What is a Revenue Cycle?

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A revenue cycle is the process businesses use to describe the financial progression of their accounts receivables from the very beginning, when they first acquire product, if they're product based, until they get paid, if they get paid in full.

Discussing the business's revenue
Discussing the business's revenue (Image: Jupiterimages/BananaStock/Getty Images)

The Beginning of the Revenue Cycle Process

For companies that sell products, the revenue cycle process begins with that product being priced and ready to be sold. If the company has to purchase product to do the services, the revenue cycle starts as soon as that product is in their possession and priced.

Peanut butter on the shelf, ready to be sold
Peanut butter on the shelf, ready to be sold (Image: Justin Sullivan/Getty Images News/Getty Images)

Revenue Cycle Management for Product Based Businesses

If a company sells products, the first stage in the revenue cycle process is selling the product. When they sell the product, if they collect in full at the point of the sale and record the purchase, the revenue cycle for them is complete. If they sell the product and don't collect in full, then it goes on to the next stage of the revenue cycle process, which is the collections process. Revenue cycle management is usually done by the accounts receivable (or accounting) department of a company.

Paying in full at point of sale
Paying in full at point of sale (Image: Brand X Pictures/Brand X Pictures/Getty Images)

Revenue Cycle Management for Service Based Businesses

If a company sells services, which could include charging for products at the same time, the next stage is providing the service. If they collect for services and supplies used at the time of billing, then the revenue cycle is complete. If they don't collect in full, then it goes into the same revenue cycle process as if they were only selling services.

Auto mechanics provide a service
Auto mechanics provide a service (Image: Brand X Pictures/Brand X Pictures/Getty Images)

Revenue Cycle Management: The Collections Process

When companies enter the collections process, it becomes the most tenuous part of the entire revenue cycle progression. Companies will track how their revenue cycle processes are going by setting time determinants on where their outstanding receivables, or uncollected monies, are.

Every company hopes to be paid in full within the first 30 days, but that doesn't happen all the time, depending on many factors outside of their control. This leads to breaking up the revenue cycle reporting into stages showing where the money is. Usually it goes something like 30 days, followed by 60, 90, 120, 180 and 360. There can be other numbers within these, so it's not cut and dried. Based on specific calculations using revenue and receivables figures, a company can determine the accounts receivable days, which tells them on average how long it's taking them to collect on their money.

Bills
Bills (Image: Comstock/Comstock/Getty Images)

Revenue Cycle Management: Getting Paid

The revenue cycle stage is finally completed either when an account is paid in full, or an account is written off the books and either sent to a collection agency, or charged off entirely. Each company and industry gets to set the rules on how to handle outstanding accounts receivables. It's important for companies to track their revenue cycle process for two reasons. One, it's how they can determine how profitable they are based on how much revenue they're generating, and two, they can track how well their cash if flowing and alter the processes for getting that cash in more quickly if necessary.

Payments recorded in a ledger
Payments recorded in a ledger (Image: Duncan Smith/Photodisc/Getty Images)

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