Revenue Cycle

Sales to Cash Collections

recurring set of business activities and related

information processing operation associated

with: Providing goods and services to customer

Collecting their cash payments

Primary exchange of information: customers

Primary Objective: provide the right product in

the right place at the right time for the right

price.

Two Phases of Revenue Cycle:

Physical Phase Goods are transferred to the buyer

Handled by the Sales Order Processing

Subsystem

Financial Phase

Cash is received from the buyer

Handled by the Cash Receipts Subsystem

Three basic functions of AIS in Revenue Cycle:

Capturing and processing data about business activities

Storing and organizing that data to support

decision making

Providing controls: ensure reliability of data

and safeguard resources

Context diagram

LOWER LEVEL

DIAGRAM

Sales to Cash Collections Key Decisions

To what extent can and should products be

customized to individual customers needs and

desires?

How much inventory should be carried, and where

should that inventory be located?

How should merchandise be delivered to

customers? Should the company perform the

shipping function itself or outsource it to a third

party that specializes in logistics?

Should credit be extended to customers?

How much credit should be given to individual customers?

What are the optimal prices for each product or service?

What credit terms should be offered?

How can customer payments be processed to maximize cash flow?

Sales to Cash Collections Threats and Applicable Control

Procedures

Inaccurate or invalid master data

Unauthorized disclosure of sensitive information

Loss or destruction of master data

Poor performance

Data processing

integrity controls

Restriction of access

to master data

Review of all

changes to master

data

Access controls

Encryption

Backup and disaster

recovery procedures

Managerial reports

Sales to Cash Collections Revenue Cycle Business Activities

1. Sales Order Entry

2. Shipping

3. Billing and Accounts Receivable

4. Cash Collections

Sales Order Entry performed by the sales order department

(reports to the VP of marketing)

1.Taking the customers order 2.Checking and approving the customers

credit

3.Checking inventory availability

Sales Order Entry

1. Taking the customers order

Order data are received on a

In the store

By mail

By phone

On a Website

By a salesperson in the field

Paper or electronic

Item numbers ordered, quantities, price and salesperson

sales order document

Sales Order Entry

1. Taking the customers order

Electronic data interchange (EDI)- used to linked

the company with its customers to receive orders

How IT can improve efficiency and effectiveness:

Orders entered online can be routed directly to

the warehouse for picking and shipping.

Sales history can be used to customize

solicitations.

Choiceboards can be used to customize orders.

Sales Order Entry

2. Checking and approving customers credit

Credit sales should be approved before the

order is processed any further

Each customer will have

maximum allowable

account balance for

each customer based on the customers past credit

history and ability to pay

credit limit

Sales Order Entry


Two Types of Credit Authorization

1. General Authorization- for existing customers

below their credit limit who dont have past-

due balances

2. Specific Authorization- for customers who

are new, have past-due balances, and are

placing orders that would exceed their

credit limit

Sales Order Entry


How can IT improve the process?

Automatic checking of credit limits and

balances

Emails or IMs to the credit manager for

accounts needing specific authorization

Sales Order Entry

3. Check inventory availability

ensure there is sufficient inventory to fill the order

and advise the customer of the delivery date

the sales order clerk can usually reference a

screen displaying quantity on hand, quantity

already committed to others, and quantity on

order

Sales Order Entry


If there are enough units to fill the order Complete the sales order.

Update the quantity available field in the inventory file.

If theres not enough units to fill the order, initiate

a back order. For manufacturing companies, notify the production

department that more should be manufactured. For retail companies, notify purchasing that more should

be purchased.

*If the item(s) become available, picking ticket is created.

Sales Order Entry


*If the item(s) become available, is created. picking ticket

authorizes the inventory

control function to

release merchandise to

the shipping department

Sales Order Entry

decisions concerning credit policies, including the

approval of credit

information about inventory availability and

customer credit status from the inventory control

and accounting functions, respectively

Sales Order Entry

The AIS should provide the operational information

needed to perform the following functions:

Respond to customer inquires about account

balances and order status.

Decide whether to extend credit to a customer.

Sales Order Entry

Determine inventory availability.

Decide what types of credit terms to offer.

Set prices for products and services.

Set policies regarding sales returns and

warranties.

Select methods for delivering merchandise.

Sales Order Entry

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THREAT APPLICABLE CONTROL PROCEDURES

1. Incomplete or inaccurate customer orders

Data entry edit checks

2. Credit sales to customers with poor credit

Credit approval by credit manager, not by sales function; accurate records of customer account balances

3. Legitimacy of orders Signatures on paper documents; digital signatures and digital certificates for e- business

4. Stock outs, carrying costs and markdowns

Inventory control systems

Shipping Filling customer orders and shipping the desired

merchandise

1.Picking and packing the order

2.Shipping the order

Warehouse Department- picks the order

Shipping Department- packs and ships the order

reports to VP of Manufacturing

Shipping

1. Picking and packing the order

The printed by the sales order entry triggers the shipping process and is used to

identify which products to remove from

inventory.

picking ticket

Shipping

2. Shipping the order

Shipping Department

Physical Count

of Inventory

Quantities in

the Picking

Ticket

Quantities in

the Sales Order

*If there are discrepancies, back order is initiated.

