Examples of a Revenue Cycle of a Company
The revenue cycle is an important concept for companies that have a substantial lag between the sale of an item and receipt of payment. The transactions that take place between those two events form the revenue cycle. The cycle will vary slightly by type of business, but the essential elements remain the same. The cycle begins when the business delivers a product or provides a service and ends when the customer makes the full payment.
Companies or individuals providing professional services, such as law or accounting firms, may have different revenue cycles. Most accounting firms and law firms that do defense or transactional work require money up front from clients as a retainer, which is kept in a special account. When the firm provides services, it draws the billed amount of money from the account. An attorney representing a plaintiff may do so on a contingency basis, which means the client will pay the attorney only if a lawsuit seeking funds is successful.
A manufacturer begins its revenue cycle when it completes the production of the goods it intends to sell. Whether the company employs salespeople to contact potential customers or has set orders through long-term customers, the next step is for the company to process the order and organize the inventory for shipping. Once the order is delivered and the customer accepts the order, the company sends the customer an invoice. The revenue cycle ends when the customer pays the invoice in full.
Health care service providers have complicated revenue cycles. Because the costs of health care services are very high, most patients either use private insurance or government-sponsored insurance to pay for the bulk of their care. These companies must conform to the billing practices of the insurance company and translate the procedures they performed into a universal code. If the insurer does not cover the full cost of the services, the health care provider may have to continue to bill the patient to recover the full cost.
The software development business has revenue cycles that operate on the basis of milestones. Generally, a software development contract will set a series of stages. The company delivers some elements of the project to the client and the client sends the company a payment to fund the next stage in the process. The revenue cycle is broken into stages and is only complete when the full project is delivered and the client makes the final milestone payment.