How to prevent revenue leakage with automated billing

Profitability is the main priority for any business offering professional services, be it via regular subscription or on an as-and-when basis. This means running a tight ship that is efficient and optimised across the board.

However, many such businesses fail to address issues that cause revenue leakage, and in turn fail to truly maximise their profitability.

This happens because revenue leakage often goes unnoticed until a thorough revenue leakage audit is carried out, though there are solutions that can be easily implemented such as automated billing. Here we explain what revenue leakage means, how it happens and how your business can plug the leaks and maximise profits.

In this article, we cover:

• What is revenue leakage?

• Common causes of revenue leakage

• What is automated billing?

• Preventing leakage with automated billing

What is revenue leakage?

The term ‘revenue leakage’ refers to a business losing earned revenue through inefficient or inaccurate processes. A revenue leakage formula calculates the difference between the amount of money earned by a business and the actual amount they collect.

It doesn’t include normal costs such as supplies and materials, but represents revenue that shouldn’t be getting spent or lost, hence why it is referred to as a leak.

Revenue leakage can cause many headaches and stress for business owners, especially if revenue forecasts are consistently overestimating the amount that should be earned by the company. Often, the forecasts are not inaccurate in themselves, but revenue leakage is diminishing the final earned revenue total over a particular period of time.

We discuss the common causes of revenue leakage below, and there are also tips on how you can alleviate the issues that cause revenue leaks.

Common causes of revenue leakage

A revenue leakage audit uncovers the causes of revenue leakage, with manual accounting processes and outdated systems being two of the most common causes. Another common cause is setting prices at too low a rate so as to not cover costs, as is clients not paying their bills on time. That latter reason can also be exacerbated if clients are not being billed as often as reasonably possible, or through a lack of communication regarding payment terms and timing expectations.

Additional causes of revenue leakage include:

• ineligible or incomplete invoices

• not following up with late-paying clients

• inaccurate revenue forecasting

• inefficient billing processes 

Revenue leakage examples

Manual data entry is one of the most frequent revenue leakage examples, with human error at the crux of it. Manually tracking time, expenses and amounts due can and does lead to data entry errors. Generating invoices by hand can cause serious issues, such as accidentally entering a ‘100’ where there should have been a ‘1000’.

This is an even bigger problem for businesses that offer varied pricing and billing options to clients with differing needs, or operate internationally and thus work with a variety of currencies and exchange rates.

Another example that a revenue leakage audit identifies is an imbalance between the cost of customer acquisition and the number of customers acquired. A high spend on customer acquisition should result in a high number of customers acquired, but this is not always the case and thus causes significant revenue leakage.

What is automated billing?

Automated billing is a system that ‘pulls’ a due payment from a client’s bank account on the due date. Such a Direct Debit system ensures payments are made on time, meaning you do not have to spend time chasing up a late-paying client. This in turn can greatly increase productivity by freeing up time for more creative tasks.

Eliminating late payments obviously helps reduce revenue leakage by itself, but the automated nature of the billing system also increases the accuracy of the invoices. This is especially important if the amounts charged to a client can change from month to month due to differences in the amount of services they use, or other such variations. This is why automated billing is good for SaaS businesses especially.

Frequently upgrading or downgrading a client’s subscription can make a manual billing process a mathematical nightmare, but automated billing software does all the calculations for you. It can also notify you if a client’s credit card has expired so you don’t have to waste time retrying a failed payment. Some Direct Debit services also retry any failed payments automatically if the card is still active.

Automated billing software is becoming more and more common around the world, and should be considered a necessity for businesses offering professional services. It doesn’t just help eliminate revenue leakage as it also helps your clients. They know they don’t have to take time to make a payment when it is due, as it is made automatically or with the simple click of a payment link.

Automated billing examples

The main payment examples of automated billing include:

• standing orders

• subscription services

• memberships

• payment instalments

A customer with a standing order is usually billed using automated billing software, as it is a set amount being billed at the same time every month.

Subscription services are similar, but the amounts billed may vary during each payment period according to what services were used. A ‘subscription as a service’ (SaaS) company may do a lot of software development work for a client during one payment period, but only some basic maintenance during another. In this example, automated billing software calculates the amount to be charged according to what services were used.

Memberships are often invoiced with automated billing software, as they work similarly to standing orders, with a set amount billed at the agreed intervals.

Another good example of automated billing software in action is payment instalments. Many retailers offer products with this option nowadays and it is a popular choice for consumers, allowing them to purchase something now that they would otherwise have to save up for. The payment instalments are agreed at the point of sale, and they are automatically pulled from the customer’s bank account on each subsequent due date.

Preventing leakage with automated billing

Automated billing software enables you to create customer profiles that contain all the data required to accurately generate an invoice. The customer profile contains information such as their name, billing address and contact details, plus the software program receives other data regarding the services that the customer is to be billed for.

The software then calculates the correct amount to be billed according to the rates and services rendered, and can either automatically print an invoice immediately or print all invoices at a set time. Some billing systems also automatically send an electronic invoice to the client via email, which is another reason why automated billing is good for startups as well as established companies.

By automating the billing process, the correct amounts are always charged to the client at the correct time, eliminating the chance of revenue leakage.

How GoCardless can help prevent revenue leakage

GoCardless enables businesses to collect recurring and one-off payments directly from their clients’ bank accounts – which is not easy for smaller companies to do by themselves due to the strict underwriting requirements. By using Direct Debit through GoCardless, your business will be in greater control of incoming payments and thus eliminate revenue leakage.