Revenue that is ‘earned’, but lost from the system before it can be turned into hard cash is a “silent killer” of profitability. Causes include billing errors, time the firm is unable to bill due to product or project delivery issues, incorrect statements of work or misquotes. Studies have revealed that the industry average for this lost revenue is 5%. With margins often tight, this certainly a significant amount.
Understand the problem exists
Worryingly, many organizations don’t even realize that they’re suffering from the problem. In that sense, it provides a useful barometer for overall operational efficiency. Perhaps not surprisingly, PSOs with higher levels of revenue leakage report lower utilization, lower EBITDA and poorer on-time project delivery than organizations that focus on contract management, billing and capturing hours and expenses accurately (source SPI, 2011).
Activity accountability a must – within the right time frame
With information scattered across project proposals, HR (absence & leave; schedule), timesheets etc. it can be a real challenge to create an accurate picture of how your employees complete the work week. As such, the most common approach to managing revenue leakage is to have employees account for every one of their working hours – creating a detailed overview that can be directly compared to accounts receivable.
However, this approach is, in itself, not necessarily an effective way to combat the losses. We continually see that firms reporting work hours at the end of the month suffer more revenue leakage than firms reporting work hours on a daily or weekly basis. The reason is often simple enough – with the longer time lapse, employees fail to recall work activities correctly and may misallocate billable hours as non-billable. As such, it’s not simply a case of identifying worked hours that haven’t been invoiced. Many businesses are failing at the step before – accurately recording what’s actually been done.
Frequent reporting a big step in the right direction
The first major step is to move your consultants to more regular hour and activity entry. Moving from a monthly basis to a weekly (or even daily) routine will ensure they make fewer mistakes. In order to promote this behavior, you need the right tools to make time registration quick, easy and accessible. A system that provides for an online time entry portal will allow people to update on the run, preferably from a mobile device.
Once the information is in, seal the revenue cracks
Building accountability checks into your entry system (e.g. completeness of timesheets) will help prevent mistakes and hours getting lost. Integrating time registration and approval with your invoicing process will also close revenue cracks. Having to transfer data from one system to another provides an opportunity for information to go missing. Think about manually moving a complex excel sheet to an invoicing platform and it’s not difficult to imagine money going astray. If an invoice can be automatically generated from frequently entered, approved hours, there’s much less chance that any of your hard earned money can be misplaced.
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