Lecture 3 _ CH4_online Revenue Cycle

Chapter4 Dr. sandy Fadel For Remembering 1. More Study, More Return 2. More Effort, More Gain 3. More Honesty, More Credit Chapter Outline Learning Objectives After studying this chapter, you should be able to: 1. Describe the basic business activities and related data processing o...

Chapter4 Dr. sandy Fadel For Remembering 1. More Study, More Return 2. More Effort, More Gain 3. More Honesty, More Credit Chapter Outline Learning Objectives After studying this chapter, you should be able to: 1. Describe the basic business activities and related data 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. Introduction  The Revenue Cycle is a recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales.  The primary external exchange of information is with customers.  Information about revenue cycle activities also flows to the other accounting cycles. For example, Introduction  The expenditure and production cycles use information about sales transactions to initiate the purchase or production of additional inventory to meet demand.  The human resource management/ payroll cycle uses information about sales to calculate sales commissions and bonuses.  The general ledger and reporting function uses information produced by the revenue cycle to prepare financial statements and performance reports. The Basic Revenue Cycle Business Activities Introduction The revenue cycle’s primary objective is to provide the right product in the right place at the right time for the right price. To accomplish that objective, management must make the following key decisions: 1. To what extent can and should products be customized to individual customers’ needs and desires? 2. How much inventory should be carried, and where should that inventory be located? Introduction 3. How should merchandise be delivered to customers? Should the company perform the shipping function itself or outsource it to a third party that specializes in logistics? 4. What are the optimal prices for each product or service? 5. Should credit be extended to customers? 6. What credit terms should be offered? 7. How can customer payments be processed to maximize cash flow? Introduction  In addition, management must monitor and evaluate the efficiency and effectiveness of revenue cycle process. This requires easy access to detailed data about the resources employed in the revenue cycle, the events that affect those resources.  Moreover, to be useful and relevant for decision making, that data must be accurate, reliable , and timely. Introduction This chapter examines the three basic functions of the AIS in the revenue cycle: 1. Collecting and processing data about business activities, 2. Storing and organizing that data to support decision making, 3. Providing controls to ensure the reliability of data and the safeguarding of organizational resources. The Basic Revenue Cycle Business Activities The Basic Revenue Cycle Business Activities There are the four basic revenue cycle business activities: 1. Sales order entry 2. Filling customer orders and Shipping 3. Billing and accounts receivable 4. Cash collections The Basic Revenue Cycle Business Activities The Basic Revenue Cycle Business Activities These four activities of revenue cycle are aim to provide information about the following main points. 1. The inventory and its location 2. Customization of Product or service to customers’ needs and desires. 3. Pricing process or determine the optimal price of product or service. 4. The credit that belongs to customers and its terms The Basic Revenue Cycle Business Activities 5. Delivery mechanism of merchandise using one of two routines, one is the shipping process by the company itself, and the other way depends on a third party specialized in logistics. 6. Maximizing cash flow by processing customer payment Quick Check True / False: 1- The expenditure and production cycles use information produced by the revenue cycle to prepare financial statements and performance reports. 2-The revenue cycle’s primary objective is to provide the right service in the right place at the right time for the right cost. 3-The pricing process or determining the optimal product or service price is not the revenue cycle objective. Quick Check 4- Which of the following is not an activity of revenue cycle business activities? a. Sales order entry b. Shipping. c. Billing. d. The general ledger cycle 5- Which cycle is a recurring set of business activities processing operations associated with providing goods and services to customers. a. revenue cycle. b. The human resource cycle. c. The production cycles. d. The general ledger cycle. The Basic Revenue Cycle Business Activities Application  AMAN Group (AG) selling a variety of office equipment products, including digital copiers, Fax and printers, and small office appliances.  Like most importers in Egypt, AG does not sell its products directly to final users or consumers, but only to retailers. The Basic Revenue Cycle Business Activities  AG takes orders of customers via internet.  Sales representative enter orders when calling on customers.  The sales department enters received orders of customers then, the system quickly verifies the following; customer creditworthiness - checks available units of inventory - notifies the shipping and warehouse departments about the approved sale. The Basic Revenue Cycle Business Activities  Shipping and Warehouse departments enter data about performed activities, and so on updating information about inventory status and generating paper or electronic invoices for customers.  Customers will paying cash or by checks or by bank’s online bill paying service.  