Understanding Revenue Leakage: How to Identify It

Revenue leakage is lost income due to internal inefficiencies ranging from uncollected invoices to administrative errors. These lost revenues are a pervasive business problem, with consequences ranging from earnings shortfalls to rising debt and deterioration of your firm’s financial health.

Identifying and plugging revenue leaks can put your firm on the fast track to profitable growth. Start today with this guide. We will explore the common sources of financial leakage and explain how to identify leakage problems, estimate leakage costs, and prevent lost sales and profits going forward.

Revenue Leakage and Common Sources

Revenue leakage is a broad concept with many underlying sources. If your law firm is not operating efficiently and billing and collecting on every hour and dollar spent on client matters, lost revenues result.

Sources of revenue leakage can be clear-cut or obscure. Unpaid invoices are an obvious source, at least for law firms using accounting and invoicing software. The software documents client bills with no corresponding payments, so a quick review of accounts receivable reveals the problem.  

Other sources of financial leakage can go unnoticed indefinitely. Examples include: 

• Inaccurate billing
• Poor contract management
• Mismanaged reimbursable expenses
• Manual receipt tracking
• Paper-based systems
• Inefficient revenue reporting

These items can be tough to identify without a disciplined auditing practice. Let’s review each and introduce corrective strategies. 

Unpaid Invoices 

A firm billing $1 million annually but only collecting 85% is leaking $150,000 a year. Ample flexible payment options, automated late payment reminders, and timely invoicing practices can raise that collection rate and recoup lost cash. 

Inaccurate Billing and Invoicing

Timekeeping failures can prevent full billing of time spent. Or, invoice errors resulting from the failure to track and enter billable time can result in uncompensated work.

Automating timekeeping, including passive time-tracking tools such as Smart Time Finder, and integrating time records with invoices can minimize these issues. It’s also important to train team members on disciplined, contemporaneous timekeeping so everyone contributes to a complete and accurate invoicing process. 

Poor Contract Management

Fees specified in contracts, such as late payment fees and contract termination fees, can go unbilled if there is no process to enforce them. 

Law firms can recapture this revenue with process changes and automation. The ideal solution is standardizing contracts so that all fees can be handled automatically by the invoicing or case management system. Alternatively, someone at the firm can be assigned responsibility for tracking and following up on fees that fall outside normal billing processes. 

Mismanaged Client Expense Reimbursements 

Unbilled client reimbursable expenses are another major source of lost dollars for law firms. A robust system for tracking paid client expenses is crucial. To ensure proper invoicing, reimbursable expenses must be logged and categorized as they are incurred. 

Manual Receipt Tracking

Manual receipt management can also inhibit the collection of reimbursable expenses. A system requiring manual receipt submission by team members is prone to failure, either because receipts get lost or staff does not follow established processes. 

Digitizing receipts immediately can minimize lost documentation. Implementing reminders generated as expenses are incurred can also ensure complete expense records. 

Paper-Based Systems

Paper-based systems for timekeeping and invoice creation are insufficient for the modern law firm. Paper-based systems lack the check and balances required to ensure time and expenses are fully billed. Handwritten notes can be easily misplaced or forgotten.  

Technology and automation can support complete documentation of time and expenses, which in turn should be integrated into the firm’s invoicing system. 

Inefficient Revenue Reporting

Even digital timekeeping systems can fail if team members misunderstand which tasks are billable. Training combined with technology can help in this regard. Team members should have a shared understanding of how to record time and have tools available to help them do it as efficiently as possible. 

How to Identify Revenue Leakage Points

Identifying revenue leakage points in a law firm can occur through either an intuitive process or a rigorous investigation. Law firm leaders will likely gain the most actionable data by addressing revenue leakage from both angles. 

On the intuitive side, it is helpful to begin with a hypothesis that explains already visible signs of financial leakage. A hypothesis test followed by a comprehensive review of billing, payments, and expense management can uncover all sources of uncollected income. 

Hypothesize Visible Signs of Revenue Leakage 

High-priority financial issues can be symptoms of leakage. Two examples are: 

1. If billed amounts routinely fall short of expectations, one might conclude that team members are not adequately tracking their time. 
2. If operating expenses are consistently higher than expectations, reimbursable expenses may be regularly miscategorized. 

Both hypotheses warrant further investigation and testing. To address the first issue, audit workflows for time-logging and invoice creation. For the second issue, review charges and workflows in place for documenting and invoicing reimbursable expenses.

Audit Billing Processes 

If you don’t have hypotheses to test, begin revenue leakage auditing with a detailed review of how team members bill time and how time logs get applied to invoices. Identify all points in the process that are subject to human error. 

