PART B
Business Processes
Sales Management INTRODUCTION This chapter describes the sales process, which is the process of selling goods to the customers. This chapter also focuses on the documents used in the sales process and business risk connected with the sales process.
Knowledge Component 2 Business Processes 2.6 Sales Management
2.6.1
2.6.2 2.6.3
Identify activities connected with the sales process, such as order acceptance, credit evaluation, delivery, invoicing, recording and settlement of receivables. Identify the documents relating to sales process, point of origination, flow of documents and purpose. Assess the business risk connected with activities related to the sales and receivable process.
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CHAPTER CONTENTS
LEARNING OUTCOME
1 Sales process
2.6.1/2.6.2
2 Credit evaluation
2.6.1
3 Order acceptance
2.6.1/2.6.2
4 Delivering and invoicing
2.6.1/2.6.2
5 Settlement of trade receivables
2.6.1/2.6.2
6 Other documents relating to sales process
2.6.2
7 Business risk in the sales process
2.6.3
1. Sales process Activities within the sales management process are order acceptance, credit evaluation, delivery, invoicing, recording and settlement of receivables. The sales process is a term used for the process of selling, delivering goods to the customers and receiving cash from them. The stages in the sales management process are; Customer evaluation Order acceptance Invoicing and delivering goods to the customer Settlement of receivables An overview of the process is shown below. The documents produced during the cycle are shown in the lower part of the diagram.
Quotation
Customer Order
Sales Order
Invoice
Settlement of Receivables
Invoicing, Delivering Goods & Recording
Customer Evaluation & Order Acceptance
Receiving Customer Orders
Sending Quotations
Figure: An overview of the Sales Cycle
Receipts
Dispatch Note
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2. Credit evaluation / Customer evaluation It is the process followed by companies to evaluate the credit worthiness of prospective and current customers to identify the customer’s ability to pay for goods and services. In general, granting of credit depends on the customer’s credit worthiness. Credit worthiness encompasses the customer's ability and willingness to pay within a reasonable period. The sales department should confirm the credit limit and conditions of sales to the customer by checking on the “Customer” after receiving the customer’s purchase order. The company can develop a credit policy which should be applied when a customer order is received from a new customer account or when an existing customer’s order amount exceeds the credit limit. How to evaluate the credit worthiness of a customer? Credit worthiness of a customer is evaluated based on the following documents and information.
Past customer records of transactions
Customer's balance sheet, cash flow statements, inventory turnover rates, debt structure, management performance and market conditions.
Credit evaluation should be done by an independent person and all the documents should be kept in written form for future reference.
3. Order acceptance Upon receipt of a customer’s purchase order to the sales department, the sales department must check the description and compare the purchase order with the corresponding quotation. After checking the content, customer’s purchase order will be signed by the sales manager for confirmation. The confirmed purchase order will be transferred from the sales department to the customer service department for order processing. After checking the confirmation signature(s) of the sales manager on the purchase order, the customer service staff will enter the order data into the sales system. It may be a computerised or a manual system. Then a sales order number will be assigned to each order. The customer service staff will write down the sales order number on the customer purchase order for future reference and use sales order as a documentary evidence for receiving the customer order. CA Sri Lanka
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Sales order The Sales order is an internally generated document that a company sends to a customer as a confirmation of purchase order. It may be for products and/or services. A sales order, being an internal document, can therefore contain many purchase orders under it. In a manufacturing environment, a sales order can be converted into a work order to start the manufacturing process of a particular product. As an internal control, sequential sales order number is used by the company for its sales order documents to monitor the completeness of the sales orders. Figure: Sales Order
Customer’s Name: Customer’s Address:
Item No
Description
Sales Order Form Order No: Order Date: Qty
Sub Total Tax Total Amount Prepared by…………
Price
Amount Rs.
Authorised by:………………..
4. Delivering and invoicing The sales staff and the customer service staff of the sales department have to pay full attention to timely delivery of products. Delivery time information can be checked frequently by referring to the customer’s purchase order or the sales order. The seller must always make sure to deliver the accurate quantity of quality goods according to the purchase order requirements. In order to avoid any mistakes, it is necessary to go through the descriptions of required goods mentioned in the purchase/sales order where the details of goods such as what kind of goods should be delivered or how the goods should be packaged etc. are mentioned. The company uses a delivery/despatch note as a documentary evidence for delivering of goods.
