Chapter 6

1. Chapter 6 The Sales/Collection Business Process

2. Chapter Objectives • Identify the characteristics of the traditional sales/collection process and related IT applications. • Describe weaknesses in the traditional sales/collection process and IT application architecture. • Develop a REAL model of the sales/collection process. • Suggest ways to improve the sales/collection process and its IT application.

3. The sales/collection process is a series of operating events that: collectively serve to attract customers, help customers select goods and services, deliver the goods and services requested, and collect payments for the goods and services. The process should: Minimize the amount of time between the selection of products and services and the collection of cash. Minimize the amount of cash that is not collected from customers for goods and services provided. Structure product quality and price to balance customer value and organization profitability. The Purpose of the Sales/Collection Process

4. In a manual sales/collection process, paper is used as the primary means to capture and store business data and communicate information to information customers as the audit trail for documenting the process. to store duplicate data as data is processed across various departments (e.g., the Sales Order Department, the Shipping Department, the Billing Department, and the Warehousing Department). to communicate authorizations between departments and to external parties. Files of source documents and journals are often called transaction files while master files include the subsidiary ledgers, general ledger, and control accounts used by units within the Accounting Department (e.g., accounts receivable, inventory control, and general ledger). An Overview of the Traditional Sales/collection Process

5. Take Order • The customer order typically includes data about the customer, where to ship the goods, the items the customer wants to order, and payment terms. • The company receives the order and checks the customer files to see if the customer is a new or existing customer. • Usually, this customer order is recopied onto a company’s own sales order document. • A copy of the sales order may eventually be used as a sales invoice. Having order data on a pre-numbered internal document helps a company locate order data and avoid losing orders. This is important, because missing documents can signal unfilled or unauthorized transactions.

6. The Sales Order has many of copies: A copy of the sales order is sent to the Credit Department for approval. A picking slip or stock request document, to the Warehousing Department authorizing warehousing to pull the goods and move them to the shipping area. The packing slip is sent to the Shipping Department to communicate that goods are forthcoming from the Warehousing Department. Two copies of the sales order are sent to the Billing Department to inform them of the sale and for use in invoicing the customer after the goods are shipped. A copy of the sales order (the copy with Credit Department approval) is filed in the Sales Order Department with the customer's order document to create a customer order activity file. The file of customer orders is organized alphabetically (for ease in locating information by customer name). Finally, a copy of the sales order may be sent to the customer to acknowledge acceptance of their order. Sales Order

7. The Warehousing Department cannot act without authorization from the Sales Order Department. in the form of the picking slip or stock request document. Warehousing personnel pick the goods (noting any stock-outs or other problems on the picking slip) and transfer them to the shipping area. (If necessary, a back order document is created for stock-out items.) A warehouse inventory subsidiary ledger may be updated to reflect the goods taken out of inventory. In a traditional accounting system, each department may keep its own inventory records. These separate inventory records are not included on Exhibits 6-1 and 6-2. Fill Order

8. The Shipping Department compares the packing slip (from the Sales Order Department) with the picking slip and the goods to be shipped. They pack the goods and select a carrier; they prepare a bill of lading (that describes the packages they accept for shipment, the carrier, the route, and customer information), keep a copy in the Shipping Department, and send a copy to the customer. Shipping personnel prepare a shipping notice to communicate that the goods have been shipped. The packing slip is included with the packaged goods. A copy of a shipping notice is sent to the Billing Department as notification of the need to bill the customer. Documents in the shipping activity file are typically ordered numerically to allow a completeness check to identify missing documents or documents used out of order. Ship Product

9. Upon notification of shipment, the Billing Department pulls and reviews the sales order from the temporary file to make sure the products should have been shipped. They also review the shipping notice to verify that the goods have been shipped and that the transaction meets the definition of a sale for accounting purposes. The Billing Department prepares a sales invoice by adding prices to the data found on the sales order document. A copy of the sales invoice serves as the source document for recording the transaction in the sales journal. The total amount of the group of sales invoices for a period of time is summed to calculate a batch control total. The batch control total is used to prepare a journal voucher document The journal voucher document is sent to the General Ledger Department for posting to the general ledger Bill Customer A copy of the sales invoice is sent to the customer (as their bill). A copy of the sales invoice is sent to the Accounts Receivable Department to record in the accounts receivable subsidiary ledger, and the picking slip or packing slip is sent to inventory control to update the inventory subsidiary ledger.

