Growing revenues takes years for a commercial services business, but increasing margins on that revenue is even harder. With the typical service provider margin topping out at 10-15%, in businesses that already run lean, the question is not what’s left to be cut, but what’s there to be gained. Read on to learn about the low-hanging fruit that eats away up to 5% of revenue every month, and what to do about it.
To start, let’s take a look at how a typical service provider’s annual margins break down:
You probably recognize most of the table, but what’s that 5% about? Revenue leakage is an insidious - and costly phenomenon. It’s when cash flows out of your business instead of in, and you don’t even see it happening. It often happens when you or your team should have billed for something, but you didn’t, either because you forgot, didn’t notice, or too much time passed, and you let it slide. It’s estimated that businesses lose up to 5% of their revenue here,
according to EY.
Revenue leakage is hard to measure because the problem is rooted in human error. As long as the billing cycle has manual dependencies built into it, people will make mistakes, from the billing admin all the way to the owner. People will forget to charge the extras, or update contracts with new rates, or simply miscommunicate added charges, and revenue will not make it onto invoices and into the company. We wrote about more examples here.
If you took away the possibility of human error, you would effectively remove the possibility of revenue leakage rearing its ugly head in your business, every month.
Let’s take a look at our example bottom line without it:
We created Anchor to give service providers a way to take their hands off their billing cycle, and let it run itself. By doing business on Anchor, companies put their entire billing cycle from proposal to payment and reconciliation in one place. We connect the dots between each step, from editable agreements, to the terms in the contract that populate invoices, to the instant release of payment upon completion of work. Our solution is called Autonomous Billing and Collections, and you can learn more about it here.
If businesses just stemmed the flow of revenue leakage, they could significantly increase their profit margins in months. That’s faster than any other way to grow their dividends, and businesses can now easily do this.