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Delivery note/ Despatch note The delivery note is a document that certifies the delivery of goods to the buyer. The buyer will sign the delivery note to confirm that the goods have been delivered in accordance with the conditions established. This document must contain the following information:
Data identifying the seller and the buyer Reference to the invoice Number and description of the products Date of issue of the document and date of delivery of the goods Name, signature and stamp of the purchaser, accepting delivery of the goods in good condition
Figure: Delivery Note DELIVERY/DESPATCH NOTE Customer Name & Address:…………………………………… ……………………………………
Date:
Quantity
Price
Description
Sales Person: Document No: Total Amount (Rs.)
Sub Total Authorised by:-………………. Date:-………………..
VAT Total
Acknowledged by:-………………. Date:-………………..
When delivering the goods to the particular customer, sales invoice is sent along with the goods.
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Sales invoice A sales invoice can be defined as the request of payment from customer for goods sold or services provided by the seller. An invoice generally lists the description and the quantity of the item sold or service provided. The document is also a record of the sale for both the seller and the buyer. Once the invoice is raised, it should be checked against the delivery note and the purchase order. Further it should be approved by an authorised person.
Figure: Sales Invoice Tax Invoice Invoiced To:Company Name & Address …………………………………. Description
Invoice No:Invoice Date:Due Date:Price
Quantity
Total Amount Rs.
Sub Total Tax Total Rs. Prepared by:-……………….. Date:-…………………..
Authorised by:-……………….. Date:-………………………..
Generally when an invoice is raised, sales income is recognised in the general ledger. Thus, it is necessary to credit the sales income account and debit the trade receivables or cash/bank account.
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5. Settlement of trade receivables Cash or cheques for the sales to the customer should be collected within a reasonable period of time and that time limit depends on the credit period given to the particular customer.
How to reduce the receivable days Businesses employ a number of collection methods to reduce the receivable days. The following methods are frequently used by business organisations to reduce receivable days.
Discounts: Giving a discount for early payment is one way to motivate people to pay off their bills early.
Invoice early: Send out invoice as soon as a job is completed or the product is in the consumer's hand.
Follow up quickly: When a customer is late to make a payment, follow up right away to get the payment made immediately. When receiving money from a particular trade debtor, sales receipt is raised as a proof of evidence for settlement of trade receivables.
Sales receipts A receipt is a written acknowledgment that the payment has been received. The recipient of money provides the receipt. Further, the sales receipt acts as a proof of evidence for settlement of the particular sales invoice. However, there is no standard form for a receipt nor a requirement for it to be machine generated. Most of the companies automatically produce the receipts when collecting the payments. Normally, receipts are either produced manually or generated by accounting systems.
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Figure: Receipts Receipt Name of the Customer:Receipt No. Date :Amount Received in Numbers:Amount Received in words:Comments/Purpose:-…………………………
Sale Made with: - Cash/Credit Card/Cheque No. Recipient’s Signature: - ………….. Date:-………………
/Other
Customer’s Signature;-……………………. Date:-……………..
6. Other documents relating to sales process Other than the above mentioned documents, the documents mentioned below are also used in the sales process.
Sales return A sales return refers to the goods sent back by a buyer to the seller, usually due to one of the following reasons:
Delivery of excess quantity Defective goods Late delivery of goods Incorrect product specifications Delivery of wrong items
A company uses the sales return journal for recording sales return.
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Sales returns journal This is the journal used to record sales returns. It performs the same function as the sales journal. Many companies record these transactions in the sales journal rather than recording them in a separate journal. Based on the sales journal, a seller records the sales return as a debit to a Sales Returns account and a credit to the Accounts Receivable account. The total amount of sales returns in this account is a deduction from the reported amount of gross sales in a period, which yields net sales of the company. The credit to the Accounts Receivable account reduces the amount of accounts receivable outstanding. A seller can more closely control the amount of sales returns by requesting to issue a sales return authorisation number before the receiving department accepts a return. Otherwise, some customers will return goods which may have been damaged eliminating the possibility of the returned goods to be resold. Companies use a credit note/a sales return note as a documentary evidence for returning of sales.