10. The Accounts Receivable Department uses a copy of the sales invoice to record invoice amounts in the customer’s account in the accounts receivable subsidiary ledger. The Inventory Control Department reduces inventory balances in the inventory subsidiary ledger (for companies that use a perpetual inventory system) and assigns the goods sold to cost of goods sold. The General Ledger Department uses the journal voucher to record the total sale as a debit to Accounts Receivable and as a credit to Sales in the general ledger. Information Processes

11. At this point, the company waits for the customer to return payment. Often the sales invoice includes an additional page to be returned wit the payment, called a remittance advice, lists the customer’s name, account number, and balance due. Generally, two people are assigned to open the mail to reduce employee fraud or theft. The employees document the payments by completing a batch remittance list that lists the source of each check and its amount. The amount of the check is compared with the amount on the remittance advice to verify their equality and the check is restrictively endorsed “for deposit only”. Receive Payment

12. A copy of the batch remittance list is sent, along with the checks, to personnel in the Cash Receipts Department. A deposit slip is prepared to deposit the checks in the bank. The batch remittance list is used as a source document to record the cash received in the cash receipts journal. The totals are used to prepare a journal voucher that is sent to the General Ledger Department to update (increase) the General Ledger Cash account and (decrease) the General Ledger Accounts Receivable control account. The batch of remittance advices is sent to the Accounts Receivable Department where the customer's subsidiary ledger is updated to reflect the payment. The remittance advices are placed in customer files to document the customer payment. A copy of the batch remittance list is also sent to the controller to reconcile total remittances for the day to the bank deposit amount (recorded on a validated deposit slip obtained from the bank). Information Processes

13. Sample Data Flows Commonly Associated with the Sales/Collection Process • Customer Order • Sales Order • Picking Slip • Packing Slip • Bill of Lading/Shipping Notice • Sales Invoice (Bill) • Remittance Advice • Deposit Slip • Customer Check • Open Sales Order • Open Sales Invoice

14. Sales Credit Order Manager Sales Order C Approve Credit E D C F I G A B A H Traditional, Manual Sales/Collection Process - Part 1 Billing Customer Customer Order Customer Order Hold Until Shipped Shipping Notice S/O copies Prepare Sales Orders S/O copy acknowledge- ment 6 Match Copies / Extend Prices Prepare Invoice Approved S/O Sales Order Goods, Pkg slip 3, Bill of lading 1&2 Sales Journal Release all S/O copies after credit approval Dr/Cr to G/L A= Alphabetic C= Chronological N= Numerical Invoice Sales Order #2 & Customer Order .

15. A F B I H D E Traditional, Manual Sales/Collection Process - Part 1 Inventory Accounts General Warehouse Shipping Ledger Receivable Control Dr/Cr to G/L Accts Rec Invoice copy Packing Slip S/O Copy Picking Slip S/O Shipping Notice Post to A/R sub ledger Post to General Ledger Prepare Shipping Docu- ments Post to inv. records Release Goods General Ledger A/R sub ledger Bill of Lading Goods, Pkg slip 3, Bill of lading 1&2 Picking Slip S/O Inventory Sub. Ledger Shipping Notice Bill of Lading 3 Ship documents & goods N .

16. Mail Cash Accounts General Room Receipts Receivable Ledger B C D A General Ledger B D Traditional, Manual Sales/Collection Process - Part 2 Customer Controller Bank In Batches Remittance Advice Mail Check and RA Cheques Deposit Slip & Checks Remittance Advices Dr/Cr to G/L Remittance List Created Post to A/R sub ledger Bank Validates Deposit Post to General Ledger Remittance List 2 Remittance List 1 A Remittance List 1 A/R sub ledger Validated Deposit Slip Compare Batch of Checks General Ledger Remittance List 2 A Batch of Checks Remittance Advices Prepare deposit slip Post to Cash Rec. Journal C Remittance Lists and Deposit Slips Remittance Advice Remittance Lists A= Alphabetic C= Chronological N= Numerical Checks and Deposit Slip Cash Receipts Journal N Dr/Cr to G/L C .

