Technology & Innovation
What causes revenue leakage and how can you prevent it?
Learn what revenue leakage is, what causes it, and how to prevent it with our comprehensive guide. Discover SaaS strategies for preventing revenue leakage.
It’s well-known in the accounting world that SaaS CFOs are responsible for maximizing their companies’ revenue. However, that’s an incomplete job description. You’re also responsible for preventing revenue leakage at all costs.
If the revenue you bring in just slowly trickles back out through cracks in your FinOps systems, that’s a very serious problem. This post offers a deep dive into what revenue leakage is, what causes it, and how SaaS businesses can prevent it from happening in the first place.
What is revenue leakage?
Revenue leakage refers to the loss of potential revenue that occurs when a business fails to capture all of the revenue that it otherwise would have processed due to various RevOps errors. Preventing revenue leakage is crucial for businesses because it can have a significant impact on their bottom line. Even small losses in revenue can add up over time and ultimately reduce profitability.
Furthermore, subscription-based SaaS companies should pay careful attention to possible sources of revenue leakage for at least two reasons:
1. SaaS companies are generally recurring revenue firms.
The repetitive nature of the SaaS billing process means that any transactional or systemic cracks will leak additional revenue with each billing period. It’s an evolving problem that grows as a company scales, so finance leaders need to spot it before it gets out of control.
2. Inaccuracies in revenue reporting carry regulatory consequences.
Revenue leakage might result in unintentional inaccuracies in your financial reporting. This has the potential to be a serious legal issue.
By identifying and addressing the root cause of revenue leakage, businesses can ensure that they are maximizing their revenue potential and maintaining a healthy financial position. To that end, let’s examine some of the specific causes of revenue leakage and see what you can do about them.
What causes revenue leakage?
This loss of revenue can happen for a variety of reasons, including but not limited to billing errors, manual data entry errors, human error due to manual processes, contract mismanagement, fraud, and customer churn.
Revenue leakage is measured via your net dollar retention (NDR). Your NDR measures how much recurring revenue you’ve held on to–and grown through subscription expansions–over a given period.
Some of the significant factors that can cause organizations’ revenue to leak and their NDR to drop include:
Manual accounting and revenue processes
Manual processes and workflows are responsible for more problems in departmental and organizational efficiency than almost anything else. Accounting automation, on the other hand, enables departments to streamline their processes and have total confidence that no revenue has fallen through the cracks due to careless oversights. (Further Reading: Outgrowing QuickBooks? Stop Relying on Spreadsheets: Here’s Your 5-Step Transition Plan.)
Lack of a single source of truth
Automated software uses a single source of truth (SSOT) to help executives centralize their companies’ data. With an SSOT, every member of your team will have reliable access to the information they need at all times, eliminating the tedious back-and-forth involved in manual systems.
No link between billing events and contract obligations
Another major cause of lost revenue potential is a disconnect from your contract obligations. ASC 606 requires SaaS companies to meticulously track billing events against their service obligations with every customer. Automation helps finance executives align their companies’ billing events and contract obligations to avoid lost revenue at all costs.
Let’s look at how CFOs and finance departments can proactively spot revenue leakage while it’s still in its early stages.
How to identify revenue leakage
As we discussed earlier, NDR is the SaaS metric that most CFOs use to identify revenue leakage.
If your NDR has been steadily declining, but your subscriber volume has held steady, it’s time to look for revenue leaks.
To calculate your NDR for a specific period, add your MRR to your expansion MRR. Once you’ve done that, subtract your churn MRR and contraction MRR from that figure. Divide that number by your starting MRR, and then multiply by 100.
The resulting answer (expressed as a percentage) is your NDR. SaaS CFOs always want their NDR to stay above 100%. Automation can help teams continuously monitor their NDR for any troubling or suspicious drops.
How do you stop losing revenue in the first place, though? An ounce of prevention is worth a pound of cure, after all.
How to prevent revenue leakage
Even though the primary responsibility for preventing potential revenue loss rests on the shoulders of a CFO, it’s best to ensure your other department team members know why it matters and how to stop it.
Here are some of the best ways of preventing revenue leakage and maximizing your NDR:
- Stop involuntary churn: Involuntary churn can be a significant source of lost revenue unless spotted quickly and handled proactively. Cloud-based accounting tools can help you automate the dunning process, which involves automatically emailing customers who are about to involuntarily churn so they can update their info.
- Put a cap on free trials: Double-check that any free trials you offer can only be accessed once per customer. Otherwise, revenue leakage from repeated trials will add up quickly.
- Automate ASC 606 workflows: Automation turns ASC 606 from a hassle into a profit driver. With automated ASC 606 assistance, you’ll never struggle with revenue leakage from contract obligation mistakes again.
Preventing financial losses in real time with Sage Intacct
Sage Intacct helps forward-thinking SaaS CFOs and finance teams with all this and much more.
Hopefully, you’ve got a much better sense of the potential severity of revenue leakage–and the importance of having well-defined revenue operations in place to maintain and scale profits.
Interested in learning more about preventing potential revenue loss? Get a firsthand demo of how Sage Intacct and discover how SaaS finance executives are revolutionizing their relationship with revenue.
Recommended Next Read
Modernizing your nonprofit chart of accounts
Subscribe to our Sage Advice Newsletter
Get our latest business advice delivered directly to your inbox.
Ask the author a question or share your advice