The Revenue Cycle: Sales to
Cash Collections
Chapter 6
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Learning Objectives
1. Describe the basic business activities and related
information processing operations performed in the
revenue cycle.
2. Discuss the key decisions that need to be made in the
revenue cycle, and identify the information needed to
make those decisions.
3. Identify major threats in the revenue cycle, and evaluate
the adequacy of various control procedures for dealing
with those threats.
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INTRODUCTION
• The revenue cycle is a recurring set of
business activities and related information
processing operations associated with:
▫ Providing goods and services to customers
▫ Collecting their cash payments
• The primary external exchange of information
is with customers.
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The Revenue Cycle
1.Basic Revenue Cycle Activities
Four basic business activities are performed in the
revenue cycle:
1. Sales order entry
2. Shipping
3. Billing
4. Cash collection
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Level 0 Data
Flow
Diagram:
Revenue
Cycle
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General Revenue Cycle Threats & Controls
Threats Controls
1. Inaccurate or invalid master
1.a Data processing integrity
data
controls
2. Unauthorized disclosure of
1.b Restriction of access to
sensitive information
master data
3. Loss or destruction of
1.c Review of all changes to
master data
master data
4. Poor performance
2.a Access controls
2.b Encryption
3.a Backup and disaster recovery
procedures
4.a Managerial reports
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1. SALES ORDER ENTRY
• Sales order entry is performed by the sales
department.
• The sales department typically reports to the VP
(Vice President) of Marketing.
• Steps in the sales order entry process include:
▫ Take the customer’s order
▫ Check the customer’s credit
▫ Check inventory availability
▫ Respond to customer inquiries (may be done by
customer service or sales order entry)
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Sales Order Entry Processing Steps
• Take the customer
order
▫ Source document:
sales order
• Approve customer
credit
• Check inventory
availability
• Respond to
customer inquiries
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SALES ORDER ENTRY
• How IT can improve efficiency and
effectiveness:
▫ Have customers enter data themselves (OCR,
webpages, etc.)
▫ Electronic data interchange (EDI) can be used to
link a company directly with its customers to
receive orders or even manage the customer’s
inventory.
▫ Use sales history information to create
marketing messages tailored to the individual
customer
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1.1 TAKE ORDER
▫ Orders entered online can be routed directly to
the warehouse for picking and shipping.
▫ Use interactive sales Order entry systems that
allow Customer to customize product orders.
▫ Email and instant messaging are used to notify
sales staff of price changes and promotions.
▫ Laptops and handheld devices can equip sales
staff with presentations, prices, marketing and
technical data, etc.
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1.2 CREDIT APPROVAL
• Credit sales should be approved before the order
is processed any further.
• There are two types of credit authorization:
▫ General authorization
▫ Specific authorization
• How can IT improve the credit check process?
▫ Automatic checking of credit limits and balances
▫ Emails or IMs to the credit manager for accounts
needing specific authorization
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1.3 CHECKING INVENTORY AVAILABILITY
• When the order has been received and the
customer’s credit approved, the next step is to
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 customer
▫ Quantity available
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CHECKING INVENTORY AVAILABILITY
• If there are enough units to fill the order:
▫ Complete the sales order
▫ Update the quantity available field in the
inventory file
▫ Notify the following departments of the sale:
Inventory (picking ticket)
Billing
Shipping
▫ Send an acknowledgment to the customer
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CHECKING INVENTORY AVAILABILITY
• If there’s not enough 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.
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RESPONDING TO CUSTOMER INQUIRIES
• Another step in the sales order entry process is
responding to customer inquiries:
▫ May occur before or after the order is placed
▫ The quality of this customer service can be critical to
company success
• Many companies use Customer Relationship
Management (CRM) systems to support this process:
▫ Organizes customer data to facilitate efficient and
personalized service
▫ Provides data about customer needs and business
practices so they can be contacted proactively about the
need to reorder
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RESPONDING TO CUSTOMER INQUIRIES
• Transaction processing technology can be used
to improve customer relationships:
▫ POS systems can link to the customer master file
▫ IT should be used to automate responses to
routine customer requests.
▫ The effectiveness of a website depends on its
design
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Sales Order Entry Processing
Threats Controls
5 a. Data entry edit controls
b. Restrict access to master data
5. Incomplete/
6 a. Digital or written signatures
inaccurate orders
6. Invalid orders 7 a. Credit limits checked and if sale exceeds
7. Uncollectible accounts limit, specific authorization needed
8. Stock outs and excess 7b. Aging of accounts receivable
inventory
8 a. Perpetual inventory system
9. Loss of customers
b. RFID or bar code technology
c. Training
d. Physical inventory counts
e. Sales forecasts and activity reports
9.CRM systems, self-help Web sites, and proper
evaluation of customer
service ratings 7-18
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2. SHIPPING
• The second basic activity in the revenue cycle is
filling customer orders and shipping the desired
merchandise.
