Is your company leaking profits?

Mar 1, 2004 12:00 PM, by I. Gregg Van Wert

Much has been written in the past couple of years about the importance of improving efficiency. The advice goes something like this: In a challenging business environment, decreases on a company's top line can be offset by efficiency improvements that hold its bottom line in check.

It's good advice that most CEOs I've met have taken seriously. So seriously, in fact, that for many, opportunities for efficiency improvement have been pretty much exhausted.

Enter the concept of revenue leakage.

Capture all costs

Revenue leakage occurs when change orders are put through, but the costs they incur are not captured and billed to the customer. It occurs when a press stands idle for 90 minutes, while manufacturing, sales and customer-service personnel wait for customers who are consistently late for press checks. It occurs when accounting accepts payments that reflect unearned discounts.

Because change orders, idle presses and cash tied up in slow-paying accounts all represent costs that are fully borne by the printer, revenues that go unbilled represent revenue leakage. And its impact is significant. Said to be two percent of total revenues across all industries, leakage is known to be as high as 20 percent in industries or segments where advancing technologies are out-pacing users' ability to identify and capture all of their costs.

Improvement pays its way

The concept of revenue leakage is not new to the printing industry. In the mid 1970s, NAPL (Paramus, NJ) introduced “Cost Watch at Average Litho,” a master plan for plugging cost leaks that were commonly found by NAPL consultants in the course of working for member companies.

The original release of Cost Watch predated our industry's widespread use of computers. Nonetheless, the program offered breakthrough analysis as it tracked the fictional Average Litho Co.'s efforts to plug one cost leak per week for 36 weeks. While technology has advanced, the premise of revenue leakage is the same, and the benefits to be derived from plugging it have never been greater.

Reversing a company's stream of revenue leakage involves far more than seeking efficiencies. It begins with mapping a company's wall-to-wall workflow to ensure that no opportunity to capture and record revenue is missed. Says one CEO, who recently updated his business-management software, “The investment we make in MIS is as important to our company's competitive advantage as our investment in presses. We constantly look for enhanced functionality that will leave no stone unturned in assessing the accuracy and validity of procedures related to cost and revenue recovery.”

Another CEO, whose company has been battered by eroding profit margins, describes his experience in capping the flow of revenue leakage this way: “Identifying where profits are dripping out of the company has become our No. 1 priority. In one instance, we found that our paper inventory and storage practices were the cause of significant revenue leakage. Customer invoices did not reflect our inventory gain, and our pricing did not accurately represent the cost of storing and handling customer-supplied materials.

“Every time we invest in reversing the tide of revenue leakage,” he continues, “the payback is enormous. These costs are legitimate and recoverable. The top line gains typically outweigh the cost of correction by a factor of three to four!”

At this $25 million company, the potential for profit improvement is indeed substantial. If the organization fits the national average, it can potentially recover two percent of its income, or $50,000 a year.

It's your money

Printers leading the charge against revenue leakage understand what Cost Watch proponents have known for years: When costs increase, or revenues decline, stabilizing profits involves more than chasing new sales. Companies with below-average profitability have become profit leaders by improving their data collection and reporting.

The words of one Haven Group client best summarize current attitudes on the subject: “Over the past two years, we have exhaustively reviewed our internal processes for cost excesses. Having done that, we are now looking for revenue leakage that will flow income we have rightfully earned to our top line.”

This CFO recently examined invoices for rush delivery. “In their haste to please customers, our sales and front-office personnel were using overnight delivery services to an excess, and charging them to general administrative overhead where they were lost on the expense side of our P&L,” he observes. “We now have a process of accounting — and accountability — in place that provides for the accurate billing of these costs.”

For this executive, revenue leakage is personal. “The dollars at stake are substantial,” he notes. “They're ours, and employees clearly understand that we're committed to recovering each and every one of them!”

I. Gregg Van Wert is founding principal of The Haven Group. Contact him at ivangpr@aol.com.