What is CA Tushar Makkar known for?

CA Tushar Makkar is known for being AIR 47 in CA Final and creating India's largest audit community.

What services does CA Tushar Makkar offer?

He offers audit resources, courses, and expertise to chartered accountants.

Revenue Leakage in Financial Due Diligence (FDD): Real Case Study & Practical Analysis

Learn how revenue leakage impacts valuation through a real Financial Due Diligence case study. Understand cut-off issues, customer churn, seasonality risks, and practical FDD insights for CA students and professionals entering transaction advisory roles.

15 January, 2026

Introduction

Imagine you run a small kirana shop. Every day, you sell products worth ₹10,000, but at the end of the month, you only have ₹2.5 lakhs in your cash box instead of ₹3 lakhs. Where did ₹50,000 go?
Some customers didn't pay, some products were given at wrong prices, and some sales weren't even recorded properly. This is exactly what revenue leakage looks like—money that should be yours but somehow slips through the cracks.
Now scale this up to a company doing ₹500 crores in annual sales. If they're leaking even 3-4% of revenue, that's ₹15-20 crores disappearing every year! As someone preparing for a career in financial due diligence (FDD), your job is to catch these leaks before your client buys the company or invests crores of rupees.
Today, I'll walk you through a real-world case study of revenue leakage analysis that you might encounter in an FDD assignment. This is the kind of practical work you'll do as a CA, FDD analyst, or transaction advisory professional.

What is Revenue Leakage and Why Does It Matter in FDD?

Revenue leakage is the gap between what a company should have earned (based on its contracts, sales, and services) and what it actually collected or recorded. It's not about fraud always—sometimes it's just poor systems, human errors, or sloppy processes.
Think of it this way: A coaching institute signs up 100 students at ₹50,000 each. They should earn ₹50 lakhs. But due to various reasons—some students got discounts that weren't recorded, some invoices weren't sent, some payments weren't followed up—they only collected ₹46 lakhs. That ₹4 lakh difference is revenue leakage.
In FDD, finding revenue leakage is critical because it directly affects valuation. If a company claims ₹100 crores in revenue but is actually leaking ₹5 crores annually, you're not buying a ₹100 crore revenue company—you're buying a ₹95 crore one. And that changes everything—the price you pay, the projections you make, and the risks you take.

The Task: Analyzing Raw Sales Data to Spot Red Flags

Let me tell you about a recent case. An Indian private equity firm was looking to acquire a mid-sized manufacturing company based in Gujarat. The company's financial statements looked decent on paper—steady revenue growth, reasonable margins, and a clean audit report from a reputed CA firm.
Our FDD team was brought in to dig deeper. We were given three years of raw sales data—Excel files with thousands of rows containing:

Customer names
Invoice numbers
Invoice dates
Product details
Invoice amounts
Payment dates and amounts

Our task was simple but critical: analyze this raw data to find anomalies, understand the real quality of revenue, and identify any leakage patterns.

Red Flag #1: The Mysterious December Drop (Cut-off Issues)

The first thing we did was create a month-wise revenue analysis for all three years. We loaded the data into Excel, created pivot tables, and plotted monthly revenue trends.
And boom! The first red flag jumped out immediately.
December revenue was near zero in all three years.
In a normal business, December should be just another month. But here's what the numbers showed:

November 2022: ₹8.2 crores
December 2022: ₹0.3 crores (that's just 3% of November!)
January 2023: ₹9.1 crores

Same pattern repeated in 2023 and 2024. What was happening?
This is what we call a revenue cut-off issue. The company was deliberately postponing December invoices to January of the next year. Why would they do this?
Several possible reasons:

Tax planning: They wanted to defer revenue to the next financial year to reduce tax liability for the current year
Target manipulation: The management wanted to start the new year with a "strong" January to impress investors
Working capital management: They wanted to delay recording revenue to manage their balance sheet better

Here's the problem: This isn't just an accounting trick—it's a serious red flag. Companies that manipulate cut-offs often have other issues too. Think about it: if they're willing to play games with when they book revenue, what else might they be hiding?
During our interviews with the finance team, we discovered they were intentionally holding back December invoices. They'd ship the goods in December but date the invoices in early January. This violates basic accounting principles—revenue should be recognized when goods are transferred, not when invoices are raised.
Real-world impact: This pattern meant the company's actual year-end revenue was consistently understated by about ₹8-9 crores. But more importantly, it showed a culture of financial manipulation that our client needed to know about.

Many revenue leakage patterns—such as cut-off manipulation or suppressed invoices—also overlap with forensic accounting techniques, where the focus is on uncovering what numbers are trying to hide rather than what they show.