• The process consists of two steps
▫ Picking and packing the order
▫ Shipping the order
• The warehouse department typically picks the order
• The shipping departments packs and ships the order
• Both functions include custody of inventory and
ultimately report to the VP of Manufacturing.
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Shipping Process
• Pick and pack
the order
▫ Source
documents:
picking ticket
• Ship the order
▫ Source
documents:
Packing slip,
Bill of lading
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PICK AND PACK THE ORDER
• Technology can speed the movement of inventory
and improve the accuracy of perpetual inventory
records:
▫ Bar code scanners
▫ Conveyer belts
▫ Wireless technology so workers can receive instructions
without returning to dispatch
▫ Radio frequency identification (RFID) tags:
Eliminate the need to align goods with scanner
Allow inventory to be tracked as it moves through warehouse
Can store up to 128 bytes of data
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2.2 SHIP THE ORDER
• The shipping department compares the
following quantities:
▫ Physical count of inventory
▫ Quantities indicated on picking ticket
▫ Quantities on sales order
• Discrepancies can arise if:
▫ Items weren’t stored in the location indicated
▫ Perpetual inventory records were inaccurate
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SHIP THE ORDER
• The clerk then records :
▫ The sales order number
▫ The item numbers ordered
▫ The quantities shipped
• This information is used to:
▫ Update the quantity-on-hand field in the
inventory master file
▫ Produce a packing slip
▫ Produce multiple copies of the bill of lading
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SHIP THE ORDER
• The shipment is accompanied by:
▫ The packing slip
▫ A copy of the bill of lading
▫ The freight bill
(Sometimes bill of lading doubles as freight bill)
• What happens to other copies of the bill of
lading?
▫ One is kept in shipping to track and confirm
delivery
▫ One is sent to billing to trigger an invoice
▫ One is retained by the freight carrier
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Shipping Process
Threats Controls
10. Picking wrong item or 10 a. Bar-code and RFID technology
b. Reconcile picking list to sales order
quantity to ship
11 a. Restrict physical access to inventory
11. Theft of inventory b. Document inventory transfers
c. Bar-code and RFID technology
12. Shipping errors (delay d. Physical counts of inventory and
or failure to ship, wrong reconcile to quantities recorded
quantities, wrong items,
wrong addresses, 12 a. Reconcile shipping documents to sales
duplication) orders, picking lists, and packing slips
b. Use RFID systems to identify delays
c. Data entry via bar-code scanners and
RFID
d. Data entry edit controls
e. Configuration of ERP system to prevent
duplicate shipments 29
3. BILLING
• The third revenue cycle activity is billing
customers.
• This activity involves two tasks:
▫ Invoicing/billing
▫ Updating accounts receivable
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3. Billing Process
• Invoicing the
customer
▫ Source document:
sales invoice
• Updating accounts
receivable
▫ Source document:
credit memo and
monthly
statements
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BILLING
• Accurate and timely billing is crucial.
• Billing is an information processing activity
that repackages and summarizes information
from the sales order entry and shipping
activities
• Requires information from:
▫ Shipping Department on items and quantities
shipped
▫ Sales on prices and other sales terms (discounts,
etc)
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3.1INVOICING
• The basic document created is the sales
invoice. The invoice notifies the customer
of:
▫ The amount to be paid
▫ Where to send payment
• Invoices may be sent/received:
▫ In paper form
▫ By EDI
Common for larger companies
Faster and cheaper than snail mail
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INVOICING
• When buyer and seller have accurate online
systems:
▫ Invoicing process may be skipped
Seller sends an email when goods are shipped
Buyer sends acknowledgment when goods are received
Buyer automatically remits payments within a specified
number of days after receiving the goods
▫ Can produce substantial cost savings
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3.2 MAINTAIN ACCOUNTS RECEIVABLE
• The accounts receivable function reports to
the controller
• This function performs two basic tasks
▫ Debits customer accounts for the amount the
customer is invoiced
▫ Credits customer accounts for the amount of
customer payments
• Two basic ways to maintain accounts
receivable:
▫ Open-invoice method
▫ Balance forward method
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MAINTAIN ACCOUNTS RECEIVABLE
• OPEN-INVOICE METHOD:
▫ Customers pay according to each invoice
▫ Two copies of the invoice are typically sent to
the customer
Customer is asked to return one copy with payment
This copy is a turnaround document called a
remittance advice
▫ Advantages of open-invoice method
Conducive to offering early-payment discounts
Results in more uniform flow of cash collections
▫ Disadvantages of open-invoice method
More complex to maintain
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MAINTAIN ACCOUNTS RECEIVABLE
• BALANCE FORWARD METHOD:
▫ Customers pay according to amount on their
monthly statement, rather than by invoice
▫ Monthly statement lists transactions since
the last statement and lists the current balance
The tear-off portion includes pre-printed
information with customer name, account number,
and balance
Customers are asked to return the stub, which serves
as the remittance advice
Remittances are applied against the total balance
rather than against a specific invoice
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MAINTAIN ACCOUNTS RECEIVABLE
• Cycle billing is commonly used with the
balance-forward method
▫ Monthly statements are prepared for subsets of
customers at different times.
