Every business runs on cash. A healthy cash flow is needed to thrive and maintain operations in order to remain competitive and keep customers satisfied.
However, the financial management of a business is not as simple as shipping goods and collecting payments. Many factors go into managing the finances of a business, which can make it overwhelming to manage without a formal understanding of revenue cycles.
Revenue cycle management aims to manage the process by identifying flaws in the system and optimizing payment collection from customers to maximize revenue. By optimizing revenue cycles, you set up your RevOps for success, leading to a stable cash flow.
More and more businesses have started to look at revenue cycle management, which eventually lead to the industry's global market valuation of $40.9 billion in 2021.
In this article, we’ll discuss what the revenue cycle is, steps to manage revenue cycle operations, and the growing role of technology in effective financial management.
What is a Revenue Cycle?
A revenue cycle refers to the accounting process that records and keeps track of revenue generated from sales, from order placement to payment. Revenue cycles are used for accurate invoicing, collecting payments on time, and efficiently managing transactions for positive customer relationships/business acumen.
Revenue cycle management is pretty self explanatory; simply put, it is the process of managing revenue cycles. This process helps identify flaws and bottlenecks in the revenue cycle and optimize it to increase revenue and minimize delayed payments.
Managing revenue cycles is complex as the process varies from one industry to another. Three major types of industries can best utilize revenue cycle management, with each of them following a different framework for revenue collection.
In manufacturing industries, revenue cycle management helps track orders, shipments, and invoicing. The process starts when the customer places an order. The billing department then creates an invoice, sends it to the customer, receives payment, and dispatches the goods.
In the service industry the process is relatively shorter. It starts with the customer placing an order and entering an agreement with the supplier. After providing the service, the supplier gets paid, concluding the revenue cycle. In the case of ongoing services, the agreement will process as discussed beforehand.
- Healthcare Provider:
Healthcare providers have a complex revenue cycle that opens the way to a new subset of management of medical services: healthcare revenue cycle management. This is the process of managing the administrative and clinical functions in the revenue cycle of healthcare systems. In the healthcare industry, the revenue cycle begins when the patient is registered for treatment in healthcare facilities. From there many other factors such as claims submissions, reimbursements, contacting the insurance company, and third-party follow-ups play a part to finalize patient payments.
Importance of Having and Managing Revenue Cycles
A revenue cycle dictates the revenue collection process by highlighting key factors and people involved in revenue collection. Managing revenue cycles is important for companies to maximize revenue and maintain a positive and stable cash flow to the business.
Some benefits of having and managing revenue cycles include:
- Better decision-making when looking for cost-effective solutions
- Reducing credit period of customers and getting payment faster
- Reduces the risk of bad debts
- Optimizes the billing process by quickly creating and issuing receipts
- Reduces costs and time on repetitive processes through automation
- Improves the accuracy of billing processes for products/services
Revenue Cycle Operations: 6 Key Steps of the Revenue Cycle Process
No matter the industry you operate in, effective revenue cycle management often follows a similar framework consisting of six steps.
The revenue cycle starts when the customer first places the order. This may look different for different industries. For example, in healthcare the first stage would be patient registration.
After placing the order, the business receives it and decides whether to accept or not in the next stage.
This step of the process can also be referred to as sales order authorization. Customer orders are approved by management after reviewing sales prices, stock levels, and terms of the agreement.
Most businesses use software to receive and process orders. This ensures that only authorized staff can accept and decline orders according to approved standards. It also ensures that only the staff with an idea of delivery schedules and stock levels deal with orders to reduce the risk of accepting an order only to cancel it later.
After confirmation of the order, the invoice is accurately calculated and generated using the authorized terms and prices. This invoice is then sent to the customer for payment.
Delivery of Goods
All goods or services that the customer ordered are dispatched for shipping. Only authorized goods are shipped, those that were mentioned in the invoice, and are delivered to the customer.
After getting a confirmation of the shipment of goods, the accounting department works on calculating the accounts receivable.
Calculate Accounts Receivable
Once the goods are delivered, the accounting department invoices all the shipped items, calculates credit notes, and makes adjustments to record accounts receivable per organization guidelines.
After looking at the credit notes and adjustments, all the issues are recorded for the period. These accounts are then properly presented and disclosed according to organization policy and legal requirements in order to comply with professional standards.
To conclude the revenue cycle, payment is received as the final step. Most businesses use a CRM or POS system for automating payment collection. This helps to accurately collect payment on time, reducing the credit period and time spent implementing this last step.
Cash receipts data is collected and processed adjusting for any discounts if applicable. Payment may be automatically deducted from the customer's bank account with the bank ledger being regularly reconciled against the general ledger. Customers would also be mailed their account receivable statement to have record of the transaction.
Role of Technology in Revenue Cycle Management
The evolution of technology has been rising rapidly and more businesses are showing interest. Newer technologies, most notably A.I. and developed IT architecture, are revolutionizing revenue cycle operations by providing ways to automate tedious tasks and finding improvement opportunities.
Perhaps the most useful type of technology being used to overcome revenue operations challenges is CRM, EDI, and Payment Collection/Order Tracking software.
These B2B solutions aim to automate payment processes, invoice generation, and subscription management while accurately processing and calculating orders, accounts receivable, and customer data.
Using revenue operations management software to optimize revenue cycles is becoming the industry standard. If you haven’t implemented a business software or tool to help manage and maintain your revenue cycles, it’s only a matter of time until your competition surpasses you.
Gaining an understanding of revenue cycles and learning to effectively manage them can lead to increased revenue and a more stable cash flow for your business.
Revenue cycle management is a complex process and requires the collaboration of all departments to implement effectively, from order placement to payment collection. That’s why before implementing this process, it’s vital to ensure your whole team is on the same page.
In this article, we discussed what revenue cycles are and what the typical revenue cycle looks like. This information will help you to develop a RevOps framework to start optimizing revenue cycle operations for different industries.
Due to the wider adoption of technology, better-optimized systems are being developed that are designed to help manage the revenue cycle through automation and data management. So, when creating a data-driven strategy for your RevOps team, it’s essential to factor in the technology that makes it possible for top companies to ensure a positive cash flow to their business.