Revenue Cycle – Sales to Cash Collections (Chapter 10) (copy)

INTRODUCTION

• Revenue cycle = recurring business activities + information processing for providing goods/services to customers and collecting cash.
• Primary external information exchange: customers.
• Key questions addressed:
• What business activities & data processing occur in the cycle?
• What decisions are required; what information supports them?
• What major threats & controls exist?
• Information produced feeds other cycles:
• Expenditure & production – trigger inventory procurement/production.
• HR/Payroll – calculate commissions/bonuses.
• General Ledger/Reporting – compile financial statements & performance reports.
• Primary objective: deliver “right product, right place, right time, right price.”
• Typical managerial decisions:
• Product customization?
• Inventory quantity & location?
• Delivery method?
• Pricing strategy?
• Granting credit—limits & terms?
• Payment-processing techniques to maximize cash flow?
• Efficiency/effectiveness evaluation requires data about:
• Events, resources, agents (REA model).
• Data must be accurate, reliable, timely.
• AIS performs three functions within revenue cycle:
• Capture/process data.
• Store/organize for decision making.
• Provide controls to safeguard resources (including data).

OVERVIEW OF REVENUE CYCLE BUSINESS ACTIVITIES

• Four core activities (in order):
1. Sales Order Entry.
2. Shipping.
3. Billing.
4. Cash Collection.
• Each mapped via Data-Flow Diagrams (DFDs) showing entities, data stores & flows (see slides).

SALES ORDER ENTRY

• Performed by Sales Order Department (reports to VP Marketing).
• Four sequential steps:
1. Take Customer Order.
2. Approve Customer Credit.
3. Check Inventory Availability.
4. Respond to Customer Inquiries.

1. Take Customer Order

• Data captured on Sales Order (paper or electronic) – item #s, quantities, prices, salesperson.
• Order-capture channels: in-store, mail, phone, website, field sales reps.
• Error-reduction tactic: customer self-entry via websites, OCR forms, IVR phone menus.
• IT tools enhancing efficiency:
• Online orders route directly to warehouse.
• Sales history → targeted solicitations.
• Choiceboards for mass customization (e.g., Dell, Gateway; now shoes, jeans).
• EDI links customers’ systems to firm (auto-replenishment, vendor-managed inventory).
• Email/IM push price changes & promotions to sales staff.
• Laptops/handhelds equip reps with catalogs, pricing, tech specs.

2. Approve Customer Credit

• Credit approval required before processing further.
• Two authorization levels:
• General Authorization – existing customers within \text{credit_limit} & no past-due balance; automated by system.
• Specific Authorization – new customers, past-due, or orders exceeding limit; performed by Credit Manager (reports to Treasurer).
• IT aids: real-time limit/balance checks; automated alerts (email/IM) for exceptions.

3. Check Inventory Availability

• Sales clerk reviews screen for:
• Quantity on hand.
• Quantity committed.
• Quantity on order.
• If sufficient:
• Complete sales order; update inventory “available” field.
• Notify Shipping, Inventory Control & Billing.
• Send acknowledgment to customer.
• If insufficient:
• Create back order.
• Manufacturer → Production Dept.
• Retailer → Purchasing Dept.
• Accurate perpetual records critical; common retail errors: multiple scans of same SKU, mishandled returns.

4. Respond to Customer Inquiries

• Can occur pre- or post-sale; service quality highly influential.
• CRM Systems:
• Aggregate customer data for personalized service & proactive reorder reminders.
• Goal: retention – costs 5 times more to acquire new customer than keep existing.
• Tech-enabled self-service: phone menus, web FAQs, online chat/IM, manuals online (e.g., Timex).
• Website design matters – analyze interaction logs for pain points & cross-sell insights.

SHIPPING

• Second activity; fulfils orders & transfers custody.
• Two departments under VP Manufacturing:
• Warehouse – Pick & Pack.
• Shipping – Verify, Ship, Document.
• Two major steps:
1. Pick & Pack Order.
2. Ship Goods.

Step 1: Pick & Pack

• Triggered by Picking Ticket printed/emailed from Sales Order Entry; lists SKUs & quantities.
• Workers document quantities picked on ticket (paper or electronic).
• Tech accelerators:
• Bar-code scanners & RFID tags (no alignment needed; up to 128 bytes data; big savings for high-volume carriers like FedEx/UPS).
• Conveyors; wireless headsets/PDAs for instructions.

Step 2: Ship Goods

• Shipping dept compares three quantities:
• Physical count.
• Picking ticket.
• Sales order.
• Discrepancies → initiate back order.
• Clerk records sales order #, item #s, quantities shipped; system actions:
• Update inventory on-hand.
• Produce Packing Slip (descriptions & quantities).
• Generate Bill of Lading (B/L) – legal contract; specifies carrier, source, destination, special instructions, freight terms.
• Document distribution:
• Shipment includes Packing Slip + B/L + Freight Bill.
• Extra B/L copies: retained in Shipping, sent to Billing, kept by carrier.