EXAMPLE: Bill customers according to the following
schedule:
1st week of month—Last names beginning with A-F
2nd week of month—Last names beginning with G-M
3rd week of month—Last names beginning with N-S
4th week of month—Last names beginning with T-Z
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MAINTAIN ACCOUNTS RECEIVABLE
• Image processing can improve the efficiency and
effectiveness of managing customer accounts.
▫ Digital images of customer remittances and accounts
are stored electronically
• Advantages:
▫ Fast, easy retrieval
▫ Copy of document can be instantly transmitted to
customer or others
▫ Multiple people can view document at once
▫ Drastically reduces document storage space
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MAINTAIN ACCOUNTS RECEIVABLE
• EXCEPTION PROCEDURES: ACCOUNT
ADJUSTMENTS AND WRITE-OFFS:
▫ Adjustments to customer accounts may need
to be made for:
Returns
Allowances for damaged goods
Write-offs as uncollectible
▫ These adjustments are handled by the credit
manager
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MAINTAIN ACCOUNTS RECEIVABLE
• If there’s a return, the credit manager:
▫ Receives confirmation from the receiving dock
that the goods were actually returned to
inventory
▫ Then issues a credit memo which authorizes
the crediting of the customer’s account
• If goods are slightly damaged, the
customer may agree to keep them for a
price reduction
▫ Credit manager issues a credit memo to
reflect that reduction
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MAINTAIN ACCOUNTS RECEIVABLE
• Distribution of credit memos:
▫ One copy to accounts receivable to adjust the
customer account
▫ One copy to the customer
• If repeated attempts to collect payment
fail, the credit manager may issue a credit
memo to write off an account:
▫ A copy will not be sent to the customer
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Billing Process
Threats Controls
1. Failure to bill customer 1 a. Reconcile invoices with sales
orders and
2. Billing errors shipping documents
3. Posting errors in accounts b. Separate shipping and billing
functions
receivable 2 a. Data entry edit controls
4. Inaccurate or invalid credit b. Configure system for automatically
memos enter price data
3 a. Reconcile subsidiary accounts
receivable
balance to the amount for
accounts
receivable in the general ledger
4 a. Segregation of authorization and
recording function for credit
memos
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4. CASH COLLECTIONS
• The final activity in the revenue cycle is
collecting cash from customers
• The cashier, who reports to the treasurer,
handles customer remittances and deposits
them in the bank
• Because cash and checks are highly
vulnerable, controls should be in place to
discourage theft
▫ Accounts receivable personnel should not have
access to cash (including checks)
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Cash Collection Process
• Process customer payment and update their
account balance
▫ Remittance
• Deposit payments to the bank
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CASH COLLECTIONS
• Possible approaches to collecting cash:
▫ Turnaround documents forwarded to accounts
receivable
▫ Lockbox arrangements
▫ Electronic lockboxes
▫ Electronic funds transfer (EFT)
▫ Financial electronic data interchange (FEDI)
▫ Accept credit cards or procurement cards from
customers
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Cash Collection Process
Threats 17. Theft of cash
Control 17 a. Proper segregation of cash handling and
posting to customer accounts, authorize
credit memos, or reconcile bank account
b. Use of EFT, FEDI, and lockboxes to minimize handling
of customer payments by employees
c. Obtain and use a UPIC to receive EFT and FEDI
payments from customers.
d. Immediately upon opening mail, create list of all
customer payments received
e. Prompt, restrictive endorsement of all customer checks
f. Having two people open all mail likely to contain
customer payments
g. Use of cash registers
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h. Daily deposit of all cash receipts
Cash Collection Process
Threats 18. Cash flow problems
Control 18.a Lockbox arrangements, EFT, or credit
cards
b. Discounts for prompt payment by
customers
c. Cash flow budgets
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Key Terms
• Remittance advice
• Revenue cycle
• Sales order • Balance-forward method
• Electronic data interchange • Monthly statement
(EDI) • Cycle billing
• Credit limit
• Credit memo
• Accounts receivable aging report
• Back order • Remittance list
• Picking ticket • Lockbox
• Customer relationship • Electronic lockbox
management systems (CRM) • Electronic funds transfer (EFT)
• Packing slip • Financial electronic data
• Bill of lading interchange (FEDI)
• Sales invoice
• Universal payment
• Open-invoice method
identification code (UPIC)
• Cash flow budget
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Copyright © 2015 Pearson
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