Revenue leakage is the unnoticed or unintended loss of revenue from your company due to inefficiencies in your processes and revenue-producing initiatives failing. As businesses grow many struggle to ensure their business processes can keep pace, we have found even the best run companies are leaving money on the table especially when it comes to their rebates.
Statistics show that current software systems allow for revenue leakage of about 2 to 5% of a business' revenue which can equate to thousands, millions, and even billions in lost revenue. For example, if you're a million-dollar company, that means you're losing up to $50,000 per year — and that number will only grow as your business does. Unless you keep a close eye on revenue leakage as you prepare for another year in business.
Common causes of revenue leakage
- Incorrect data & manual processes: While some companies manage the rebate process effectively, in the vast majority of organisations their rebate management processes are still manual, relying on individuals and manual processes such as spreadsheets. This lack of automation leads to errors and an inefficient allocation of resources. The smallest miscalculation of rebates could have dire consequences financially meaning revenue leakage. Rebate management systems eliminate this type of error by calculating, accruing, and allocating rebates for you in one centralized system.
- Unsent invoices: Sometimes busy companies forget to create and send an invoice to their trading partners. And let’s face it, if a client doesn’t receive an invoice, most likely they will not be in a rush to pay it.
- Unclear payment timeframes: A trading agreement manually created may have the right due date for payment. However, separate ones filed in cabinets or on someones computer may say something else. Missing or incorrect information may result in the business failing to follow up on collecting payments meaning a higher chance of revenue leakage. Instead, businesses who use a rebate management system can track due dates, and payments received to trigger appropriate courses of action.
- Rebates are not managed and accounted for correctly: It's all too easy for revenue leakage to happen if there is not a process for managing and accounting for rebates. We’ve seen that complex trading agreements such as supplier rebates often involve incredibly complicated performance-based calculations with endless permutations and are subject to periodic review and change. Several companies have made the headlines in recent years and IFRS 15 looks set to put rebate accounting firmly in the spotlight.The necessity for businesses to have an effective rebate management system in place to deal with complex trading agreements has never become more apparent.
How can you reduce revenue leakage?
There are a number of options your organisation can adopt to help you with management of rebate agreements and reduce the risk of revenue leakage, including:
- Spreadsheets and manual processes – If your business only deals with a relatively small number of complex trading agreements, this may be a viable option, but as the volume and complexity increases, the possibility for error and revenue leakage surges exponentially. The more data that these manual processes have to deal with, the more chaotic it becomes, posing significant financial risks to your business.
- Suppliers to calculate rebates – You could make things a whole lot easier for your business by handing over the entire rebate calculation process over to your suppliers, but it does come with its risks. Deferring this responsibility requires a huge leap of faith that could lead to miscalculations and disagreements, not to mention more revenue leakage.
- ERP functionality – If you are already using an ERP system, some have the functionality to help with rebate management but lack the ability to manage the complexities involved with multiple agreements. The more complex your agreements, the more beneficial it would be to integrate your ERP with a rebate management system to prevent further revenue leakage.
- Make sure your agreements are organised and managed: In a rebate management system, your trading agreements can be assigned to certain stakeholders who can see the contracts’ terms along with deliverables, due dates, and their terms. It's also worth rechecking them now and again so that you know your trading partner is meeting contractual obligations. A contract owner’s timely management can prevent or end revenue leakage before significant loss occurs.
- Dedicated rebate management solution – Solutions like our very own rebate management system offer a structured, intelligent approach to rebate management, with highly advanced analytics functions which allow your business to manage complex trading agreements reliably and efficiently, minimising risk and uncertainty. If you don’t have a reliable, accurate and effective rebate management system in place then at best you could be exposed to revenue leakage, at worst you could be falling foul of accounting standards for revenue recognition. For companies whose revenue depends on these financial incentives, neither is a risk you want to take.
For more information, download our guide “key drivers for effective rebate management”.