What Is a Revenue Cycle?

When you walk into a shop and buy an item – be it a bottle of perfume, a motorcycle or a pack of gum – you have become part of the revenue cycle. The revenue cycle is a term used in accounting and business that describes the journey of a product or service from its humble beginnings to its sale. The revenue cycle begins when the business delivers a product or provides a service, and ends when the customer makes the full payment.

It's important for all accountants to know something about the revenue cycle because it is one of many processes used in an effective accounting system. Accountants who work for a company must be able to keep track of the sales and profits. A good way to achieve this is by implementing a system that tracks the revenue cycle.

Companies that have a substantial lag between the sale of an item and receipt of payment find the revenue cycle especially useful. Revenue cycles vary by type of business. However, the essential elements remain the same.

Professional Services: Companies or individuals that provide services rather than goods – such as law or accounting firms – have different types of revenue cycles. These types of professionals often require money up front from clients as a retainer, and this retainer is kept in a special account. When the firm provides services, money is drawn from that account. Attorneys sometimes have another type of arrangement wherein they take on a client with the agreement that they receive their payment from any settlement won in the lawsuit.

Manufacturing Companies: A manufacturing firm's revenue cycle begins when it completes the production of the goods it intends to sell. The next step is processing the order and getting the inventory ready to ship. Some manufacturers have sales teams who handle this part of the cycle, or they have regular dealers that they supply with goods. After the goods are delivered, the company sends the customer an invoice. When the customer pays the invoice, the company's revenue cycle is complete.

Health Care Companies: Health care companies have the most complicated revenue cycles. The costs of health care services are very high, as most consumers know, and patients either use private insurance or government-sponsored insurance to pay for much of their care. These insurance companies are middlemen who protract and complicate the revenue cycle. Health care companies that accept insurance must conform to the billing practices of the insurance company and translate the procedures they performed into a universal code. Often, the insurer does not cover the full cost of the services, and this means that the health care provider will have to also bill the patient to recover the full cost. The revenue cycle is complete when payment from both the patient and the insurance company are received.

Software Development: Software development businesses often create revenue cycles based on hitting certain milestones. Some elements of the project are delivered to the client during each stage of the development process, and the client sends the company a payment to fund the next stage in the process. The revenue cycle is complete when the full project is delivered, and the client makes the final payment.

Another important cycle in accounting is the expenditure cycle. While the revenue cycle follows the journey of an item from delivery to sale, the expenditure cycle is all about the purchasing done by a company.

Companies purchase goods and services in order to operate efficiently and achieve its business objectives. Purchasing is an internal function, and effective purchasing has several goals, including minimizing spending and maintaining quality. The expenditure cycle is what governs the methodology a company uses for purchasing.

An expenditure cycle involves the repetitive process of first creating purchase orders and ordering goods and services, then receiving these items, approving the invoices and finally paying the invoices. A good example of the expenditure cycle at work is the purchase of office supplies, which is something most companies need. The expenditure cycle for office supplies would begin when purchase orders are created based on the needs of employees. Next, those supplies are ordered by phone or online from an office supply store. The order is placed using a purchase order. Once the items are delivered, accounting will approve the invoice for payment and write a check to the supplier.

Creating a process for your company's expenditure cycles is a good idea, no matter how small the business. Many small-business owners don't implement a system to track purchases accurately. Without a clearly defined expenditure cycle, a business owner or manager must personally approve every purchase, every invoice and every vendor. Or if you decide to just let employees do what they want when they want, your company's expenditures could increase significantly. Duplicate and unnecessary purchases can become common when there is no system in place that tracks purchasing.

If you establish a system for your company's expenditure cycle, you can reduce fraud and the potential for fraud. Putting a system in place has shown to reduce the opportunity for embezzlement significantly. Employees can't "pay" fake or fraudulent vendors if your system requires vendors to be pre-approved or approved before ordering. In addition, if you control payments, employees can't write unauthorized checks. A written expenditure cycle can truly strengthen your company's accounting and financial infrastructure.

The production cycle is yet another key cycle in the business world. Also known as the product life cycle, the production cycle describes the period over which an item is developed, brought to market and eventually removed from the market. There are four stages to the production cycle: introduction, growth, maturity and decline.

While the revenue and expenditure cycles are important to accountants, the production cycle is more useful for the marketing department. It helps your company's marketing team decide when it is a good time to advertise, reduce prices, explore new markets or create new packaging.

The production cycle follows a fairly standard path. First, a product idea is introduced, then sent to research and development to determine the product's feasibility and potential profitability. Next, the product is produced, marketed and rolled out. This is called the growth phase of the product. If the new product becomes successful, production will increase until the product becomes widely available and matures. This is called the maturity phase of the product. Eventually, demand for the product will decline, and it will most likely become obsolete, resulting in the decline stage. Understanding a product's life cycle is important for a successful company.

When a product begins its life cycle, it may have little-to-no competition in the marketplace. Then, if it does well, competitors may start to emulate its success. The more successful the product becomes, the more competitors it will face. This may cause the product to lose market share, eventually leading to its decline.

The way a company markets a product depends, in part, on its stage in the production cycle. A brand-new product, for example, must be explained to consumers. A product that is further along in its life cycle will need to be differentiated from its competitors.

The length of time between payrolls is referred to as the payroll cycle or full cycle payroll. Businesses vary in their payroll time frames, and every business must decide which payroll schedule is best for their company and employees. Often, there are different payroll cycles within a single company. Exempt or salaried employees may be paid once a month, for example, while hourly employees may be paid weekly.

The payroll cycle starts with deciding on the wages and salaries for new employees. The next part of the cycle involves attendance and timekeeping. Some employees must clock in and out to keep a record of their hours worked. Others are paid a set amount no matter the hours they put in. The payroll cycle ends with payment followed by preparation of governmental (tax) and internal reports. Steps in the payment cycle include gathering employee time, running earnings and deduction calculation and printing a check.

If an employer processes payroll every week, each week is considered a new payroll cycle. If an employer processes a payment once a month, then each month is considered the start of the new payroll cycle. Payroll is typically a business's biggest expense, and it is a key factor in employee morale, as well.

In the United States, the most common payroll cycles are monthly, semimonthly (twice a month), biweekly (every two weeks) and weekly. A minimum pay period is typically required by state law. Business owners are never restricted from paying employees more frequently, but they are prohibited from paying employees less frequently than once a month. Different payroll cycles have both advantages and disadvantages.

Because accounting departments run monthly reports, accountants typically prefer semimonthly pay periods. This way, the last paycheck of the month usually coincides with the end of the month. Employees paid biweekly also get two bonus months of the year that have three pay periods instead of two.

Health care, retirement and other benefits also typically run on a monthly basis. With semimonthly pay cycles, these deductions are easy. If you pay your employees biweekly, it gets more complicated because you will have to manage deductions based on the total number of annual pay periods – 26 pay periods or 27 in some years.

However, hourly employees appreciate biweekly pay periods because they get paid overtime, whereas salaried employees don't.

The weekly pay cycle also has some advantages, though it is not a popular option for most companies outside the trades, such as construction and plumbing, for example. Cost is a big reason why business owners don't like it, and most payroll vendors charge each time payroll is run. Another disadvantage is that each time you run payroll, it can waste a lot of time for your payroll administrator, especially if there are payroll accruals and overtime.