4 minute read 7 Aug 2019
Fixing a Chopper

Revenue Leakage: how do you identify revenue leakages in your company and recoup them?

By Nikolaas Vanderlinden

EY Belgium Consulting Partner

Trusted business advisor.

4 minute read 7 Aug 2019

Identifying, recouping and preventing revenue leaks is possible by scrutinizing contracts and critically analyzing processes.

It is estimated that 1 to 5% of EBITA flows unnoticed out of companies because they do not have their contract management and payment follow-up processes completely in order. That is what Nikolaas Vanderlinden, Executive Director Advisory (Risk) at EY, says.

How can businesses simply allow money to slip through their fingers?

“These days, businesses operate in a typical network economy: everything – from the logistics of the purchase of goods to the delivery of coffee and office cleaning – is based on contracts, and a lot of money is involved. Often, the contracts are the problem, and for all kinds of very practical reasons. It is not unusual for there to be absolutely no contract. It has either expired or no-one in the purchasing department remembers exactly what it says. Amendments have been lost, there are deviating price agreements in e-mails, you name it.”

EY traces 90% of the revenue leaks clients themselves cannot find. “Via data mining, we first run exception reports on the accounts payable transactions to detect incorrect or double payments.” Once an incorrect transaction has been identified, it is first validated internally with the client, and then with the third party (who rectifies the difference).

In a second step, all the transactions with specific third parties (often suppliers) are examined in detail. This is the contract compliance review, which starts with a risk assessment of the biggest suppliers. “We ask the client's purchasing department to evaluate their largest suppliers based on criteria such as complexity, order of magnitude, previous experiences, etc. and analyze the suppliers with the greatest risk on the basis of that.”

With its integrated Revenue Leakage services, EY succeeds in identifying, recouping and preventing revenue leakage.
Nikolaas Vanderlinden
EY Belgium Consulting Partner

Anomalies reveal themselves

Concretely, EY recalculates all prices based on the contracts, compares them with the prices in the client’s price system and finally with the amounts that the client actually paid over the past years (on invoices).

“This exposes anomalies. For example, it may say in black and white that pricing is based on the prices applicable at the time of the purchase order, but due to complicated calculations with indexations, the client actually turns out to be paying invoices based on the time of shipping. Although we often hear people say ‘that's normal in the sector,’ it is not what the original contract says and something like this is rarely to the client's benefit.

“Discounts are another example: they may be agreed upon for all transactions in Belgium and the Netherlands, but in practice they are only calculated for Belgian transactions. Often, such incorrect calculations go unnoticed.”

“Another example is that prices are invoiced that have since been adjusted (for example, in e-mails between the purchasing department and the supplier), but the financial departments of both companies know nothing about this and so have continued to use the old prices. Or sometimes, they just use incorrect prices.”

Third-party reviews for the total picture

A client has no view of certain pricing factors. Suppliers sometimes apply price indexes related to the efficiency of their production process, for example. EY may perform a third-party audit to gain better insight into this internal information of the supplier. That happens on the basis of audit clauses in the contracts, but equally often simply on the basis of the goodwill of the supplier who wants to keep its relationship with important clients transparent.

For the revenue leakage services, EY calls in a team of people who know their way around data, can untangle contracts and can critically analyze processes. “In the case of big retailers, we focus on the many relatively small transactions with very diverse suppliers typical for this sector. With big production companies, we take a close look at the larger transactions through intensive data analysis.”

Follow-up

A possible follow-up process for companies is to take a hands-on approach to their contract management. “It is about keeping and managing contracts, as well as how they are drafted. Often, this can be dealt with much more intelligently in commercial terms. Take the example I just mentioned: pricing based on purchase date versus shipping date. As a business, you have to think strategically because it can make a big difference.

“As part of a follow-up process, EY can draft contract templates or set up internal audit measures. It is also possible to better align the client’s pricing system with the company’s actual requirements. It makes no sense for a product to be packaged in three different ways without the possibility to include the prices for the different packaging in the pricing system, for example.

“Revenue leakage reviews and the follow-up processes are a matter of a real partnership with clients,” Vanderlinden says. “We support the finance team and make sure that companies can work with each other properly.”

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Summary

It is estimated that 1 to 5% of EBITA flows unnoticed out of companies because they do not have their contract management and payment follow-up processes completely in order.

About this article

By Nikolaas Vanderlinden

EY Belgium Consulting Partner

Trusted business advisor.