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Uncovering Hidden Revenue Leaks: Using Profit Trees for Quick Revenue Wins

This guide will show you how to use SMB profitability trees to easily identify key revenue leaks and quick-win strategies for revenue improvements.

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Studies show that around 42% of businesses suffer from revenue leakage, some at an alarming rate. According to estimates, businesses lose up to 5% of EBITA due to poor contract management and payment processes, which can significantly affect long-term profitability and growth.
Fortunately, there are simple yet effective strategies for identifying and plugging revenue leaks, starting with profit trees.
This guide will show you how to use SMB profitability trees to easily identify key revenue leaks and quick-win strategies for revenue improvements.

What Are Revenue Leaks?

Revenue leaks are the different ways a business loses earned money in unforeseen or unplanned ways. In other words, revenue leakage is any revenue you make from customers that’s processed but doesn’t get credited to your account. Revenue leakage affects virtually every business, but for startups and SMBS, it can be the difference between scaling up or shutting down.

Common Types of Revenue Leakage in SMBs

When you dig into the root causes of revenue leaks, you’ll usually find a faulty process, bad data, or both. But here are some of the most specific causes of data leakage in SMBs.

Manual Processes

Manual invoicing or data entry is one of the leading causes of data leaks in SMBs due to human error. Usually, invoices aren’t created when a sale closes, which means add-on services get omitted, time tracking is underestimated, or renewals aren’t processed.

Spreadsheets

This is another area of revenue leakage caused by a lack of automation. Manually entering data into spreadsheets often leads to mistakes or omissions, resulting in underbilling or missed invoices. If your spreadsheets integrate with a billing system, this could lead to further inefficiencies due to incompatible technology.

Outdated Customer Information

If you have manual processes or multiple systems coordinating customer data, you may end up with inaccurate information about the volume of service, hours billed, or products delivered. Credit card expiration is another key issue that can lead to nonpayment or delays, causing small but significant revenue leaks.

Unclear Policy Information

Your sales team should have easy access to up-to-date sales policy information to ensure they are using the most accurate quotes. If they have outdated information or lack regular updates, they could be charging low rates or providing outdated promotions without even realizing it.

Underbilling

If your SMB has a high percentage of service revenue, your personnel may be underbilling. If your team is unclear on what services count as billable hours, you could end up with inaccurate invoices that leave money on the table.

Pricing Errors

From promotional pricing that overruns the end of a sales period to introductory pricing periods extending for too long, pricing errors are common in SMBs and are easily fixable sources of revenue leaks.

Un-enforced Fees

Finally, your team may be failing to enforce penalties or fees for early termination of contracts, missed deadlines, etc. When these penalties aren’t enforced, your bottom line is affected.

How Are Profit Trees Useful For Revenue Leaks?

One of the easiest strategies to identify and prioritize revenue leaks and improvement ideas is using profit trees.
SMB profitability trees are visual tools for analyzing a company’s profitability. In the case of revenue leaks, profitability trees allow you to map out each source of revenue and identify the stage at which profit is being lost.
It’s a simple yet effective tool that drills into specific areas of revenue until you reach the root of profitability and the root-rot known as revenue leakage.

Profit Tree Structure

The “root” of a profit tree is your total company profit. Each branch coming from this will represent different sources of revenue and costs, with sub-branches representing any related factors.
Your sub-branches for potential revenue leaks might include:
  • Pricing strategy and promotional offers
  • Customer churn
  • Sales process inefficiencies
  • Manual processes that need automation
  • Policy gaps
For each revenue branch, clearly identify every source of revenue, each factor that relates to that source of revenue, and any potential leaks that need to be investigated.

How To Measure the Impact of Revenue Leaks on SMB Profitability

To figure out if your company has revenue leaks, begin with a simple equation: 

Revenue leakage = expected revenue – actual revenue

 

This equation shows how much money you are potentially losing. It seems simple, but you’ll be surprised by how far off your expectations can be when you add up all the income you expect to get from projects and products.

