Revenue Leakage: What It Is and Where to Look

What is revenue leakage?

Revenue leakage is money a customer agreed to pay you that never reaches an invoice, or reaches it at less than the agreement allows. It is the quietest way money leaves a business: nothing is stolen and nobody complains. The usual causes are a price rise the contract allows that nobody applied, usage above the plan that nobody billed, a fee or a period never invoiced, and a discount that outlived its reason. Each is small on one invoice and large over a year, which is why it is found by comparing every agreement with every invoice, not by reading the reports.

Why doesn’t revenue leakage show up in your reports?

Because your reports start from the invoices, and leakage is what is missing from them. The P&L, the aged receivables and the cash forecast all count what you billed, so a price rise never applied or a fee never raised leaves no line anywhere to question. The account looks paid in full. The only record of what you should have billed is the agreement, often a signed PDF nobody opens again.

What are common revenue leakage examples?

The common ones are each a gap between a document that sets what is owed and the invoice that should follow it.

• Uplifts never applied: the agreement lets the price rise at renewal or on each anniversary, by a fixed step or in line with an index such as the Consumer Price Index, which the Bureau of Labor Statistics publishes, and billing keeps the old price.
• Usage never billed: the plan includes a set amount of users, locations or messages and charges for anything above it, but the overage sits in a usage report that never reaches billing.
• Fees never raised: a setup fee, a late fee or a charge the agreement allows for extra work is agreed and then forgotten.
• Periods never invoiced: a renewal rolls on without a new invoice, or a quarter is skipped when a customer changes plan.
• Discounts that outlive their reason: a first-year price or a one-off concession carries on into year two because nobody set an end date in billing.
• Credits without a basis: a credit note goes out with no return, dispute or agreement term behind it. When that turns into a question of fraud, see where receivables fraud hides.

Worked example: an uplift and an overage at Quillfield

Quillfield Scheduling is an invented company, one of the Demo companies Ressura uses to show its checks, and every figure below is made up for the example. It sells scheduling software to clinics and field-service firms on annual contracts.

Pinecrest Physical Therapy renewed on 1 March for 150 seats at $14.00 a seat a month, and its renewal clause raises the price by 5% at each renewal, to $14.70. Billing kept the old price, so every invoice since March is $0.70 a seat under on 150 seats: $105.00 a month, and $735.00 over the seven months from March to September.

Northgate Field Services’ plan includes 2,000 text reminders a month and charges $0.04 for each one above that. Its usage report shows 5,600 reminders in July, 6,100 in August and 5,900 in September, so 11,600 reminders above the plan were sent, worth $464.00. None was invoiced, because the overage never left the usage report.

Together that is $1,199.00 not collected from two customers, and both gaps grow every month until billing is fixed. Neither shows in Quillfield’s reports, because both customers paid every invoice they received, on time.

How do you find revenue leakage?

You put each customer’s agreement, with its amendments, next to the invoices billed under it and ask three questions of every period: was every fee it allows billed, at the price it sets on that date, for the quantity actually used? Start with your largest customers and those who renewed or changed plan this year, where the price most often stays behind, and set each period’s usage report against the quantity on its invoice. Before you raise a gap, read what the agreement says about billing a past period, then raise it in writing with the clause and the arithmetic, and fix billing so the next invoice is right.

How can Ressura help you stop it?

Ressura’s Order-to-Cash Module checks every invoice you send against what the customer agreed to pay, and shows the money you are not collecting in dollars. Price against the agreement checks each price you invoice against the price the customer agreed for that item on that date. Fee has a basis checks that every fee the agreement lets you charge is billed, Quantity against the order checks what you invoice against what the customer ordered or what you delivered, and Missing invoice raises a period the agreement lets you invoice when no invoice covers it. It works from the agreements and invoices you already have, with nothing to connect to start, and later you can connect QuickBooks Online or Xero so every invoice is checked as you send it. If every invoice matches, the result says so and lists what was checked.

Sources

1. Consumer Price Index, which the Bureau of Labor Statistics publishes