Review Client Payments 

Dive into client payment records to uncover any patterns associated with late payments or uncollectible amounts. Lack of detail on invoices or delayed billing of reimbursable expenses, for example, could be contributing factors. 

Audit Expense Management Processes

An expense management audit will pinpoint how reimbursable expenses get lost or fail to appear on invoices right away. Often, culprits include time-consuming and tedious manual processes and an overreliance on memory to document client costs rather than following established procedures.  

How to Calculate Revenue Leakage 

Using the revenue leakage auditing steps noted, you will have identified the primary causes. Delve into each to estimate its cost. For example: 

1. Billing time: Review time records alongside case files. Compare time spent on similar cases to identify discrepancies. Interview team members to determine how long repeated tasks usually take. Approximate how many hours the case should have required and compare it to actual hours billed. 
2. Contract fees. Audit contracts and compare contracted hourly rates, late fees, and other fees to client invoices. Tally the discrepancies. 
3. Client reimbursable expenses: Categorize all costs on the firm’s credit card account for several months as client-related or operating costs. Compare incurred reimbursable expenses to billed amounts. 
4. Payments: Analyze amounts that have been invoiced but not collected. Estimate the firm’s collection rate.

How Revenue Leakage Affects Profit Leakage

Law firm profits equal revenues less expenses. If revenues are lower than they should be due to uncollected income, profits will also be disappointing. 

Revenue leakage and the associated profit degradation are most damaging when they result from manual and paper-based processes. This is because the source data is scattered and disorganized. Auditing paper receipts and handwritten time entries, for example, is a difficult and monotonous job.

In that environment, leakage carries on unchecked. The cumulative effect on the firm’s financial health over time can be dramatic. 

Preventing Revenue and Profit Leakage

So, how do you minimize revenue leakage? The short answer is to implement proactive financial management practices. These include optimizing workflows around identified issues such as lost reimbursements, committing to a pricing policy, using technology to automate billing and collections, monitoring financial benchmarks to surface issues quickly, and establishing a disciplined receipt tracking process. 

Fix Workflows Around Specific Identified Issues

For any identified leakage points, gather team feedback on improving the process. Often, the solution is automation and better tools. Involving your team in documenting the issues and evaluating potential solutions will contribute to a smoother rollout of the new workflows.

Stick to Your Pricing

An established pricing policy can prevent team members from making deals that work against the firm’s financial objectives. Set hourly and fixed-fee rates and establish an approval process for writing contracts that deviate from those rates.  

Automate Billing and Invoicing with Software

Two common struggles for law firms are capturing billable time and collecting unpaid invoices. A comprehensive automated billing and payments solution that integrates with case files and time records can address both issues. 

Case management software can track work completed in the software and prompt staff to capture time when case communications are logged or files are uploaded. These records can support the automated creation of accurate and complete client invoices. Just as an integrated payments solution with a range of payment options can efficiently improve collection rate, so too can invoicing software that automatically sends payment reminders and monthly statements to clients. 

Monitor Financial Benchmarks 

Financial reporting dashboards that highlight key metrics can be instrumental in identifying leakage problems early. A sudden change in a key performance indicator (KPI) like the collection rate or utilization rate, for example, should prompt further investigation. That investigation could reveal workflow optimizations that could stem leakage and improve profitability. 

Automate Reimbursable Receipt Tracking

Automated reimbursable receipt tracking can improve cash flow and eliminate month-end surprises when the credit card bill arrives. Ideally, team members should log law firm expenses and digitize receipts immediately after expenses are incurred. Those records should integrate seamlessly into case files and the firm’s invoicing system. 

MyCase Smart Spend handles this automation with ease. The technology is linked to your firm’s corporate credit account so team members are prompted to categorize expenses and upload receipts as soon as the transaction occurs.

Preventing Revenue and Profit Leakage with MyCase Smart Spend

If your firm is not collecting earned revenue, growth will slow, cash flow will tighten, and profitability will suffer. Fortunately, revenue and profit leakage can be minimized with awareness, the right tools, and disciplined financial oversight. 

The right tools may require a software upgrade that can create immediate revenue leakage controls. By implementing MyCase Smart Spend, for example, your firm would benefit from a comprehensive case management solution with digital timekeeping and reimbursement tracking linked to the firm’s credit card. Smart Spend prompts team members to categorize expenses and upload receipts immediately, so reimbursable expenses can be invoiced right away.

To experience how MyCase Smart Spend can improve financial oversight, stem revenue and profit leakage, and support sustainable profitability and growth, schedule a demo or sign up for a 10-day free trial today.