If you want to maximize the profitability of your projects, eliminating any revenue leakage should be your first step. Let's go through the what's-what of revenue leakage and how to stop it.
Did you know that you aren’t collecting the same amount of revenue that you’re making?
Yes, that’s entirely possible — thanks to revenue leakage or revenue loss that many businesses aren’t aware of. It can happen for several reasons, like human error, billing mistakes, manual processes, and payment delays.
Left unchecked, leaks in your revenue can slowly eat away at your profits. In turn, professional service providers can feel like they aren’t taking on enough client work to meet their financial goals. But by taking on more work than their maximum capacity, agencies risk employee burnout.
In the long haul, revenue leakage impacts not just employee performance, but also client satisfaction levels. As you struggle to submit more and more work to make up for lost revenue, the quality of your work takes a hit.
But before you can eliminate revenue leakage, you need to first understand the most common causes behind it. In this guide, let’s look at them along with the steps you need to take to eliminate revenue leakage.
As its name suggests, revenue leakage is the loss of revenue that a service-based business has earned but not collected.
Think of revenue leaks as lost revenue, caused by several reasons such as a faulty billing system, outdated and manual finance process, and lax discounting policies. Let’s look at these causes next.
Although each professional service provider has unique culprits to blame, you’ll find your answer to what’s causing the revenue leaks behind one or more of these factors:
The manual work that goes into data entry and tracking numbers in a spreadsheet is prone to a lot of human error. Often there are at least 2-3 people manipulating the data captured in a spreadsheet, which adds to the risk of manual errors.
To top that, the information in a spreadsheet must be integrated into a billing system and a time tracking software. Not only does this create unnecessary admin work but it also increases inefficiencies.
Manual invoicing brings two main problems to the table.
One, it means you aren’t invoicing at the same time a project closes. This delay in invoicing means you can easily forget the exact services offered, particularly, the add-on services you provided. This, in turn, leads to underbilling.
And two, because you don’t have a central hub for managing the time going into completing projects and tracking project accounting, you jump between tools (or spreadsheets). Again, this increases the odds of billing errors, resulting in leaked revenue.
The infamous scope creep also contributes to revenue leaks. To recap, scope creep is when a client gradually increases the work required on a project without factoring in its impact on the project cost and timeline. And, as Runn's co-founder Nicole Tiefensee reflects, scope creep is the bane of project management:
I worked in project delivery many years before co-founding Runn, and I would say that never, ever, in the entirety of my career did I see project start with a specific kind of scope and remain with exactly the same scope right the way through to the end. Things always change at so many different levels. It's really complex to navigate - but you should plan and expect to encounter it.
When the scope of a project incrementally shifts and expands, there’s a high chance that you will lose track of the extra work and hours that go into a project. The result? You underbill the client, leading to revenue loss.
When you offer multiple services and different prices to different clients, it becomes another cause of revenue leakage. The main culprit in both cases boils down to confusion.
Think of it really, if you offer client X a different retainer package but charge client Y a different price, things can quickly get challenging to track.
This is specifically true if you don’t maintain an updated sheet sharing client information including project work, how you price them, what you charge, and whether you offer them a discount.
Similarly, service variation means you’re charging differently for the different work you do for various clients. For example, a content marketing agency may offer services like content audits, content strategy, content production, content repurposing, and more.
Now imagine if the same agency in our example offers packages that pair 2-3 services and offers a price. But a long-term, retainer client asks for more discount or requests they provide another small service at the same price. Wouldn’t all this breed confusion and pricing errors?
Underbilling, late billing, and unbilled services all fall into this category, causing loss of a significant amount.
Mainly, the problem stems from incomplete or outdated information flow. As a result, your staff might not realize that the extra work they’re doing for clients is billable. Similarly, work done in response to a client request may not be effectively communicated to the billing department.
Not billing a client by considering them inactive or billing them the wrong rate is also entirely possible.
Lastly, inaccurate estimates of the work and time that go into a project can leave a significant impact on your revenue.
