What is the Expenditure Cycle?

The expenditure cycle is a type of process that helps to define what occurs from the point that a business or consumer decides that the purchase of a given good or service is necessary to the point that the purchase is paid for in full. The number and type of steps included within the cycle will vary, based on the complexity of researching and ultimately obtaining permission to make the purchase. The process may further be complicated based on the policies and procedures that are involved in deciding when and how to tender payment for those purchases.

For many companies, the expenditure cycle begins with the granting of permission to make a particular purchase. Typically, the party wishing to make the purchase must submit what is known as a requisition form to a purchasing agent or department. If the agent reviews the requisition and finds that the requested item is within the pricing guidelines and budgetary restrictions of the company, the next step in the cycle involves the issuance of a purchase order number. At that point, the party who submitted the original request may contact the authorized vendor and place the order, carefully noting that the purchase order number assigned by the purchasing agent is to be included as part of the detail found on the invoice for the order.

Once the order is placed and the requested item is delivered, the next step in the expenditure cycle involves accounting for the receipt of the item and assigning the cost to a specific department or division within the company structure. Depending on the type of company involved, the item may be placed into an active inventory until it is actually disbursed to a specific department. For example, raw materials used in the creation of goods that the company offers for sale may be held in a company warehouse until they are released and charged to the department that serves as the first link in the manufacturing process.

The final steps in an expenditure cycle involve the scheduling of payment for the purchased goods. In some cases, the cycle is very short, as in when payment must be tendered at the time of delivery. At other times, this final portion of the expenditure cycle may arrange current outstanding invoices based on the due dates assigned by vendors, with an accounts payable team reviewing and approving each invoice for payment. At that point, the payment is scheduled to take place on or before the actual due date listed on the invoice. Depending on company policies, that payment may be in the form of an electronic transfer made to the vendor’s account, or a paper check that is prepared and mailed to the remittance address supplied by the vendor. Typically, the expenditure cycle is considered complete once the payment has been processed and has cleared the issuing bank.