17. An Overview Of The Traditional Automated Sales/collection Process • Authorizations and data access can be provided through computer screens there is potential for decrease in the amount of paper • The paper sales and cash receipts journals in a manual system have been physically changed to disk or tape transaction files. The paper inventory and accounts receivable subsidiary ledgers and the paper general ledger have been upgraded to disk or tape master files. • Input typically comes from a hard copy document (the document symbols) and goes through one or more processes. Processes (represented by rectangles) store data in files (the tape or disk symbols) or prepare data in the form of a report (also a document symbol).

18. An Overview Of The Traditional Automated Sales/collection Process • Each program can include screens for collecting data, edit checks on the data entered, instructions for processing and storing the data, security procedures (e.g., limiting access via passwords or user IDs), and steps for generating and displaying output. • To understand the files and their use, it is important to consider their contents (their record layouts). • Notice the relationship between the documents and files used for input and the files and documents generated as output. The input documents and the files must contain the data necessary to generate the desired output.

19. From customer or salesperson Customer’s order Exception and error display Enter order via terminal Performed by sales order clerk Merchandise inventory master file Customer master file Edit order, preform credit check & check inventory Customer’s order Open sales order file Orders Print order documents Sales Order Picking list Acknowledgement Orders To warehouse To customer Traditional Automated Sales/Collection Process Flowchart - Order Entry

20. Picking list (amended) From warehouse Exception and error display Enter data concerning goods delivered to shipping Performed by shipping clerk Picking list (amended) Edit data concerning picked goods Shipping file Shipping reference file Print shipping documents Bill of lading Shipping notice Packing slip Pack goods with packing slip enclosed & ship Shipping file Performed by shipping clerk To carrier and customer To billing Traditional Automated Sales/Collection Process Flowchart - Shipping

21. From shipping Shipping notices Batch total Prepare batch total Performed by billing clerk Shipping notices Enter batch total & select prices Exception and error display Customer order 1 Customer master file Customer billing data Shipping notices Edit billing data Pricing ref. file Billing file Open sales order file Merch. Inv. master file Prepare invoices & update files A/R master file General ledger file Sales history file Printed at end of day Invoice register Sales invoice Open sales invoice file A/R summary Invoice batch totals To billing To customers Compare to batch totals of invoices Performed by accounts receivable clerk 1 File Traditional Automated Sales/Collection Process Flowchart - Billing

22. From customer Checks Remittance advices Performed by mail room clerk Endorse checks & prepare batch total Batch total Checks Remittance advices Enter cash receipts & batch total Error & exception display Edit receipts data, list errors & write to receipts file Customer A/R file Separate checks & remittance advices Open sales invoice file Exception & summary report Cash receipts file Program compares computed totals from processed batch with precomputed batch totals Remittance advices Checks Compare batch totals & print remittance list To accounts receivable Remittance list To cashier To accounts receivable Traditional Automated Sales/Collection Process Flowchart - Mail Room

23. From mail room Remittance list Checks Performed by cashier Compare Remittance list Checks Fromother sources Enter data from checks Checks Add new check data to file & print outputs Cash receipts file Deposit slip Cash receipts listing C/R file To bank To accounting manager To accounts receivable Traditional Automated Sales/Collection Process Flowchart - Cashier

24. From mail room From cashier Remittance list Remittance list Batch total Remittance advices Remittance advices Exception & summary report Exception & summary report Customer reference files Compare & make corrections & reconciliations Performed by accounts receivable clerk Enter changes Error & exception display Edit change data Open sales invoice file Cash receipts file GL trans. summary file Update files & print analyses Customer A/R file Customer A/R file A/R summary Updating errors report File Compare, reconcile, adjust To managers (and summary files) Traditional Automated Sales/Collection Process Flowchart - Accounts Receivable

