Presentation on theme: "The Revenue Cycle: Sales to Cash Collections"— Presentation transcript:
1The Revenue Cycle: Sales to Cash Collections Chapter 12The Revenue Cycle: Sales to Cash Collections
2INTRODUCTIONThe revenue cycle is a recurring set of business activities and related information processing operations associated with:Providing goods and services to customersCollecting their cash paymentsThe primary external exchange of information is with customers.
3INTRODUCTIONInformation about revenue cycle activities flows to other accounting cycles, e.g.:The expenditure(acquisition) and production(conversion) cyclesReceive information about sales transactions so they’ll know when to initiate the purchase or production of more inventory.
4INTRODUCTIONInformation about revenue cycle activities flows to other accounting cycles, e.g.:The expenditure and production cyclesThe human resources/payroll cycleUses information about sales to calculate commissions and bonuses.
5INTRODUCTIONInformation about revenue cycle activities flows to other accounting cycles, e.g.:The expenditure and production cyclesThe human resources/payroll cycleThe general ledger and reporting functionUses information produced by the revenue cycle in preparing financial statements and performance reports.
9General Revenue Cycle Threats/Controls Inaccurate or invalid master dataControlsData processing integrity controlsRestriction of access to master dataReview of all changes to master data
10General Revenue Cycle Threats/Controls Unauthorized disclosure of sensitive informationControlsAccess controlsEncryption
11General Revenue Cycle Threats/Controls Loss or destruction of master dataControlsBackup and disaster recovery proceduresPoor performanceManagerial reports
12Sales Order Entry Take order Check and approve credit Check inventory availability
13Sales Order Threats/Controls THREAT NO. 5—Incomplete or inaccurate customer order (Table 12-1)Why is this a problem?It’s inefficient. The customer has to be re-contacted, and the order has to be re-entered.Causes customer dissatisfaction and may impact future sales.ControlsData entry edit controls (see Chapter 10)Restriction of access to master data
14Sales Order Threats/Controls THREAT NO. 6—Orders that are not legitimateWhy is this a problem?You can’t make good credit decisions or collect from a customer you haven’t properly identified.Traditionally, legitimacy of customer orders is established by receipt of a signed purchase order from the customer.Digital signatures and digital certificates provide similar control for electronic business transactions.Online credit card transactions with retail customers are fraught with issues.Authentication issuesRepudiation issues
15Sales Order Threats/Controls THREAT NO. 6—Orders that are not legitimateControlsDigital signatures or written signaturesFor online credit card transactions(card holder not present)See next slide
16Sales Order Threats/Controls Some actions companies are taking with online or phone-order retail customers(cardholder not present transactions):Requiring the three-digit code on the back of the credit card for confirmation that the customer physically possesses the card.Billing zip codeChecking to see if billing address and shipping address are the sameSending s to the customer to confirm the transaction.Verified by Visa/ MasterCard secureAddresses authentication and non repudiation issue
17Sales Order Threats/Controls THREAT NO. 7—Uncollectible accounts (Sales to customers with poor credit)Why is this a problem?Results in lost assets or revenues.ControlsCredit limitsSpecific authorization to approve sales to new customers or sales that exceed a customer’s credit limitAging of accounts receivable
18Sales Order Threats/Controls THREAT NO. 8—Stockouts, carrying costs, and markdownsWhy is this a problem?If you run out of merchandise, you may lose sales.Can’t sell empty shelf spaceIf you carry too much merchandise, you incur excess carrying costs and/or have to mark the inventory down to sell it.
19Sales Order Threats/Controls THREAT NO. 8—Stockouts, carrying costs, and markdownsControlsPerpetual inventory control systemUse of bar-codes or RFIDTrainingPeriodic physical counts of inventorySales forecasts and activity reports
20Sales Order Threats THREAT NO. 9—Loss of Customers Why is this a problem?Rule of thumb: It takes 5 times as much effort to attract a new customer as it does to retain an existing one.ControlsCRM systems, self-help Web sites, and proper evaluation of customer service ratings
21ShippingPicking and packing the orderShipping the order
22Shipping Threats/Controls THREAT NO. 10 & 12—Picking Wrong Items/Quantities, Shipping errorsWhy is this a problem?Customer dissatisfaction and lost sales may occur if customers are shipped the wrong items or there are delays because of a wrong address.Shipping to the wrong address may also result in loss of the assets.
23Shipping Threats/Controls THREAT NO. 10 & 12—Picking Wrong Items/Quantities, Shipping errorsControlsBar-code and RFID technologyReconciliation of picking lists to sales order detailsReconciliation of shipping documents with sales orders, picking lists, and packing slipsUse RFID systems to identify delaysData entry via bar-code scanners and RFIDData entry edit controls (if shipping data entered on terminals)Configuration of ERP system to prevent duplicate shipments
24Shipping Threats THREAT NO. 11—Theft of Inventory Why is this a problem?Loss of assets.Inaccurate inventory records (because thieves don’t generally record the reduction in inventory).ControlsRestriction of physical access to inventoryDocumentation of all inventory transfersRFID and bar-code technologyPeriodic physical counts of inventory and reconciliation to recorded quantities
25Shipping Threats/Controls Additional Threat. —Damage/Lost in transitWhy is this a problem?Added costsCustomer dissatisfaction and lost sales may occur if goods are damaged
26SHIPPING Threats/Controls A major shipping decision is the choice of delivery methods:Some companies maintain a fleet of trucks.Companies increasingly outsource to commercial carriers.Reduces costs.Allows company to focus on core business.Selecting best carrier means collecting and monitoring carrier performance data for:On-time delivery.Condition of merchandise delivered.