Red Flag #2: The Vanishing Customers (Customer Churn Analysis)

Next, we created a customer-wise revenue analysis. We listed all customers who contributed more than ₹10 lakhs in revenue in 2022 (let's call them "major customers") and tracked their purchases over the next two years.
Here's what shocked us:
Out of 45 major customers from 2022:

12 customers (27%) placed ZERO orders in 2023
8 more customers (18%) placed ZERO orders in 2024
Combined, these 20 customers represented ₹18 crores in lost annual revenue

Now, losing a customer or two is normal. But losing 20 major customers over two years? That's a massive red flag!
We dug deeper and conducted interviews with the sales team. Here's what we found:
Reason 1: Quality Issues Seven customers stopped ordering because of consistent quality problems. The company's quality control had deteriorated, leading to higher rejection rates. One customer—a large automobile component manufacturer—specifically mentioned they had to reject 3 batches in a row, costing them production delays.
Reason 2: Delayed Deliveries Five customers cited delivery delays. In manufacturing, timing is everything. If your supplier can't deliver on time, you find a new supplier. One customer told us they once waited 45 days for an order that was promised in 20 days.
Reason 3: Pricing Disputes Four customers left due to sudden price increases without proper justification. The company had hiked prices by 15-20% without improving service or quality.
Reason 4: Competition Four customers switched to competitors who offered better terms, technology, or service.
What this means for FDD: Customer churn isn't just about past revenue loss—it signals deeper operational problems. It affects future projections too. If the company is losing customers at this rate, how reliable are their next 3-5 year revenue forecasts? Our client needed to factor in significant risk premiums in their valuation.

Red Flag #3: The Seasonal Cash Flow Trap (Seasonality Analysis)

The third analysis we performed was tracking revenue patterns throughout the year. We created a heat map showing monthly revenue for each year.
A clear pattern emerged: Sales consistently spiked during May, June, and July across all three years.
Here's the monthly breakdown for 2024:

January: ₹9 crores
February: ₹6 crores
March: ₹7 crores
April: ₹8 crores
May: ₹15 crores (spike!)
June: ₹17 crores (spike!)
July: ₹16 crores (spike!)
August: ₹9 crores
September: ₹7 crores
October: ₹8 crores
November: ₹8 crores
December: ₹0.4 crores

What does this tell us? The company had severe seasonality in its business, which creates major cash flow challenges.
Here's why seasonality matters in FDD:
Working Capital Needs: During May-July, the company needs much more working capital to produce goods, buy raw materials, and manage inventory. But during other months, they have excess cash sitting idle.
Banking Relationships: We checked their bank statements and found they were taking short-term loans every year around April-May to fund the peak season production. This meant higher interest costs and dependency on continued bank support.
Customer Concentration: We discovered the seasonality was driven by 3-4 large customers who placed bulk orders before the monsoon season (the company manufactured agricultural equipment parts). This created a double risk—both customer concentration and seasonal concentration.
Cash Collection Timing: The May-July invoices often had 60-90 day credit terms. This meant actual cash would come in August-October. But the company had to pay suppliers in May-June itself (30-day terms). This created a dangerous 90-day cash gap every year.
Real-world impact: Our client realized they'd need to arrange ₹12-15 crores in additional working capital every summer just to keep operations running. This wasn't mentioned in the company's information memorandum. The acquisition became significantly less attractive when these hidden costs were factored in.

How We Documented Our Findings: The FDD Report

After completing our analysis, we prepared a detailed Quality of Earnings (QoE) report for our client. Here's how we structured our revenue leakage findings:
Section 1: Executive Summary We highlighted the three major red flags upfront with quantified impacts:

Cut-off manipulation: ₹8-9 crores annual revenue timing shift
Customer churn: ₹18 crores lost revenue, 44% attrition among major accounts
Seasonality risk: ₹12-15 crores additional working capital needed annually

Section 2: Detailed Analysis For each red flag, we provided:

Charts and graphs showing the trends
Root cause analysis with supporting evidence
Management's explanations (and our assessment of their credibility)
Industry benchmarking where possible

Section 3: Adjustments to Normalized Earnings We recommended several adjustments to the company's reported earnings:

Adjust December revenue to reflect economic reality
Factor in higher quality control costs needed to stop customer churn
Account for additional finance costs due to seasonal working capital needs
Create provisions for potential customer disputes and returns

Section 4: Risk Assessment We rated each issue as High, Medium, or Low risk and provided recommendations for mitigation.

This kind of hands-on revenue and Quality of Earnings analysis is exactly what professionals are trained to do in structured Financial Due Diligence programs, where raw data interpretation matters more than textbook theory.

