The expenditure cycle includes all of the things a company does to interact with it’s suppliers, basically buying things and paying for them.
The revenue cycle’s cast of characters is organized in two primary categories. Operations take care of placing orders and processing receipts, and Finance/Accounting pays the bills.
There are four primary steps within the expenditure cycle:
Planning
Ordering
Receiving
Cash payment (A/P)
Planning involves all of the things the company does to set up the structure of their purchasing function. These aren’t things that are dealt with on a daily basis, but the framework needs to be there. The steps including selecting an inventory control method, identifying key commodity groups, negotiating supplier contracts, and monitoring vendor performance.
The choices for an inventory control method are economic order quantity (EOQ), just-in-time (JIT), or materials requirements planning (MRP). EOQ is the traditional approach to managing inventory, which entails examining a host of factors such as lead times and carrying costs to identify a re-order point when inventory gets too low. Just-in-time inventory is based on the idea that it is costly to maintain inventory – working capital is tied up in things we aren’t directly using, and we have to have a warehouse to put things in. Why not just buy things as we need them, and have them delivered to a specific location just in time? It can work really well, but requires you to do business with very reliable suppliers. MRP is used when production is done according to a schedule, and is most common for projects that take a long time to finish like a building or an airplane. An MRP system coordinates purchases so that things arrive right when a particular task comes up on the schedule.
We also want to identify the different commodity groups that we buy from. This allows buyers to specialize on a particular type of product so they develop some expertise. For example, an aircraft manufacturer might have some buyers focusing on raw materials such as steel and composite material, while others focus on technical avionics systems. These are very different types of purchases, so it makes sense to specialize.
We also want to negotiate supplier contracts at the company wide level to take advantage of purchasing power. It is very important to make sure these contracts get communicated company wide, so that they are used.
The last step in planning is establishing a framework for monitoring vendor performance. This involves thinking about what is important to the company, and coming up with a way to incorporate those factors into a score, which is usually a weighted average. Things that may play into this might be quality (important for a high-end manufacturer), price (important for low-cost provider), or timeliness (important for anyone using JIT).
The second primary step in the expenditure cycle is ordering, which involves completing purchase requisitions, completing purchase orders, and coordinating the procurement card program.
When ordering, it is important to remember that not everyone in an organization is allowed to go out and make big purchases in the name of the company. This privilege is delegated to individuals called buyers. However, needs for purchases arise from all over the company, and they way that individuals notify buyers about their needs is through completion of a purchase requisition. Purchase requisitions tell buyers what people need, where they should be delivered, etc. They also include a G/L account number to be charged, and should prove that the purchase is authorized by the requesting individual’s department. Buyers aren’t in the business of saying we should or shouldn’t buy something – they just go make the purchase. The department is the party that is going to know whether something should be bought or not, which is why they do the approval.
Once the requisition process is complete, then buyers can start the order placement process. This is going to involve getting bids, selecting a supplier, updating the inventory master file, and completing a purchase order.
Getting bids can be formal or informal. For a large purchase, the buyer may initiate a formal request for proposal (RFP) process, where they invite prospective suppliers to submit written bids showing what they can do. For less significant purchases, the buyer may choose to rely on Internet quotes or a few phone calls.
After selection, the buyer will need to update the inventory master file so that a) we have a way to account for the product, and b) we can document the vendor selection process so that we don’t have to do it again in the near future. Use of a vendor master file can be helpful (similar to what we saw how the customer master file is used in the revenue cycle) to store demographic information about suppliers.
The document to execute a purchase is known as the purchase order – it is a contract to purchase, and a promise to pay. Sometimes companies will issue “blanket” purchase orders to buy a large amount of material over a long time horizon, and then “release” against the blanket order any time they need something. This is nice for both the buyer and the supplier – it helps reduce buyer’s uncertainty about raw material sources, and it helps the supplier plan out their capacity.
Procurement cards are company credit cards that are used to make small purchases. Given that the major cost driver of the ordering function is the number of purchase orders processed, this can greatly reduce the number. Another strategy involves the use of reverse auctions, which is kind of like ebay in reverse where potential buyers go to an auction website and say what they would like to buy, and then potential suppliers bid on the work, with the low cost supplier winning the business. It is best in environments where the product is a commodity (like gas, lumber, etc.) where it really doesn’t matter who you buy from because the product is the same.
Monday, March 19, 2012
Friday, March 16, 2012
WCGW Exercise Videos
I've posted videos that walk you through the solution to the WCGW grid questions in your walkthrough packet to Moodle. They are available underneath the Midterm #2 resources.
