Revenue Cycle

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Revenue Cycle

ACC 444 Enterprise Process Analysis

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REVENUE CYCLE BUSINESS ACTIVITIES

Four basic business activities are performed in therevenue cycle:

Sales order entry

Shipping Billing

Cash collection


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SALES ORDER ENTRY

Steps in the sales order entry process include:

Take the customers order

Check the customers credit

Check inventory availability

Respond to customer inquiries (may be done by customerservice or sales order entry)


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SALES ORDER ENTRY

Take customer orders:

The sales order (paper or electronic) indicates:

a) Item numbers ordered

b) Quantitiesc) Prices

d) Salesperson

To reduce human error, customers should enter data

themselves as much as possible: On websites

On OCR forms

Via phone menus


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SALES ORDER ENTRY

How IT can improve efficiency and effectiveness in taking customerorders:

Orders entered online can be routed directly to the warehouse forpicking and shipping.

Electronic data interchange (EDI) can be used to link a companydirectly with its customers to receive orders or even manage the

customers inventory. Sales history can be used to customize solicitations.

Choiceboards can be used to customize orders (eg. Dell).

With respect to sales order data, the following edit checks should beperformed:

Validity checks on the customer account and inventory itemnumbers.

Completeness test to make sure all needed information wascollected.

Reasonableness tests comparing the quantity ordered to pasthistory.


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SALES ORDER ENTRY

Credit sales should be approved before the order is processed anyfurther.

There are two types of credit authorization:

General authorizationa) For existing customers below their credit limit who dont have past-due balances.

b) General authorization involves checking the customer master file to verify theaccount and status.

Specific authorizationa) For customers who are:

New Have past-due balances Are placing orders that would exceed their credit limit

b) Specific authorization is done by the credit manager.

How can IT improve the credit approval process?

Automatic checking of credit limits and balances

Emails or IMs to the credit manager for accounts needing specificauthorization


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SALES ORDER ENTRY

When the order has been received and the customerscredit approved, the next step is to ensure there issufficient inventory to fill the orderand advise thecustomer of the delivery date.

The sales order clerk can usually reference a screendisplaying:

Quantity on hand

Quantity already committed to others

Quantity on order


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SALES ORDER ENTRY

If there are enough units to fill the order:

Complete the sales order

Update the quantity availablefield in the inventory file

Notify the following departments of the sale:

a) Shippingb) Inventory

c) Billing

Send an acknowledgment to the customer

If theres not enough to fill the order, initiate a back order.

For manufacturing companies, notify the productiondepartment that more should be manufactured.

For retail companies, notify purchasing that more should bepurchased.


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THREATS IN SALES ORDER ENTRY

Threats in the sales order entry process include:

1. THREAT 1: Incomplete or inaccurate customer orders

2. THREAT 2: Sales to customers with poor credit

3. THREAT 3: Orders that are not legitimate4. THREAT 4: Stockouts, carrying costs, and markdowns


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SHIPPING

The second basic activity in the revenue cycle is filling customerorders 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


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SHIPPING

A picking ticket is printed by sales order entry and triggers the pick-and-pack process

The picking ticket identifies:

Which products to pick

What quantity

Warehouse workers record the quantities picked on the picking ticket,which may be a paper or electronic document.

The picked inventory is then transferred to the shipping department.

Technology can speed the movement of inventory and improve theaccuracy of perpetual inventory records:

Bar code scanners

Conveyer belts

Wireless technology for efficient communication among workers

Radio frequency identification (RFID) tags:

a) Eliminate the need to align goods with scanner

b) Allow inventory to be tracked as it moves through warehouse


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SHIPPING

The shipping department compares the following quantities: Physical count of inventory picked

Quantities indicated on picking ticket

Quantities on sales order

The clerk then records online:

The sales order number

The item numbers ordered The quantities shipped

This process

Updates the quantity-on-hand field in the inventory master file

Produces a packing slip (which lists the quantity and description of

each item in the shipment) Produces multiple copies of the bill of lading

The shipment is accompanied by:

The packing slip

A copy of the bill of lading

The bill of lading is a legal contract that definesresponsibility for goods in transit

It identifies:

The carrier

The source

The destination

Special shipping instructions

Who pays for the shipping


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THREATS IN SHIPPING

Threats in the shipping process include:

THREAT 5: Shipping Errors:

a) Wrong merchandise

b) Wrong quantities

c) Wrong address

THREAT 6: Theft of Inventory


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BILLING

The third revenue cycle activity is billing customers.

This activity involves two tasks:

Invoicing

Updating accounts receivable


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BILLING

Accurate and timely billing is crucial.

Requires information from:

Shipping Departmenton items and quantities shipped

Saleson prices and other sales terms

The basic document created is the sales invoice. The invoicenotifies the customer of:

The amount to be paid

Where to send payment

Invoices may be sent/received:

In paper form

By EDI

a) Common for larger companies

b) Faster and cheaper than snail mail


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BILLING

EXCEPTION PROCEDURES: ACCOUNT ADJUSTMENTS AND WRITE-OFFS:

Adjustments to customer accounts may need to be made for:

a) Returns

b) Allowances for damaged goodsc) Write-offs as uncollectible

These adjustments are handled by the credit manager (by wayof a credit memo)

Having the credit memos issued by the credit manageris goodsegregation of duties between:

Authorizing a transaction (write-off)

Recording the transaction


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THREATS IN BILLING

Threats that relate to this process are:

THREAT 7: Failure to bill customers

THREAT 8: Billing errors

THREAT 9: Errors in maintaining customer accounts


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CASH COLLECTIONS

The final activity in the revenue cycle is collecting cash fromcustomers

Because cash and checks are highly vulnerable, controls shouldbe in place to discourage theft

Accounts receivable personnel should not have access tocash (including checks)


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CASH COLLECTIONS

Possible approaches to collecting cash:

Remittance advice (but not the check) forwarded toaccounts receivable by mailroom personnel

Lockbox arrangements (customers remit payments to a

bank P.O. box; bank electronically notifies company)

Electronic funds transfer

Financial electronic data interchange (FEDI)

Accept credit cards or procurement cards from

customers

Electronic bill payment


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THREATS IN CASH COLLECTION

The related general threats are

THREAT 10: Theft of Cash


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The Revenue Cycle

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

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Revenue Cycle