25. Criticisms of Traditional IT Applications • Multiple systems • the sales/collection process has helped you notice the large number of IT applications and which exist in each functional area, including production, marketing, and finance. • Subset of the process • each of the traditional IT applications capture, store, and process data about a subset of the events. None of the applications provide an organization-wide view of this process. • Untimely processing • system does not capture data in real time, significant amount of processing delays results

26. Criticisms of Traditional IT Applications • Limited characteristics • The traditional accounting system captures only limited characteristics about the events (e.g., date, account, and amount). Capturing only limited characteristics restricts the types of information accountants can provide to information customers. • Level of aggregation • Data stored in the traditional accounting system is typically very summarized. • One view • the traditional accounting system restricts users to only one view of the businessthe financial view

27. Opportunities to Improve the Process • 3 opportunities for accounting and IT professionals to enhance their value: • Define rules to shape the business processes. • Embed IT applications in business processes to control the process and to capyure and store detailed data in real time. • Provide useful information for decision makers to plan, execute, control, or evaluate the organization. • Understanding and defining a business process includes: • Describing each event, what triggers the event, and the business rules associated with the event. • Identifying business risks associated with each event

28. New Architectures to Support the Sales/Collection Process • Organizations can significantly improve processes by following just one simple principle: • Embed IT into the business process so business event data are recorded and event/process rules are executed as each event occurs. • The REAL analysis framework aids in analyzing business events by highlighting what (the resources involved in the event), who (the internal and external agents), and where (the location) of each event. The events, agents, and resources involved in the sales/collection process will vary somewhat from organization to organization.

29. Providing Useful Measures About the Sales/Collection Business Process • Top Management • Top managers are primarily interested in summary information for the sales efforts of the entire enterprise: • Market share of company products compared to the market share of competitors. • Trends in sales this year compared to prior years. • Changes over time in key economic indicators compared to changes in the organization’s sales, sales returns and allowances, and uncollectibe accounts.

30. Providing Useful Measures About the Sales/Collection Business Process • Marketing • Information relevant to marketing includes: • Amount and location of inventory in stock. • Customer preferences and changes in those preferences. • Cost to produce each product and to provide each service. • Activity and success of each salesperson. • Quantity and price of each product sold by salesperson, by customer type, and by geographic area. • Detailed information on competitor’s products, services, pricing strategy, and advertising campaigns.

31. Providing Useful Measures About the Sales/Collection Business Process • Human Resource • requires labor information to determine workforce needs, oversee employee scheduling, initiate employee compensation, and conduct employee performance evaluation. • Production • to maintain adequate stores of inventory on hand and producea quality product.

32. Providing Useful Measures About the Sales/Collection Business Process • Finance & Accounting • Finance people must provide: • Strategic management and analysis. • Management control measures that tie actions to corporate strategy. • Cost management that is forward focused. • Effective & efficient management of financial processes. • Support for the core business processes.

33. (1,1) Customer (1,1) (1,1) (1,1) (0,*) (0,*) Call on Customer (1,1) (0,*) (1,1) Salesperson (0,*) (1,1) (0,*) (0,*) Customer Places Order (0,*) Order Clerk (1,1) (0,*) (0,*) (1,1) (0,*) (1,*) Inventory Pick/Pack Inventory Warehouse Clerk (1,*) (0,*) (1,1) (0,*) (1,*) (1,1) Shipping Clerk (1,1) (0,*) (0,*) Ship Order (0,*) (0,*) (0,*) Carrier (1,*) (1,1) (0,*) Bank Cash Collect Payment (1,1) (0,*) (1,1) (0,*) (0,*) (0,*) Cashier (1,1) Christopher, Inc. Sales/Collection REAL Model

34. Sales/Collection Process Sample Events • Marketing event • Customer Order event • Move the Goods from Warehousing to Shipping event • Ship Goods and/or Provide Services event • Receive Customer Payment event • Accept Returns and Approve Allowance event • Write Off Uncollectible Accounts event

35. Sales/Collection Process Sample Information Customers Top Management Marketing Accounting Finance Production Customers

36. Christopher, Inc. Sales/Collection Process

37. Christopher, Inc. Sales/Collection Process