Summary Catch Up (Midterm 2) Part 1
Continuing on with our discussion of the revenue cycle, next is shipping, which is best done by someone outside of the warehouse. If the shipping clerk thinks everything is OK, they remove the items from on-hand inventory, and print out the two main shipping documents, a packing slip and a bill of lading. The packing skip authorizes the shipment for final release of the finished goods, and it communicates to the customer what is in the box. The bill of lading identifies responsibilities for the item while it is in transit with a 3rd party delivery company, which is really important for revenue recognition purposes.
Shipping needs to send a copy of the bill of lading (or packing slip if there isn't one) to the billing department so that the invoicing process can start. Invoicing is done by taking the price and term details from the sales order, and quantities from the bill of lading. We also walked through an alternative approach to invoicing that is known as evaluated receipts settlement (ERS), where companies agree on an arrangement with their customers that they won't send out invoices at all, but the customer agrees to pay the sales order order price for the number of items they receive after a specified number of days.
We also have to update our accounts receivable records when we bill - this is done by an A/R clerk.
There are two approaches to billing. The open invoice method involves sending bills one at a time, and the balance forward method groups a series of transactions together in once monthly statement (I called this the Mastercard approach). When a company uses the balance forward method, they often will use cycle billing to have a more uniform flow of cash.
When people return products, they need to be processed by the receiving clerk, and then the credit manger makes a decision on whether to issue a credit memo that authorizes a reduction in the customer's A/R subsidiary ledger balance. If a customer doesn't end up paying at all, the credit manager makes the decision on whether or not to write-off the balance, but we don't tell the customer if that is the way we want to go because they may have a change of heart someday.
The last step in the revenue cycle is cash collections. We have to take in customer payments and make deposits, update the A/R subsidiary ledger accounts to reflect the payments (known as cash application), and make decisions regarding whether or not it is time to write-off a balance.
There are several approaches to collecting cash, but I focused on two of them. The first is where the company processes customer payments on their own. In this case, the invoice will request that companies send a remittance advice along with their payment (the top part of the invoice usually). When the mail is opened, the mailroom clerk compiles the remittance advices and sends them to the A/R clerk to make updates to the subsidiary ledger, and sends the checks to the cashier. Each party is then going to add up their transactions, and make sure they are the same. If the total of remittance advices is different than the deposits made to the bank, we may have a problem.
The other primary approach involves the use of a lockbox. This is where the company outsources the processing of customer payments to their bank. Banks set up a post office box that customers send payments to, and then they deposit checks as they come in, and notify the firm about payments received.
The process of "finding a home" for customer payments is known as cash application. This involves giving the right customer credit for the payments they make. If a company uses a lockbox, it is pretty common to have an automated interface between banks and firms that allows for automated cash application. Systems will usually be configured to general an unapplied cash report listing out the payments received for which the bank was not able to find a home for. Someone in A/R is going to need to investigate these.
Shipping needs to send a copy of the bill of lading (or packing slip if there isn't one) to the billing department so that the invoicing process can start. Invoicing is done by taking the price and term details from the sales order, and quantities from the bill of lading. We also walked through an alternative approach to invoicing that is known as evaluated receipts settlement (ERS), where companies agree on an arrangement with their customers that they won't send out invoices at all, but the customer agrees to pay the sales order order price for the number of items they receive after a specified number of days.
We also have to update our accounts receivable records when we bill - this is done by an A/R clerk.
There are two approaches to billing. The open invoice method involves sending bills one at a time, and the balance forward method groups a series of transactions together in once monthly statement (I called this the Mastercard approach). When a company uses the balance forward method, they often will use cycle billing to have a more uniform flow of cash.
When people return products, they need to be processed by the receiving clerk, and then the credit manger makes a decision on whether to issue a credit memo that authorizes a reduction in the customer's A/R subsidiary ledger balance. If a customer doesn't end up paying at all, the credit manager makes the decision on whether or not to write-off the balance, but we don't tell the customer if that is the way we want to go because they may have a change of heart someday.
The last step in the revenue cycle is cash collections. We have to take in customer payments and make deposits, update the A/R subsidiary ledger accounts to reflect the payments (known as cash application), and make decisions regarding whether or not it is time to write-off a balance.
There are several approaches to collecting cash, but I focused on two of them. The first is where the company processes customer payments on their own. In this case, the invoice will request that companies send a remittance advice along with their payment (the top part of the invoice usually). When the mail is opened, the mailroom clerk compiles the remittance advices and sends them to the A/R clerk to make updates to the subsidiary ledger, and sends the checks to the cashier. Each party is then going to add up their transactions, and make sure they are the same. If the total of remittance advices is different than the deposits made to the bank, we may have a problem.
