech stack. What is your monthly/annual software license spend? Are any of the platforms you’re paying for superfluous? Or perhaps certain software has outlived its use for your team? Maybe there’s a cheaper, better alternative? Whatever the case, many small businesses can find leaks here if they’ve become a little too app-happy.
- Talk to your team. A little collaboration goes a long way. Ask your team where they think there may be revenue slipping through the cracks. Two or more heads are always better than one, and getting feedback from the people you work with can alert you to missed opportunities and new solutions you might not have considered.
- Add it all up. Now that you know roughly how profitable your projects are, you’ve scrutinized your processes and your software, and you’ve talked to the team, add up everything you’ve learned. Use what you know you should be making on projects (from your profitability calculations) against the unintentional costs you’ve uncovered to give you a clear indication of how much you’re losing in revenue leakage.
Can you stop revenue leakage quickly?
You can stop revenue leakage fast when you can identify the problem and provide a quick solution. Automation is a good example of how you can plug a revenue leak pretty quickly, especially with invoicing.
If you have a medium-to-large-sized organization, it will inevitably take more time to identify where all the leaks are.
Additionally, revenue leaks that can’t be plugged with software or a quick change in processes may take longer to fix. For example, if you’re losing money consistently because clients have issues with the support, you’ll have to have a discussion with your team and come up with solutions.
6 Practical Ways To Stop Revenue Leakage NOW
1. Tighten up your invoice management (and automate)
If you don’t have invoice management, get it. Do not leave the job to people and spreadsheets. A project management tool with invoicing that offers automation can make sure you never miss out on revenue due to invoice errors. Even if you do nothing else on this list, #1 will save you money, time, and stress. Never stress about invoicing again!
2. Automate as much admin as you can to prevent manual errors
Don’t stop at invoicing. If you automate as much admin as you can, you can dramatically cut down on manual errors. You’ll also forfeit having to pay people on your team to do tedious admin work.
3. Make time tracking easier
People are usually totally happy to track their time; they just don’t want the hassle of doing it. If you make time tracking easier on your team, you can stop revenue leakage from unbilled hours. You can do this by getting time tracking software with features like a mobile app and browser extension, so everyone can track time wherever they are working. Or you can go all the way with self-driving time tracking, a feature that automatically tracks time based on your calendar and GPS location.
4. Drop software that doesn’t serve you
If you’re paying for extemporaneous software, drop it. You can find more value in all-in-one solutions that can kill more birds with one stone. All those licenses really add up and may not be necessary to deliver great results.
5. Automatic renewals
To avoid the pitfalls of revenue leakage from inferior renewal management, make the switch to automatic renewals.
6. Use role-based rates
Small businesses and startups often have team members who wear a lot of hats. Your developer might also be your fly-by-night graphic designer. The accountant might also be the virtual secretary. You get the idea. With role-based rates, you can pay your resources different amounts, depending on the role they’re working in. This way, you won’t pay a creative $100/hour for doing admin work. Leak plugged.
Synopsis: Revenue leakage in professional services
Revenue leakage is entirely preventable, as long as you can identify where the problems are and provide a solution. Some of the most common revenue leaks in professional services are found in billing errors and untracked time.
To figure out where your business might be leaking revenue, you’ll need to do some investigating into the profitability of your projects and the way your task processes are flowing.
Implementing automation and/or software to manage things like invoicing is often enough to plug things up. No matter where along the way your business is leaking revenue, there are ways to tighten the ship.
Keep it together.
PSOhub can help you minimize revenue leakage by offering all-in-one project management software with invoicing. When your project data connects to your financials, your contracts, and your CRM, your life gets easier. And with automation and self-driving features, you can avoid those nasty billing and time tracking errors forever.