Form Your Revenue Leak Hypothesis

As a business manager or executive, you probably have some ideas about where potential leaks come from. Whether it’s outdated software, poor training, or pricing inefficiencies, there are often stand-out problems within the sales process.
Use your profit tree worksheet to form a hypothesis about where the revenue leaks are in your business. Talk to key stakeholders for valuable input and focus on areas closest to revenue-generation and revenue-collection functions.

Run An Revenue Analysis

A revenue analysis is a deep dive into the data and processes associated with revenue generation and profitability. This could include re-creating steps related to income generation to determine where inefficiencies lie in the process.
A revenue analysis should be done with the help of your finance department and those responsible for key areas of revenue generation. Share your hypothesis on the potential areas of concern to help narrow down the search.
The goal isn’t to point fingers but to objectively uncover the areas responsible for revenue leaks to give you actionable data.

Prioritize Leaks

You will likely find several sources of revenue leakage, but some will be worse than others. Prioritize the leaks by impact and focus on the largest revenue leaks first to see the biggest ROI.

6 Quick-Win Strategies for Dealing with Revenue Leaks

Reversing revenue leakage should be a high-priority project to add to your technology roadmap initiatives. Here are six effective strategies to help you deal with hidden revenue leaks.

Pinpoint the Problem

Use a profit tree and revenue analysis to pinpoint the specific location of the revenue leak. Rather than labeling “invoicing” as the problem, drill down further — is it the manual processing of tracked billable hours? Is it add-on services getting missed? Or perhaps outdated client information results in nonpayments.
The more specific you can be about the issue, the easier it is to identify strategies to overcome the challenges.

Fix Workflows

Map out your entire workflow as it currently stands – is it confusing, convoluted, or leaving too much room for staff to get creative with their discounts?
The simpler your workflow, the better, so spend some time creating a more efficient process that all team members can follow. This should include firm processes for pricing, discounts, billables, and time tracking.
Increased scrutiny may feel like micro-management, but it’s important to find and address those small areas of revenue leakage to get everyone on the same page.

Invest in Software Upgrades

If you have any manual processes or outdated software, now is the time to invest in the appropriate software upgrades. Automation and technology can address many of the issues that lead to revenue leaks, and there is software to replace almost any manual workflow.
Not sure what software to implement in your business? Connect with a StackPlan tech advisor today!

Be Firm on Pricing with New Policies

If you’ve pinpointed a revenue leak in pricing inefficiencies, it’s time to update your pricing policies. It’s important that salespeople have enough autonomy to close sales with discounts, add-ons, and promotional offers, but there should be clear policies in place to ensure money isn’t lost.
Update and simplify your pricing policies, and run updated staff training if there is a significant revenue leak in this area.

Appoint a Revenue Assurance Manager

It’s uncommon for SMBs to have a revenue assurance manager, but according to the Boston Consulting Group Survey, around 40% do. If you don’t have the funds or capacity for a standalone assurance manager role, it can also be helpful to make this part of a finance senior executive’s role.
By having someone dedicated to monitoring and improving revenue leaks, you’ll see a significant reduction in revenue loss and get regular reports on the progress of your new revenue improvement initiatives.

Centralize Timesheets

Have you noticed a revenue leak related to billable hours? This is common in the professional service industry, especially when staff are unsure what should and shouldn’t constitute billable hours.
Implement CRM software to help automate time tracking and send automated reminders about tracking requirements. You should also follow up with service team members to ensure they fully understand how to track hours.

Get Expert Help Identifying and Plugging Revenue Leaks

Don’t beat yourself up if you discover revenue leaks in your business – you’re not alone. Revenue leakage is a common concern for any business. Thankfully, it can be fixed with some strategic profit tree analysis and software implementation.

If you’re struggling to pinpoint the areas of revenue leakage in your business, our tech advisors can help. We’ll help you identify the root cause of revenue loss and recommend strategic upgrades to your tech stack to replace lost revenue with newfound profitability. Connect with us today!

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Tradify is a cloud-based job management solution designed for trade businesses, including electricians, plumbers, builders, and other service professionals.

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