Shipping

1. Picking and packing the order

Packing Slip

Copy of the Bill of Lading

Freight Bill

Retained in the shipping

Send to billing

Retained by the

freight carrier

Shipping

Determine the delivery method.

In-house

Outsource

Shipping

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1.Shipping errors: Wrong merchandise Wrong quantities Wrong address

Reconciliation of sales order with picking ticket and packing slip; bar code scanners; data entry application controls

2. Theft or inventory Restrict physical access to inventory; Documentation of all internal transfers of inventory; periodic physical counts of inventory and reconciliation of counts of recorded amounts

Billing information processing activity that repackages

and summarizes information from the sales order entry and shipping activities

1.Invoicing 2.Updating accounts receivable

Billing

1. Invoicing

INVOICING

Shipping Department:

items and quantities

shipped

Sales: price and other

sales term SALES

INVOICE

Billing

2. Updating Accounts Receivable

Two ways to maintain accounts receivable

1.Open- invoice method

2.Balance forward method

To obtain a more uniform flow of cash

receipts, many companies use a process

called cycle billing.

Conducive to offering

early-payment discounts,

as invoices are individually

tracked and aged

Results in more uniform flow

of cash collections

More efficient and reduces

costs because you dont bill

for each individual sale

More convenient for the

customer to make one

monthly remittance

Billing

ADVANTAGES

Billing

2. Updating Accounts Receivable

Exception Procedures: Account adjustments

and write offs

Adjustments are handled by the credit

manager

Billing

Accurate billing is crucial and requires

information identifying the items and quantities

shipped, prices, and special sales terms.

Billing The sales invoice notifies customers of the

amount to be paid and where to send payment.

A monthly statement summarizes transactions

that occurred and informs customers of their current account balance.

A credit memo authorizes the billing department

to credit a customers account.

Billing Types of billing systems:

1.In a postbilling system, invoices are prepared

after confirmation that the items were shipped.

2.In a prebilling system, invoices are prepared (but not sent) as soon as the order is approved.

The inventory, accounts receivable, and general

ledger files are updated at this time.

Billing What are examples of additional information the

AIS should provide?

response time to customer inquires

time required to fill and deliver orders

percentage of sales that require back orders customer satisfaction

analysis of market share and trends

profitability analyses by product, customer, and

sales region

Billing


1.Failure to bill customers

Separation of shipping and billing functions; prenumbering of all shipping documents and periodic reconciliation to invoices; reconciliation of picking tickets and bills of lading with sales orders

2. Billing errors Date entry edit control Price lists

3. Posting errors in updating accounts receivable

Reconciliation of subsidiary accounts receivable ledger with general ledger; monthly statements to customers

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Cash Collections The cashier, who reports to the treasurer,

handles customer remittances and deposits in the bank

1.Handling customer remittances 2.Depositing remittance in the bank

1.Cashier

2.Accounts Receivable function

Cash Collections

1.Turnaround documents forwarded to accounts

receivable

2.Lockbox arrangements

3.Electronic lockboxes

4.Electronic funds transfer and bill payment

5.Financial Electronic Data Interchange (FEDI)

6.Accept credit cards or procurement of cards

from customers

Cash Collections

1.Turnaround documents forwarded to accounts receivable The mailroom opens customer envelopes and

forwards to accounts receivable either

remittance advices, photocopies of remittance

advices, or a remittance list prepared in the

mailroom.

Cash Collections

2. Lockbox arrangements A lockbox is a postal address to which

customers send their remittances.

The participating bank picks up the checks from the post office box and deposits them to

the companys account.

Cash Collections

3. Electronic lockboxes

Upon receiving and scanning the checks, the

bank immediately sends electronic

notification to the company, including customer account number and the amount

remitted as soon as it receives and scans

those checks.

Cash Collections

4.Electronic funds transfer and bill payment

Customers send their remittances

electronically to the companys bank and

thus eliminate the delay associated with the time the remittance is in the mail system.

Cash Collections

5. Financial electronic data interchange (FEDI)

integrated the exchange of electronic funds

transfer (EFT) with the exchange of the

remittance data Electronic data interchange (EDI) is the use of

computerized communication to exchange

business data electronically in order to

process transactions

Cash Collections

6.Accept credit cards or procurement cards from

customers

Speeds collection because credit card issuer

usually transfers funds within two days.

Cash Collections

Reduction of cash theft is essential.

The billing/accounts receivable function should

not have physical access to cash or checks.

The accounts receivable function must be able

to identify the source of any remittances and

the applicable invoices that should be credited.

Cash Collections

Checks are received and deposited.

A remittance list is prepared and entered on-line

showing the customer, invoice number, and the amount of each payment.

The system performs a number of on-line edit

checks to verify the accuracy of data entry.

Cash Collections

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1.Theft of Cash Segregations of duties; minimization of cash handling; lockbox arrangements; prompt endorsement and deposit of all receipts Periodic reconciliation of bank statement with records by someone not involved in cash receipts processing

Revenue Cycle

Documents

Transcript of Revenue Cycle