Six Ways CFOs Can Bulletproof Their Companies from an Economic Bust

Six Ways CFOs Can Bulletproof Their Companies from an Economic Bust

By Justin Schweisberger, Chief Product Officer, Pramata

Justin Schweisberger, Chief Product Officer, Pramata

Almost half of U.S. CFOs believe a recession will strike the U.S. economy by the end of 2019 and more than 80 percent of them think a recession will strike by the end of 2020, according to the Duke University/CFO Global Business Outlook survey. Prudent CFOs are asking themselves how well prepared they are to ride out any upcoming economic storms. One powerful area being examined is revenue leakage from customer relationships -- loss of contractually agreed revenue due to process gaps aerrors. This revenue leakage can account for between one and five percent of expected earnings for companies annually, according to analysts.

Most finance chiefs are aware that their revenue assurance processes are far from watertight, but few know how much cash they’re losing, or how fast. In large organizations, the losses can easily run into the tens of millions of dollars every year. Fixing these leaks has rarely risen to the level of strategic attention in the past. But for many businesses, more than 80 percent of their future revenue and profit will come from existing customers - so extracting the full financial value from current contracts is becoming a priority.

Here are six areas to tackle in order to address revenue leakage during turbulent times:

1. Renewal Management. Contract renewals should be a fruitful time to secure and expand the existing revenue stream and re-negotiate deals to improve margins. Deal negotiation teams need to be notified in advance so they can be thoroughly prepared and create the best renewal event possible. But for many organizations, even finding the renewal dates can be problematic, since they’re often tied to other data in various systems – delivery dates, for example – that are external to the contract itself.

2. Contracted Pricing Variables. Companies want to achieve the highest yield from the pricing terms already present in their contracts, especially when those allow for price increases. But they don’t always know what those terms are. Price increase decisions are often not managed systematically and are left to the sales team. As a result, contract-based revenue growth opportunities can be missed.

3. Sales Process Productivity. The goal is to move more deals through the sales process faster, and with a higher rate of success. Make sure information is not hard to access or scattered across multiple locations and that it is up-to-date, accurate, and complete. The less time sales reps spend assembling intelligence, the more deals go through.

4. Entitlement and Billing Reconciliation. Companies want to ensure that customers are paying for what they purchase and are not being over-charged or under-charged. Carefully track what customers own and find a way to compare usage to the contract in order to reduce leakage.

5. Service Obligations. Companies negotiate non-standard service terms such as special invoicing, SLAs, and reporting requirements, to win deals. However, these terms are often poorly managed, leaving managers without visibility into potential risk. In order to manage these exceptions, companies may apply the most favorable rules to all customers or fail to pass through incremental fees, resulting in increased operating costs. 

6. Deferred Revenue. The aim is to pull cash and revenue in the door faster while remaining compliant. Find a way to locate all of your revenue recognition considerations to accurately assess risk. This will help working capital by keeping payment terms reasonable.

The area you choose to tackle first will depend on your organization’s priorities, but many companies find that improving renewals execution is a good place to start. This can be one of the quickest routes to recovering significant revenue. At renewal time, companies tend to leave the decision to increase prices or evaluate deal terms to the front-line sales teams, who may be more focused on locking down a renewal with a customer as quickly as possible than on taking advantage of all available opportunities.

A renewals focus has a built-in time element that can help you establish a timeframe for the revenue recovery project. You might want to identify and review contract renewals coming up in the current and next quarter, for example, to ensure that your renewal teams have all the information they need in advance of discussions.

Once you’ve selected a revenue area to target, your next step will be to pull together the relevant data for taking action. Most data will likely reside in commercial relationship documentation: contracts, amendments, order forms, statements of work, agreed-upon terms, pricing and operational commitments. Information from order systems and billing systems, such as service delivery dates, may be needed.

Next, establish a risk framework for revenue leakage and score each customer relationship. Identify and describe the risk factors for the revenue area you’re focusing on. In renewal management, you would want to consider contract and renewal terms: a contract with a fixed term and no specified option to extend or renew would be high risk; one with a fixed term with an option to renew would be neutral; and fixed term with auto-renewals would be low risk. Describe the risk levels similarly for renewal data calculation, customer termination rights, early cancellation penalties, and price holds and price increases.

Finally, categorize relationships approximately by revenue – for example, top accounts, commercial accounts, and SMB accounts. The intersection of the revenue grouping and the risk framework will help you determine the amount of revenue at risk, and the potential return on your project.

As you consolidate your initial successes, look for ways to scale up. Gather key stakeholders from across your organization to share your initial findings and projected goals. Investigate available AI and machine learning automated technologies and partners that can help you quickly grow and maintain your revenue gains. A better understanding of commercial relationships can benefit your company in many other ways – by improving customer sentiment and increasing sales force productivity, for example. For CFO profit hawks looking to save their company millions of dollars a year in hard-earned income, it’s indispensable.

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