The cashier updates the company’s cash account balances and the accounts clerk updates customer accounts. The Basic Revenue Cycle Business Activities Sales Order Entry  Sales order is the document created during sales order entry listing the item numbers, quantities, prices, and terms of the sale. The revenue cycle starts move on with the receipt of orders from customers.  Sales orders entry data are entered by customers themselves through forms on a company’s website page.  The sales order entry process requires three main phases: The Basic Revenue Cycle Business Activities 1. Taking customer orders. 2. Credit approval 3. Checking available units of inventory  Sales order entry is also include responding to customer inquiries that is a very important beside sales order processing. These inquiries occur precede an order or after it. The Basic Revenue Cycle Business Activities The Basic Revenue Cycle Business Activities The Basic Revenue Cycle Business Activities 1- TAKING CUSTOMER ORDERS  Nowadays, customers do the sales orders data entry by themselves on the company’s website by complete a form.  This process improve efficiency and reduces costs and wasted time where, in the past, sales department employees were entered customer orders into the system.  Recently, IT tools such as QR codes can further provide the efficiency and effectiveness of interacting with customers and increase sales. The Basic Revenue Cycle Business Activities  QR codes are two-dimensional bar codes that can be scanned with a smartphone used to access to multimedia anywhere at any time.  QR codes could be printed on anything like posters, screens. Once the code is scanned, the user will be directed to relevant link or website where he can make the process via his smartphone. The Basic Revenue Cycle Business Activities  Mostly, the effectiveness of a website depends on its design. Therefore, companies should regularly review feedback of customers’ records of on their websites to identify potential problems.  A well-designed website can be useful to the sales but a hard- to-use website may frustrate customers. The Basic Revenue Cycle Business Activities  Information technology can improve sales efficiency and effectiveness.(how) 1. Uploading promotional information online is cheaper way than printing those materials to sales staff. 2. E-mail and instant messaging reduce the costs and wasted time that takes to inform sales staff of pricing changes and sales promotions. The Basic Revenue Cycle Business Activities  In addition, technology tools and appliances such as laptop computers and tablets that are used by sales staff will be improve their ability to explain and show products features. The Basic Revenue Cycle Business Activities 2- Credit Approval  Almost a company's sales are made on credit so one of the revenue cycle threats is the possibility of making sales that later turn out to be uncollectible.  A credit check for each transaction is usually unnecessary for customers with a history of well-committed payments.  Therefore, the management gives the authority to sales staff to approve orders from those customers without past due transactions under the condition that such sales do not increase the customer’s total account beyond their credit limit. The Basic Revenue Cycle Business Activities  The credit limit: is the maximum allowable limit of existing customer account balance that management gives to him based on his past credit history and payment ability.  This facilitate credit approval process and the system can done this automatically by checking the customer profile at the system to verify the account exists, identifying the customer’s credit limit and confirm that the sale order does not exceed his credit limit. The Basic Revenue Cycle Business Activities  One of motivations of sales staff is the quantity of sales and the number of sales orders and not focuses on credit ability or on collectability because the sales man paid on commission of sales and this is another threat of revenue cycle.  This threat can be controlled by the system that flags order that require specific authorization because it exceeds a customer’s preapproved credit limit. Therefore, someone other than the sales man should accept or refuse the credit extension. The Basic Revenue Cycle Business Activities  The credit manager is a person who has the authorities of setup credit policies and the approval of credit extension.  The system gives the authority to the credit manager of modification the credit limit and this requires accurate and updated information about account balances, sales, and customer remittances. The Basic Revenue Cycle Business Activities  This accurate and updated information is useful for 1. Forecasting the timing of future cash inflows 2. Deciding whether to increase the credit limit for specific customers 3. Estimating bad debts and this help management decide whether changes are needed in credit policies.  Accounts receivable aging report is one of the most famous and useful tool for keeping information updated and accurate to help credit manager. The Basic Revenue Cycle Business Activities Quick and Check 1- What are the Sales Order Entry’s main phases? a. The pick and pack process. b. Shipping. c. Taking customer orders. d. none of these 2- QR code technology reduces the time lag needed to be the deposited funds available to the company by the bank. Quick and Check 3- Which activity is part of the sales order entry process? a. checking customer credit. b. setting customer credit limits. c. preparing a bill of lading. d. approving sales returns.