Revenue Cycle Definition
Revenue cycle is a method of defining and maintaining the processes used for completion of an accounting process for recording of revenue generated from services or products provided by the company which include the accounting process of tracking and recording transaction from beginning, normally which starts from receiving order from customer or entering in agreement with customer, delivering order to customer and end with getting payment from customer.
How does it work in Different Industries?
#1 – In Manufacturing Industry
It starts when an organization receives order from the customer and the concerned department process the order. It keeps goods ready to dispatch, then the department starts billing, prepares an invoice, and sends that invoice to a customer. The logistics department arranges transport and ships goods to a customer, then the customer receives goods and makes a payment, process finish when an organization receives payment and simultaneously records the transaction in the system.
#2 – In Service Industry
This cycle is shorter than the manufacturing industry, where it starts when they receive service order or organization enters in agreement with customer and concern department provide service and organization receive payment from a customer. It might be the case of continuous service in the service industry then the process will work as per agreement with the customer.
#3 – In Healthcare Industry
The revenue cycle of the health care industry is the most complicated cycle in comparison to other industries. In this industry, the process starts when patients get register in hospitals, it provides treatment to a customer, and in most cases, there is the involvement of health insurance companies due to substantial expenditure on medical treatment. Sometimes they have to recover payments from an insurance company, might be full payment or it is possible they claim part of the bill from the patient.
Process of Revenue Cycle
- Receive order from a customer
- Processing the order by making goods ready for delivery
- Billing and preparing invoices
- Delivery of goods and invoice to a customer
- Delivery received by a customer
- Accounts receivableAccounts ReceivableAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet. recorded
- Payment by customer
Importance of Revenue Cycle
The revenue cycle is maintained and used to keep a check on the cash flow of the organizationCash Flow Of The OrganizationCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. by evaluating their profit-making activities. It helps the management to take the decision on improvements possible by comparing the cycle of the organization with any available cycle of the competitors. It merely applies a check to the personnel involved in the process for reducing the errors, and by automating the repetitive process, it also helps the organization to provide timely and effective services to the customers.
Management of Revenue Cycle helps in reducing the credit period of receiving payments from the customer as well as lowering the cases or probability of Bad debtsBad DebtsBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.. It plays a vital role in the proper billing and receipt in case of a healthcare facility by providing facilities for tracking registration of patients, administrating the personal data as well as insurance-related information, scheduling the appointments and billing, as well as receipt of the bills. Before proper implementation of cycle organization should evaluate its fixed cost and cost-effectiveness, it also should measure whether it would be more beneficial to implement this system.
The most advantage that an organization gain from the management of cycle is the reduction in the time of receipt of the product or services of the organization to the interested customers & reduction in time of payment received from the customers.
Adaptation of Revenue Cycle Management also helps in reducing the time & cost of the management by automating the repeated processes. The study of the cycle helps the management to decide the structure of the process, which will provide the best results and will have the best controls in managing the cycle.
It provides overall better accuracy in the billing of the product or services provided by the organization as well as better accounting of the transactionAccounting Of The TransactionAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. . The study of delay in the receipt of the payment received from the customers helps the management to study the blockage of cash inflow from the different transactions, which helps the management to make decisions regarding the credit periodsCredit PeriodsCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy. provided to a variety of customers for maintaining the cash flow within the organization. In health industry cycle help to track all the revenue because there is the involvement of insurance company, in few cases payment is received directly from the patient, in some cases they receive part payment from patient and part payment from the insurance company and in few cases they receive payment directly from the insurance company, this requires lots of control, so revenue cycle helps in tracking all these transactions.
For proper adaption of revenue cycle management, training for the employees is necessary because if there is any mistake done by any part of the cycle, then that thing could impact the whole cycle. Proper implementation requires expertise in accounting that may increase the cost of the company.
The organization you have implemented this cycle, you will have to allocate different departments to different people so that one person won’t control all the process. For this, the organization requires the hiring of manpower that might increase the fixed costFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity. of the company. As explained, the cycle of the health care industry is complicated. In this industry, there are chances of missing some important aspects of recording revenue.
It is an accounting process that differs from industry to industry. In the service industry revenue cycle is short, and in a manufacturing company, it is a bit longer than the service industry. It is vital to follow cycle so that an organization can track all the revenue, as well as amount receivable from the debtor and also organization, can track non-payment from debtorsDebtorsA debtor is a person or entity that owes money to the other party in a transaction. The receiver is referred to as the creditor, and the payment terms vary for each transaction based on the terms and conditions agreed upon by the parties.. But the organization should also consider its cost before implementing the proper system of revenue cycle if it is cost-effective.
This has been a guide to Revenue Cycle and its definition. Here we discuss step by step process of revenue cycle along with flowchart, its importance, advantages, and disadvantages. You can learn more about financing from the following articles –