Business Revenue, Profitability and ROI: Fraud is a Key Factor
In an age where business competition is fierce and margins are often slim, a fraction of a percent in revenue may be the difference between being profitable or being out of business. This fact leaves many senior business executives strategizing on how to increase revenue, profit and ROI.
To increase revenue, profit and ROI most companies think the answer lies in marketing to new customers and increasing sales. While new business and a larger customer base are certainly an integral part of the revenue equation, whatever business and revenue coming through the front door is really meaningless if the customer’s dollars and your profits then walk straight out the back door into someone else’s pockets without your company ever deriving the benefit from it. This reflects exactly what’s occurring in today’s global business climate thus diminishing any revenue increase from marketing and sales campaigns. The reality is that you can increase revenue, profit and ROI without increasing your customer base simply by decreasing the impact of fraud on your business.
Fraud Impact - Loss Numbers Are Real
Industry studies suggest that businesses lose an average of 5% of their revenue annually to fraud. Take a $500,000,000 company, losing 5% off the bottom line means a net loss of $25,000,000 and that’s a substantial line item loss for most companies. While many companies factor fraud losses (5%) into the “cost of doing business,” the problem is that when unchecked, the amount of fraud increases dramatically. The larger amount of fraud then corresponds to a dramatic increase in lost revenue, decreased ROI, and this quickly becomes unmanageable. So, instead of a 5% loss with a $25,000,000 net impact the fraud numbers quickly escalate to 10% of revenue with a $50,000,000 net impact.
No matter how you paint it, those kinds of financial figures represent substantial revenue loss, decreased ROI and significant impact to the bottom line. Not many companies are easily able to just chalk those kinds of losses up to “the cost of doing business!”
Fraud Impact - The Financial Services Insustry
For the 64,000 foot view, think a bit more globally about how these fraud loss numbers represent an industry. Let’s take the financial services industry as an example. According to one analyst firm’s study, the financial services industry is estimated to be losing between 12-15 billion dollars a year due to fraud.
Using the 80-20 historical fraud loss calculation estimate, with 20% being the known fraud and 80% representing the unknown and unreported fraud, the financial services industry is, in all likelihood, losing significantly more than the estimated 12-15 billion dollars a year which is currently being reported.
Decrease Fraud - Increase Revenue, Profit and ROI
If companies reduce their fraud exposure by 5-10%, there is simultaneous financial impact: an ROI increase and revenue returned to the bottom line. So, the questions we’re often asked involve the actionable steps companies can take to start the process and accomplish the desired financial results.
For starters, we’re certainly not suggesting your company abandon sales and marketing programs which drive new business. However, from our experience, the “sales at all cost mentality,” without an effective operational framework as the foundation, is very simply not going to get the job done when it comes to preventing significant fraud losses.
The fact is, you can drive all the new business in the world but if you’re not operationally sound on the back end, the net impact of even the best sales and marketing programs is minimal.
Enterprise Fraud Risk Management - First Steps
To get this process rolling, everything starts with an enterprise fraud risk assessment to identify your risks and vulnerabilities. This is very much represented by Sun Tzu’s philosophy in The Art of War as “know your enemies.”
Then, armed with this information, the process of fraud risk and loss mitigation begins. So, when businesses ask “how can we reduce our fraud exposure, increase our ROI and profitability” the answer is surprisingly simple, “close the barn doors before the horses get out!”
The bottom line: it’s entirely possible to increase revenue, profit and ROI without adding new customers simply by decreasing fraud.