To add, you might add a junior employee’s hourly rates in your project forecasting. But when doing the work, you may assign and pay a senior staff member. All this culminates in incomplete billing and further revenue loss.
Begin with these three steps, then level up with our tips to prevent revenue leakage:
Go through the list we shared above to identify revenue leakage causes specific to your business. This is your hypothesis.
Example: We think we aren’t correctly estimating and tracking the time that’s going into completing client work.
You don’t have to work on creating a hypothesis alone. Relevant project teams and the finance department can work together to understand the possible causes behind revenue leakage.
This is important for prioritizing which revenue loss pointers to tackle first for recovering losses and saving from future leakages.
In the list of potential revenue loss causes, add a column that estimates how grave the situation is. Don’t have an estimate of numbers? Add tags such as “mild revenue loss,” “significant revenue loss,” and “extreme revenue loss” to guide your decision-making.
By now you’ll know which culprits need resolving first. Based on that, create a plan to eliminate the issue(s).
For instance, if manual processes are the main reason behind your revenue loss, focus on automating your processes. Get an all-in-one project management tool that helps you track time and client work, create project forecasts, and automate creating project financials reports.
Start updating old processes.
Identify the workflow (identify who collates project financial data, who will create invoices, and when you’ll invoice clients).
Don’t just stop at creating new processes though. Test them for a defined period to check their efficiency. Optimize the process from there to prevent any leaks.
A lot of easily avoidable revenue loss is due to rigid or complex account processes that take too many people to get a small change done. By making your billing process flexible, you can quickly and easily save your business from revenue loss.
Use a tool that not only centralizes project financial management but also tracks the time that goes into completing projects. It should also give you an inventory of the hourly rate of employees and part-time contractors that you work with.
Runn, for example, helps you create accurate project financials. Use it to create a central inventory of clients and their projects in the pipeline, how much you charge them, and how and when you’ve agreed to bill them.
To add, the software also gives you centralized timesheets. This way, you can see how much time is going into a project so you can bill accordingly. All this gives you timely information to bill accurately, saving you from revenue leakage.
Create a fresh sheet that lists each of your service’s pricing. Also add a column on the most discount you can offer per service.
This way, you won’t be undercharging any client. The sheet will also help you avoid pricing problems in the future.
Pro tip: Charge in one currency, say US dollars if you work with international clients to prevent currency conversion issues and subsequent leakages.
Accurate project financials can save you from revenue loss caused due to guestimates. The best solution here? An automated project forecasting tool like Runn.
Not only does it help you estimate the work that’ll go into a project but assists in tracking the actual time that goes into projects. With its automated timesheets, you can see how much work was completed, who completed the work, and in how many hours.
Runn’s resource management feature also gives you each employee’s rate. This helps further in making accurate project financials (example: you can easily factor in a senior or junior employee’s rates in your project estimates).
What’s more, Runn gives you a full lowdown of project financials including its total revenue, the profit you’ve made, and the amount you’ve to pay to the staff. You also get a comparative overview of how over- or under-budget you’ve gone.
Lastly, a common reason why project estimates tend to be inaccurate is that you don’t factor in the work that goes into edits.
If you’re using a centralized software to manage projects, you can go back to see how much extra work goes into each project’s edits/rework. Make sure you estimate this extra work in your project forecasts to control revenue loss.
As for revenue loss caused by scope creep, control it by documenting the project scope. Make sure you discuss it with the client too, so they know how you’ll be billing for work completed outside the agreed scope.
Now that you know the most common causes of revenue leakage, we’re sure you’re in a better position to identify the culprits eating away your hard-earned revenue.
Instead of ignoring them though, act today to control revenue leakage.
Standardize and automate your processes. Prepare better project forecasts. And keep tabs on the actual work, time, and resources that go into each project so you can bill accurately.
Looking for a central software to start managing it all? Try Runn for free today and see how it helps you track resources, time, and project financials in one place.
