Revenue Cycle Definition
The revenue cycle is a method of defining and maintaining the processes used for the completion of an accounting process for recording revenue generated from services or products provided by the company, which include the accounting process of tracking and recording transaction from the beginning, normally which starts from receiving an order from the customer or entering in agreement with the customer, delivering an order to customer and end with getting payment from the customer.
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How does it work in Different Industries?
#1 – In Manufacturing Industry
The logistics department arranges transport and ships goods to a customer, then the customer receives goods and makes a payment. It keeps goods ready to dispatch, then the department starts billing, prepares an invoice, and sends it to a customer. It starts when an organization receives an order from the customer and the concerned department processes the order. 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. It starts when they receive service orders, the organization enters an agreement with the customer, the concerned department provides service, and the organization receives payment from a customer. It might be the case of continuous service in the service industry, and then the process will work as per agreement with the customer.
#3 – In Healthcare Industry
The revenue cycle of the healthcare industry is the most complicated compared to other industries. In this industry, the process starts when patients get registered in hospitals that provide treatment to a customer. In most cases, health insurance companies’ involvement is due to substantial expenditure on medical treatment. Sometimes they have to recover payments from an insurance company, which might be full payment, or they may 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 invoices to a customer
- Delivery received by a customer
- Accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. recorded
- Payment by customer
Importance of Revenue Cycle
The revenue cycle is maintained and used to check 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. cash flow by evaluating its profit-making activities. It helps the management decide 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 to reduce the errors. Automating the repetitive process also helps the organization provide timely and effective customer service.
Management of Revenue Cycle helps reduce the credit period of receiving payments from the customer and lower the cases or probability of Bad 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.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 the case of a healthcare facility by providing facilities for tracking registration of patients, administering personal data and insurance-related information, scheduling the appointments and billing, and receipt of the bills. Before proper implementation of the 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 biggest advantage that an organization gains from the management of the cycle is the reduction in the time of receipt of the product or services of the organization to the interested customers & reduction in the time of payment received from the customers.
Adaptation of Revenue Cycle Management also helps reduce the time & cost of the management by automating the repeated processes. The cycle study helps the management 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 and 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 study the blockage of cash inflow from the different transactions, which helps the management 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 a few cases, payment is received directly from the patient. In some cases, they receive part payment from the patient and part payment from the insurance company. In a few cases, they receive payment directly from the insurance company, this requires lots of control, so the revenue cycle helps track all these transactions.
For proper adaptation of revenue cycle management, training for the employees is necessary. If any part of the cycle makes any mistake, that thing could impact the whole cycle. Proper implementation requires expertise in accounting which may increase the company’s cost.
As explained, the cycle of the healthcare industry is complicated. The organization you have implemented this cycle will have to allocate different departments to different people so that one person won’t control all the process. For this, the organization requires hiring human resources that might increase the company’s fixed cost. There are chances of missing some important aspects of recording revenue in this industry.
It is an accounting process that differs from industry to industry. The service industry revenue cycle is short, and in a manufacturing company, it is a bit longer than in the service industry. It is vital to follow the cycle so that an organization can track all the revenue and the amount receivable from the debtor and track non-payment fromA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. debtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. . But the organization should also consider its cost before implementing the proper revenue cycle system if it is cost-effective.
This has been a guide to Revenue Cycle and its definition. Here we discuss the step-by-step process of the revenue cycle along with a flowchart, its importance, advantages, and disadvantages. You can learn more about financing from the following articles –