No company can run a perfect operation. The challenge is to minimize the cost to your business of the errors that occur. A common mistake that many companies make is miscalculating the amount of money to collect from customers. A recent study indicates that on average companies lose about $10,000 for every $1 million in revenues due to avoidable pricing errors. For a small business generating $10 million in sales at a 5 percent pre-tax profit margin, correcting these errors could boost profitability by 20 percent.
Does putting an extra $100,000 in your pocket interest you? If so read on.
Companies misprice what they sell for a number of reasons. Conducting business with large customers has become increasingly complex, with many performance and time-based variables that impact the final price that you receive for your goods or services. With each customer negotiating a separate contract, it's easy to make mistakes regarding which terms apply to which customers and under what conditions. Many small businesses are so busy trying to win new business and fulfill orders that once an invoice goes out, they stop thinking about that order and focus on the dozens of other items that need to get done. Without a good process to ensure that the invoice is correct, small mistakes can accumulate and snowball into serious amounts of money.
5 Most Common Errors
There are several common types of errors that lead to lost revenue:
Unit cost errors. These errors include: differences in invoice pricing versus purchase order pricing; extending temporary price discounts beyond the discount window; and failure to update pricing in your computer system.
Promotions and markdown errors. These errors include: using the wrong formula to calculate a discount price promotion; using the wrong date to calculate the discount; and offering discounts on items that do not qualify for a discount.
Point of sale errors. These errors include: inappropriately calculating instant rebates at the customer point of sale and errors in calculating the proper pricing and terms on consignment sales
Shipping and receiving errors. These errors include: being charged late shipment penalties for shipments arriving on time; incorrectly being charged freight on returns; not receiving early shipment bonus; and more.
Payment errors. These errors include: being paid the prepaid price for products that are not prepaid; early payment deductions taken on payments not arriving early; not being paid interest for payments arriving late; and more.
Some small-business owners simply treat these errors as a cost of doing business and feel that the amount of money they can recoup isn’t worth the effort. Well if you are leaving $100,000 on the table because of errors, its equivalent to the profits generated from an additional $2,000,000 in revenues using the above example. Is it really easier to grow your business by 20 percent instead of just addressing pricing errors? Hardly. Failing to fix these mistakes can also send the wrong message to employees, letting them know that sloppiness is OK or worse it could give unscrupulous employees ideas about “enhancing the lost revenue program” for their own benefit.
If the problem warrants it, you can work with a Revenue Assurance and Recovery company. These consulting firms work like auditors, reviewing all of your client contracts, creating a matrix of all the terms and then reviewing your documentation to determine what happened with each sale. Using specialized software, they can dig very deeply to find instances of lost revenue, bring it to your attention and then give you the documentation necessary to go to your customers and request payment.
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