Managing the risk of revenue leakage
Tough times like this era have resulted in more stringent cash retention strategies and a zero tolerance for revenue leakages.
Tough times like this era have resulted in more stringent cash retention strategies and a zero tolerance for revenue leakages. However, just as we have those things that keep taking our money away and we cannot account for it, the same is true for our businesses.
Regardless of the revenue creation initiatives in place, we still see shrinkage in profits over things that, when carefully scrutinised, could perhaps not result in losses. As the economic climate gets more complex and with profits constantly declining, it is imperative to unpack revenue leakages and stop the gaps.
Revenue leakages happen when a company or organisation loses revenue or income, and this can happen intentionally or unintentionally and can happen even without the company or organisation noticing. Where controls lapse, there is a greater likelihood for the risk of revenue leakage, and it can go unnoticed for a very long time until the accumulated losses become significant. Revenue can leak in many ways. In this article, I will unpack a few that can affect mainly small businesses.
- Failure to optimize human capital. Revenue leakage can happen through idle employees whose output is not maximised. This means what they produce is outweighed by staff cost. While this may look like an imaginary figure, the human capital that is not adequately utilised would have produced much more or provided service to more customers if they could cut off the idle time. Business therefore need to look closely at creating efficiencies without overworking their employees as that could result in another revenue leakage situation when employees cannot keep up with the required output, leading to burnout in the long run. Business owners must therefore ensure the right balance when it comes to staffing.
- Uncollected revenue. Revenue leakage can result from debtors who fail to pay their dues. It is important to manage customers to ensure that they honour their obligations to the business per agreed timelines. Where debtors are unable to pay their dues over a period of time, they will be treated as bad debts written off, which reduces profit. Business owners must keep close of debtors and where possible keep track of all of them. A way to manage uncollected revenue can be through extending credit only to well-known customers who are in good standing in terms of payments.
- Internal fraud. Theft by employees can also be a leading cause of revenue leakage. For example, dishonest employees can write off amounts that were actually paid off by customers and keep the funds. This happens mostly where there is inadequate supervision and oversight. To manage this risk, management should closely monitor customer accounts and conduct investigations if the bad debts are escalating, as this can be a fraudulent scheme by employees to create an illusion that debtors do not honour their obligations. Controls need to be in place such as authorisation of credit arrangements by senior officials and call-back by a different department on non-payments to validate whether customers had actually paid.
There are many other forms of internal fraud such as stock shrinkage which has an impact in revenue leakage. Another revenue leakage can come from ghost employees. When HR controls are weak, employees can create ‘ghost employees’ or employees who do not exist in reality but there is a pay check in their names on a monthly basis. This can be managed through regular validations for the number of known staff against the number of staff members who are remunerated. Ghost employee schemes normally operate through employee collusion, as such they can be discovered through audits and control testing by assurance providers.
Inflated expenditure can also be a good way to discover internal fraud. Fraudulent employees normally apportion the stolen amounts to expenditure such as marketing costs to hide non-legitimate expenditure. Management should look closely at the expenditure analysis and see if the figures match what is on the ground.
- Poor customer service. Poor customer service often results in a significant reduction in revenue. It is an intangible thing and it is based on perceptions, which is all the more reason why it can result in revenue leakage that goes on unnoticed for a long time. Only at a point where there are complaints or where management picks a decline in sales can they pin it to poor customer service. To mitigate this, small businesses or organisations can have dedicated service personnel to deal with queries and escalations. This can be embedded in supervisory roles without necessarily hiring new staff.
- Unrevoked benefits/ incentives for ex-staff. Another common way for revenue to leak is through failure to halt benefits for ex-staff members. During their time of employment, they may be entitled to discounts, vouchers, subsidized accommodation, transport, gym memberships, company gadgets and many other incentives. Ordinarily, when employees leave their employ, they must forfeit these benefits. However, with control breakdowns, ex-employees can go on to enjoy such benefits for a long time even beyond the employment contract. This means that in actual fact revenue is leaking since the incentives should be for current staff only. This can go on for several ex-staff, widening the extent of the revenue leakage.
The risk of revenue leakage is very common across many small businesses and large organisations. It is important for management to review controls continuously and to test whether the controls are still effective. Critical analysis should be applied to expenditure and all payments must be scrutinised. It is important to limit all potential revenue leakages in order to retain revenue as much as possible and ensure the business remains a going concern.