Revenue Cycle

Updated on April 5, 2024

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 includes the accounting process of tracking and recording transactions from the beginning, normally which starts from receiving an order from the customer or entering in agreement with the customer, delivering an order and end with getting payment.

Revenue-Cycle

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The revenue cycle management is crucial for businesses as it represents the process of generating income and ensuring financial stability and growth. It enables tracking of sales, managing cash flow, and evaluating business performance. However, challenges such as delays in payment, customer disputes, and inefficiencies in billing processes can impede cash flow and hinder business operations.

Revenue Cycle Explained

The revenue cycle includes all the steps from the initial sale of goods or services to the collection of payments from customers. It typically begins with the identification of potential customers and the marketing and sales efforts aimed at attracting them. This phase involves various activities such as advertising, lead generation, and customer relationship management to stimulate demand and generate sales opportunities.

Revenue cycle management as 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. read more 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. read more. However, the organization should also consider its cost before implementing the proper revenue cycle system if it is cost-effective.

Following the delivery of goods or services, the company enters the billing and accounts receivable phase of the revenue cycle. In this stage, the company issues invoices to customers for the products or services rendered, and tracks accounts receivable to ensure timely payment. This phase may also involve managing credit terms, sending payment reminders, and following up on overdue accounts.

How does it work in Different Industries?

Now that we understand the basics of revenue cycle companies, let us understand how it pans out in different industries. As we mentioned earlier, it has different gestation periods in different industries, the discussion below is a detailed account of that notion.

#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 finishes 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.

Steps

While the duration of steps can be industry specific based on its gestation period, these steps are a common feature across industries. Let us understand the steps involves in revenue cycle management through the points below.

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Examples

Now that we understand the basics and how it pans out in different industries, let us also touch upon the practicality of revenue cycle companies through the examples below.

Example #1

GreenGrowth specializes in providing landscaping services to local homeowners and office spaces. Rebecca contacts GreenGrowth to request landscaping services for her backyard. The revenue cycle begins when GreenGrowth’s sales team identifies Rebecca as a potential customer and engages in discussions to understand her landscaping needs.

Once she agrees to proceed with the project, the order processing phase begins. GreenGrowth’s team creates a detailed landscaping plan for Sarah’s backyard, including plant selection, layout design, and cost estimation. Upon her approval, GreenGrowth proceeds with scheduling the landscaping work and ordering the necessary materials.

After completing the landscaping project, GreenGrowth sends an invoice to Rebecca for the services rendered, detailing the costs of labor, materials, and any additional charges. She reviews the invoice and submits payment to GreenGrowth within the agreed-upon terms.

Upon receiving payment from the client, GreenGrowth records the transaction in its accounting system, updating its accounts receivable and revenue records to reflect the income generated from the project.

Example #2

BerryDunn, a comprehensive assurance, tax, and consulting firm, has announced the reorganization of its Revenue Cycle Management (RCM) team to better address the sustained demand from the healthcare sector, including hospitals, community health clinics, and senior living facilities. The decision comes amidst a thriving RCM market, which was valued at $9 million in 2023 and is projected to grow by over 12% from 2024 to 2029. Several factors contribute to the increased demand for outsourced RCM services among healthcare providers, including a reduction in elective surgeries, the heightened cost of care for COVID-19 patients, a surge in claim denials, and a scarcity of nonclinical personnel.

Importance

The revenue cycle management 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. read more 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.read moreBad 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.read more. 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.

Advantages

The advantages of revenue cycle companies are:

  • 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. read more.
  • 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 periods 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.

Disadvantages

Despite the various advantages, there are a few factors that prove to be a disadvantage. Let us discuss them through the points below.

  • 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.
  • 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.

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This has been a guide to Revenue Cycle & its definition. Here we explain its steps, examples, importance, advantages, and disadvantages in detail. You can learn more about financing from the following articles –

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