Credit note/Sales return note A credit note is a commercial document issued by a seller to a buyer. The seller usually issues a credit note for the same or a lower amount than the amount mentioned in the invoice and then repays money to the buyer or sets it off against a balance due from other transactions. Figure: Credit Note Credit Note Date:-……………………. Credit Note No:-……………… Company Name and Address:………………………………… Invoice No:Invoice Date:-
Customer Name and Address:……………………………………. Cus. No.:- Order No:- Order Date:-
Item No.
Qty
Sub Total Tax Total Credit Comments:CA Sri Lanka
Description
Unit Price
Total Amount Rs.
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7. Business risk in the sales process Risk
Control Measures
Pre-sales activities Price may be quoted lower than the cost (Inaccurate price quotations may be sent to customers)
There should be a valid time period for a quotation. This period should not be a longer period.(E.g. Valid only for one month) All the price quotations should be approved by an authorised person before giving them to the customer. There should be a proper pricing method/policy which helps determining accurate pricing.
Approved price lists should be maintained and revised accordingly. Sales order processing Sales contract should be signed between a seller Sales order may be and a buyer and it should include all the terms and cancelled by the customer conditions of sales. after it is accepted by the seller. Accept orders for which Sales order should be evaluated by an authorised the seller has no capacity person in terms of quantity, delivery date, or ability to deliver availability of raw material and other resources. according to sales terms. Therefore customers may Inform the customer about the possible delivery dates, quantities or rejecting the quantities. become dissatisfied. Supply goods to non- Before an order is accepted, customer evaluation credit worthy customers. should be carried out and identify the So, balance may not be creditworthiness of the customer. This may be recoverable. (Risk of bad done by an independent person. Credit limits and debts) credit periods for each customer should be set according to the evaluation that has been carried out. Procedure should be implemented to stop further credit if outstanding balances exceed the credit period or credit limit. Develop a credit policy for the company. CA Sri Lanka
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Create bogus customers in Customer creation should be done by someone the system. outside of the sales department. (E.g. accounts department, IT department). The new customer profile should be created and added to the system only after credit evaluation is done and approved by an authorised person.
Inventory sourcing Supply low quality goods
Access to customer master file should be restricted to other users of the staff. In house quality standards should be complied by production departments. Quality checking should be carried out regularly.
When raw materials are purchased, set minimum quality standards. If items received are not complied with the required quality standards, they should be rejected. Delivery When dispatch note/gate pass/ delivery note/issue note is raised, it should be compared with the When there is an excess or customer order and the packing list. a shortage of the All the delivery notes should be signed by an delivered quantity. authorised person. Get the customer’s signature on the delivery notes acknowledging the delivery after the goods are unloaded at customer premises. Deliver after the due date Production schedules are prepared in order to or delay in delivery ensure timely production and achieve targets. Select the best mode of delivery if the delivery is done by the supplier. Regular follow-ups should be done. Delivery in bad condition Select the best mode of delivery if the delivery is done by the supplier. Invoicing Invoices should be checked by one person and Under invoicing, over approved by another person. invoicing or duplicate Invoicing should be computerised. invoicing. Invoices should be serially pre-numbered. Monthly statements should be sent to customers and get the balance confirmed. CA Sri Lanka
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Delivery may invoiced.
not
be When a bill or an invoice is raised, the invoice number should be mentioned on each delivery note or in the summary of delivery notes. One person should regularly check this summary. System should be developed in a way the delivery note can only be raised if there is an invoice for that. Security personnel should be advised not to let anyone not carrying an approved invoice pass the gate with goods. One copy of the invoice should be delivered to them.
Delivery note and invoice should be approved by an authorised officer. Bills may be raised for Monthly statements should be sent and balance goods that are not should be reconciled. dispatched.(Fraud risk) Duties should be properly segregated. Payment Follow-up is regularly done. Any action taken Under payment or over should be documented. payments/ Not making payment. Sales should be held until the payment is made. Sales returns Before a credit note is raised, all sales return notes Sales returns may not be should be approved by an authorised person. recorded or fictitious sales returns may be All credit notes should be approved. recorded.(Fraud Risk) Adequate amount may A system/policy should be developed to determine not be provided in the the appropriate amount for bad and doubtful books of accounts for bad amount. and doubtful accounts. System should be developed to obtain age analysis of receivables and accuracy of age analysis should be reviewed by another person.
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