Impact of Revenue Leakage on Valuation

In Financial Due Diligence, valuation is not driven only by formulas or complex models. It largely depends on how reliable the revenue numbers are. Revenue leakage weakens this reliability and directly impacts how investors value a business.
Impact on EBITDA
Revenue leakage distorts EBITDA. If revenue is understated due to cut-off issues or overstated due to timing adjustments, EBITDA no longer reflects true operating performance. Even a small correction in revenue can materially change EBITDA, especially in low-margin businesses, making investors cautious.
Impact on Valuation Multiples
Investors do not apply the same valuation multiples to every company. When revenue quality looks weak or inconsistent, they apply lower multiples to compensate for risk. As a result, two companies with similar EBITDA can have very different valuations purely because of revenue quality.
Impact on Investor Confidence
Revenue issues raise questions about management credibility and internal controls. While investors accept business risks, they expect transparency. Once confidence is shaken during FDD, every explanation is viewed more critically.
Deal-Level Consequences
Revenue leakage often leads to:

Renegotiation of deal value (usually downward)
Introduction of earn-out clauses linked to future performance
Delay or cancellation of investment in serious cases

This is why revenue analysis is a core pillar of Financial Due Diligence, and not just a routine verification exercise.

Practical Lessons for Your FDD Career

If you're preparing for a career in financial due diligence, here are the key takeaways from this case:
1. Always Start with Raw Data, Not Just Financial Statements Audited financials might look clean, but raw transactional data tells the real story. Learn Excel pivot tables, VLOOKUP, and basic data analysis—these are your most powerful tools.
2. Look for Patterns, Not Just Numbers Monthly trends, customer-wise breakdowns, and year-over-year comparisons reveal hidden issues. A single number can lie; patterns rarely do.
3. Zero Revenue is Often More Suspicious Than High Revenue When you see near-zero revenue in any month (like December in our case), investigate immediately. Companies don't naturally have zero business in specific months without reason.
4. Customer Churn is a Leading Indicator Lost customers signal problems that financial statements won't show—quality issues, service problems, competitive threats. Always track customer retention as part of revenue analysis.
5. Understand the Business Context The seasonality we found made perfect sense once we understood the company made agricultural equipment parts. Always connect the numbers back to the actual business and industry dynamics.
6. Quantify Everything Don't just say "there's customer churn." Say "20 customers representing ₹18 crores in annual revenue were lost over two years." Numbers give your findings credibility.

For practicing professionals, learning how to document such findings, challenge management explanations, and communicate risks to investors is as important as the analysis itself.

Final Thoughts: Why This Matters
Revenue leakage analysis isn't about finding problems for the sake of it—it's about protecting your client's investment. In our case study, these findings led to:

15% reduction in the proposed acquisition price
Additional warranty protections in the purchase agreement
Mandatory working capital adjustments
Management changes as a condition of closing

For you as a future FDD professional, remember that every ₹100 you help your client save or every risk you identify early builds your reputation. The HP-Autonomy disaster happened partly because due diligence wasn't thorough enough. Don't let that be your legacy.
Start practicing these analyses with any data you can find—your college fest's revenue data, your family business's sales records, or even publicly available company data.
The more you practice spotting patterns and anomalies, the better you'll become at catching revenue leakage before it costs your clients crores of rupees.
And remember, in FDD, your job isn't to be suspicious of everything—it's to be curious about everything. Ask why, verify twice, and always let the data tell its story.

Reference Links

All About Financial Due Diligence (FDD): A Complete Guide
Financial Due Diligence Terminology Explained
Financial Due Diligence Interview Questions Explained

Frequently Asked Questions (FAQs)

1: What is revenue leakage in Financial Due Diligence?
Revenue leakage in Financial Due Diligence refers to revenue that a company should have earned but failed to record or collect due to cut-off issues, customer churn, pricing errors, weak controls, or poor follow-ups. Identifying this leakage helps investors understand the true earning capacity of a business.

2: Why is revenue analysis so important in FDD?
Revenue analysis is critical because valuation depends heavily on revenue quality. Even small revenue leakages can distort EBITDA, reduce valuation multiples, and weaken investor confidence. That’s why revenue is treated as a core pillar in any Quality of Earnings (QoE) analysis.

3: What skills are required to work in Financial Due Diligence?
To work in FDD, you need strong Excel skills, ability to analyse raw data, understanding of trends and ratios, and business logic. More importantly, you must be able to question numbers, connect data with real business operations, and clearly explain risks to investors.

Abhishek Asalak
BBA Graduate | Emerging Business Professional & Freelance Digital Creator

Revenue Leakage in Financial Due Diligence (FDD): Real Case Study & Practical Analysis

Introduction

You may also be interested in