28BILLING 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 methodBalance forward method
29BILLING 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 discountsResults in more uniform flow of cash collectionsDisadvantages of open-invoice method:More complex to maintain
30BILLING 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 balanceCustomers 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.
31BILLING Advantages of balance-forward method: It’s more efficient and reduces costs because you don’t bill for each individual sale.It’s more convenient for the customer to make one monthly remittance.
32BILLINGCycle 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-F2nd week of month—Last names beginning with G-M3rd week of month—Last names beginning with N-S4th week of month—Last names beginning with T-Z
33Advantages of cycle billing: Produces more even cash flow.Produces more even workload.Doesn’t tie up computer for several days to print statements.
34Billing Threats/Controls Failure to billBilling errorsCustomer account errorsPosting errors in accounts receivableInaccurate or invalid credit memos
35Billing Threats/Controls THREAT NO. 13—Failure to bill customersWhy is this a problem?Loss of assets and revenues.Inaccurate data on sales, inventory, and accounts receivable.ControlsSeparation of billing and shipping functionsPeriodic reconciliation of invoices with sales orders, picking tickets, and shipping documents
36Billing Threats/Controls THREAT NO. 14—Billing errorsWhy is this a problem?Loss of assets if you under-bill.Customer dissatisfaction if you over-bill.ControlsConfiguration of system to automatically enter pricing dataRestriction of access to pricing master dataData entry edit controlsReconciliation of shipping documents (picking tickets, bills of lading, and packing list) to sales orders
37Billing Threats/Controls THREAT NO. 15 &16—Errors in maintaining customer accounts/Inaccurate or invalid credit memosWhy is this a problem?Leads to customer dissatisfaction and loss of future sales.May indicate theft of cash.
38Billing Threats/Controls THREAT NO. 15 &16—Errors in maintaining customer accounts/Inaccurate or invalid credit memosControlsData entry controlsReconciliation of batch totalsMailing of monthly statements to customersReconciliation of subsidiary accounts to general ledgerSegregation of duties of credit memo authorization from both sales order entry and customer account maintenanceConfiguration of system to block credit memos unless there is either corresponding documentation of return of damaged goods or specific authorization by management
39CASH COLLECTIONSThe final activity in the revenue cycle is collecting cash from customers.Because cash and checks are highly vulnerable, controls should be in place to discourage theft.
40CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable.The mailroom opens customer envelopes and forwards to accounts receivable either:Remittance advices.Photocopies of remittance advices.A remittance list prepared in the mailroom.
41CASH COLLECTIONS Possible approaches to collecting cash: Customers remit payments to a bank P.O. box.The bank sends the company:Remittance advices.An electronic list of the remittances.Copies of the checks.Advantages:Prevents theft by company employees.Improves cash flow management.Lockboxes may be regional, which reduces time in the mail.Checks are deposited immediately on receipt.Foreign banks can be utilized for international customers.Possible approaches to collecting cash:Turnaround documents forwarded to accounts receivable.Lockbox arrangements.
42CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable.Lockbox arrangements.Electronic lockboxes.Upon receiving and scanning the checks, the bank immediately sends electronic notification to the company, including:Customer account numberAmount remitted
43CASH COLLECTIONS Possible approaches to collecting cash: Customers remit payment electronically to the company’s bank.Eliminates mailing delays.Typically done through banking system’s Automated Clearing House (ACH) network.PROBLEM: Some banks do not have both EDI and EFT capabilities, which complicates the task of crediting the customer’s account on a timely basis.Possible approaches to collecting cash:Turnaround documents forwarded to accounts receivable.Lockbox arrangements.Electronic lockboxes.Electronic funds transfer and bill payment.
44CASH COLLECTIONS Possible approaches to collecting cash: Turnaround documents forwarded to accounts receivable.Lockbox arrangements.Electronic lockboxes.Electronic funds transfer and bill payment.Financial electronic data interchange (FEDI).Integrates EFT with EDI.Remittance data and funds transfer instructions are sent simultaneously by the customer.Requires that both buyer and seller use EDI-capable banks.
45Cash Collections Threats/Controls THREAT NO. 17—Theft of cashWhy is this a problem?Loss of cash.ControlsSeparation of cash handling function from accounts receivable and credit functionsRegular reconciliation of bank account with recorded amounts by someone independent of cash collections proceduresUse of EFT, FEDI, and lockboxes to minimize handling of customer payments by employeesPrompt, restrictive endorsement of all customer checksHaving two people open all mail likely to contain customer paymentsUse of cash registersDaily deposit of all cash receipts
46Cash Collections Threats/Controls THREAT NO. 18—cash flow problemsWhy is this a problem?Inability to pay bills, buy resources etc.ControlsLockbox arrangements, EFT, or credit cardsDiscounts for prompt payment by customersCash flow budgets