How to calculate revenue leakage and four ways to stop it

Is your business losing revenue? From unbilled hours to data entry hours, little leaks can really add up over time to take a bite out of your bottom line. All of this is called revenue leakage, and it’s important to stop it in its tracks. In this guide, we’ll help you find new ways to uncover, calculate, and plug costly revenue leaks.

What is revenue leakage?

The revenue leakage meaning simply describes any unintended loss of business revenue. In other words, it’s money that you’ve earned but not been able to collect for whatever reason. When income slips through the cracks due to unnoticed errors or missing invoices, for example, it reduces your overall business revenue.

What are the causes of revenue leakage?

The causes of revenue leakage are varied, but all lead to the same outcome – loss of revenue. Here are a few of the most common reasons for leakage of revenue.

Cause 1: Billing errors

Most revenue loss is due to simple, preventable billing process errors. A poorly organised invoice management system can cause invoices to become lost in the shuffle. They’re never sent, are sent to the incorrect contact, or contain errors leading to costly delays.

Cause 2: Time tracking errors

Perhaps your invoice goes to the right place at the right time, but it contains the wrong information. If you don’t track your billable hours accurately, you’ll merely be putting an estimate on the invoice. This means you might not be paid for the work you’re doing, losing income over time.

Cause 3: Currency conversion

For international businesses, using the correct currency conversion rate is vital if you don’t want to lose money. Currencies are constantly fluctuating, which means a lag in getting paid could cause you to lose income.

How to calculate revenue leakage

Understanding the causes of revenue leakage is the first step to stopping it. The second is to calculate just how much you’re leaking. For sole traders or small consulting teams, it’s easy to perform this calculation yourself.

Step 1: Calculate your project profitability.

Go through your historical sales figures to make sure that your billable hours and payments match the services you’ve performed. Are your profit margins accurate? Do purchase orders and invoices match your bank accounts? If not, you can spot the discrepancies or lost income.

Step 2: Analyse your task management processes.

The next step is to look carefully at the way you manage your tasks. Is there a certain step that’s more prone to errors? For instance, are invoices regularly getting lost in the system? If so, this means it’s a task that should be automated.

Step 3: Consult with your team members.

If you work with a team, collaborate to scrutinise your business processes. You might not notice revenue falling through the cracks, but this leakage could be spotted by your wider accounting team. You need to pull all records together to tally up the losses. Form a working hypothesis to test.

Step 4: Add your losses together.

The final step is to put all this data together for a holistic view over your processes. Identify inconsistencies in your income streams to calculate all revenue leakage. Test your working hypothesis by auditing your finance department.

How to stop revenue leakage

Now that you know just how much you’re losing, it’s time to plug those leaking gaps. Here’s how to stop revenue leakage in its tracks.

1. Automate your invoice management process

Don’t rely on manual processes any longer. Use automated invoice processing systems and cut down on human errors and delays.

2. Use time tracking software

Along with automated billing, invoicing and admin, choose software that includes a time tracking feature. This ensures that no team members are working without getting paid.

3. Use different rates for different roles

If you have team members performing vastly different roles within the organisation, you might be under or over-billing them. Make sure the per-hour rate fits the role to plug any gaps in your income stream.

4. Create a revenue leakage task force

If revenue leaks are a serious issue, it’s worth assigning a member of your team to continually monitor this problem. A little bit of upfront investment and training can significantly reduce leaks over time.

How can GoCardless help stop revenue leakage?

Combining the familiarity of bank debit with the innovation of open banking, GoCardless offers a range of secure solutions to help stop revenue leakage. Reduce late and failed payments by collecting them directly from customer bank accounts. We integrate with over 300 partners, including top accounting software, to help automate the invoicing process right from the start. We also facilitate international payments at real-time currency rates to make sure you’re not losing money on global transactions. All these little things add up to keep your revenue on track.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.