Delivery Method Decisions

• In-house fleet vs. third-party carriers; outsourcing reduces cost & focuses on core competencies.
• Performance metrics to monitor: on-time %, condition on arrival.
• Distribution-center location optimization via logistics software (supports Just-In-Time customer demands, vehicle routing).
• Global factors: regional efficiency, taxes, regulations; advanced comms provide real-time status to customers (mitigates late-shipment impact).

BILLING

• Third activity; information-processing (not physical).
• Two tasks:
1. Invoicing Customers.
2. Updating Accounts Receivable (A/R).

1. Invoicing

• Requires data from:
• Shipping (items & quantities).
• Sales (prices, terms).
• Sales Invoice notifies customers of amount due & remittance address.
• Delivery modes: paper, EDI (faster/cheaper for large co.’s).
• With integrated online systems, formal invoice may be skipped: email ship notice + automatic payment after receipt acknowledgment → cost savings.
• Integrated AIS can embed cross-sell material in statements.

2. Updating Accounts Receivable

• A/R function under Controller.
• Responsibilities:
• Debit customer for invoices.
• Credit customer for payments.
• Two methods to maintain A/R:
1. Open-Invoice Method
• Customers pay by each invoice.
• Two invoice copies sent; one returned as Remittance Advice (turnaround document).
• Pros: facilitates early-payment discounts; evens cash flow.
• Cons: complex to maintain.
2. Balance-Forward Method
• Customers pay based on monthly statement (lists all transactions & balance).
• Tear-off stub = remittance advice; payments applied to total balance.
• Pros: lower billing cost & customer convenience.
• Cycle Billing (subset each week) with balance-forward yields even workload & cash flow, avoids marathon print runs.
• Image Processing – store digital images of remittances & docs → instant retrieval, simultaneous access, space savings.

Exception Procedures: Adjustments & Write-Offs

• Handled by Credit Manager (not A/R) for segregation of duties.
• Credit Memo issued for:
• Returns (confirmed by receiving dock).
• Allowances (e.g., damaged goods kept at discount).
• Write-offs (uncollectible accounts) – copy NOT sent to customer.
• Distribution: A/R copy to adjust account; customer copy (except write-off).

CASH COLLECTIONS

• Final activity; executed by Cashier (reports to Treasurer).
• Key control: A/R staff never access cash.

Collection Techniques

1. Turnaround Documents
   • Mailroom opens envelopes; forwards remittance advices / copies / remittance list to A/R.

2. Lockbox
   • Customers mail payments to bank P.O. box.
   • Bank deposits funds & transmits remittance info + images.
   • Advantages: prevents internal theft, accelerates availability; regional boxes cut mail time; foreign banks serve international customers.

3. Electronic Lockbox
   • Bank scans checks upon receipt; sends immediate electronic notification with customer acct # & amount.

4. Electronic Funds Transfer (EFT) & On-Line Bill Pay
   • Customer initiates ACH payment; eliminates postal delay.
   • Limitation: some banks lack combined EFT + EDI, delaying account credit.

5. Financial Electronic Data Interchange (FEDI)
   • Integrates EFT with EDI; remittance & fund instructions sent together; requires EDI-capable banks for both parties.

6. Credit Cards / Procurement Cards
   • Speeds collection; issuer remits funds within 2 days, cost 2\%-4\% of gross sales.

ORGANIZATIONAL ROLES & SEGREGATION OF DUTIES

• Sales Order Dept – takes orders, approves routine credit, checks inventory; reports to VP Marketing.
• Customer Service – responds to inquiries; VP Marketing.
• Warehouse – picks goods; VP Manufacturing.
• Shipping – packs & ships; VP Manufacturing.
• Billing Dept – issues invoices; Controller chain.
• Accounts Receivable – maintains customer accounts; Controller.
• Credit Manager – approves new/problem credit, issues credit memos; Treasurer chain.
• Cashier – deposits cash; Treasurer.
• Proper segregation:
• Authorization (Credit Manager) vs. Recording (A/R) vs. Custody (Cashier).

ETHICAL & PRACTICAL IMPLICATIONS

• Accurate, timely info prevents stock-outs & back orders – critical to customer satisfaction and retention.
• Improper segregation could enable fraud (e.g., A/R writing off friend’s balance).
• IT enables efficiency but introduces data integrity and security challenges; controls (validation, access limits) must accompany automation.
• Customer data privacy within CRM systems demands ethical handling and compliance with regulations (e.g., GDPR, CCPA).

KEY NUMERICAL & STATISTICAL REFERENCES

• Customer acquisition cost ≈ 5 × retention cost.
• RFID tag storage capacity: up to 128 bytes.
• Credit card processing fees: 2\% - 4\% of gross sales.

SUMMARY FLOW

Sales Order Entry → Shipping → Billing → Cash Collection, each supported by AIS functions (capture, store, control) and intertwined with managerial decisions & IT enhancements.