The other primary approach involves the use of a lockbox. This is where the company outsources the processing of customer payments to their bank. Banks set up a post office box that customers send payments to, and then they deposit checks as they come in, and notify the firm about payments received.
The process of "finding a home" for customer payments is known as cash application. This involves giving the right customer credit for the payments they make. If a company uses a lockbox, it is pretty common to have an automated interface between banks and firms that allows for automated cash application. Systems will usually be configured to general an unapplied cash report listing out the payments received for which the bank was not able to find a home for. Someone in A/R is going to need to investigate these.
Friday, March 2, 2012
Video Lecture 3/2
The video lecture for 3/2 is now available on Moodle - it is right under the Midterm #2 review.
Have a great break!
Have a great break!
Thursday, March 1, 2012
Class 3/2
As discussed all week, class for 3/2 will be held via a video to be posted to Moodle. It should be available by the end of the day on Friday.
Sunday, February 26, 2012
ACL Video
I've posted the video of me walking through the ACL self study to Moodle. Keep in mind that the part at the beginning about AnywhereApps is outdated - you can only run the software on your own computer.
Summary (Week 5)
Now we are getting on to the real part of the course.
Up next: Finish revenue cycle, start expenditure cycle
Due next week: Quiz 1 on Monday (2/27)
Revenue Cycle
The revenue cycle includes all of the things a company does to interact with it’s customers, basically selling stuff and getting paid for it. It doesn’t matter which cycle we are talking about, it is important to remember that a well-functioning AIS will make sure that the following objectives are met; 1) transactions are properly authorized, 2) recorded transactions actually happened; 3) everything is recorded; 4) recording is accurate; 5) assets are safeguarded; and 6) managers can make good decisions. Note that some of these are financial reporting in nature, while others are operationally focused.
The revenue cycle’s cast of characters is organized in three primary categories. Sales interacts with the customer, Operations gets the product out to the customer, and Finance/Accounting makes sure that we get paid.
There are four primary steps within the revenue cycle:
Sales order entry
Shipping
Billing
Cash Collections
Sales order entry involves four sub-steps. First, we have to take the customer’s order. This involves documenting the details of the sale (item #, quantity, price, etc.) on a sales order. One thing that companies use to make this process is easier is a customer master file, which is basically a database containing things like contact information about customers, so that the company doesn’t have to ask for those details again when there is a repeat customer. We discussed two electronic/automated order management methods, one involving a direct link between the systems of customer and supplier (electronic data interchange), and one where no orders are needed because the vendor takes care of the ordering process (vendor managed inventory).
Once the details of the order have been obtained, a few things have to happen to make sure that the order is OK. The second major step involves checking the customer’s credit. This can be done either using general authorization, where companies rely on a credit limit, or specific authorization where someone (usually a credit manager) looks at things on a case-by-case basis. Specific authorization is appropriate when 1) The firm is dealing with a customer for the first time; 2) The customer is going over their credit limit; or 3) The dollars are big enough that it is worth it to have someone look at things. Sometimes the customer’s credit status can be linked into their customer master file record so that the credit check process is automated.
The third step within Sales Order Entry involves checking inventory availability. The question here is whether or not we have the stuff necessary to fulfill the order. We don't necessarily have to have the items in inventory at the time of the sale, but we at least need to be able to have them ready by the time the customer wants them.
Note that if we don't have the items available, then we need to go through the back order process, which notifies either manufacturing that they need to make more stuff, or purchasing that they need to buy more stuff. At this point, best practices dictate that the customer should have the option to 1) cancel the order; 2) request a hold until we can send all of the items, or 3) request a partial shipment if some of the product is available.
If everything is all set, then we can finalize the order. This involves updating the quantity available field in inventory (putting our claim on the items), sending an acknowledgment to the customer, and notifying the warehouse and billing departments about the order.
The last "step" in the revenue cycle responding to customer inquiries - just note that there should be a group dedicated to handling problems.
The next major step is shipping, which involves picking and packing the order, and formally shipping the order out.
In picking and packing the order, we basically want to compile the stuff that the customer ordered. A warehouse clerk is usually going to do this based on a picking ticket, which is an internal document telling them what items to pick up and how many. Note that we don't just send over the sales order, because that contains a lot of information that the warehouse clerk doesn't need to know. I walked through an example on how barcode scanners make this process easier, where warehouse clerks use a handheld scanner to scan a barcode on the picking ticket, then they scan a barcode on the shelf underneath the item they pick. Then the system double checks that the two match up, and the clerk enters in how many items they took, which automatically updates the inventory subsidiary ledger. Pretty cool process.
We spent Friday talking about ACL and how it relates to the extra credit project. Don't worry if it is overwhelming - I expect it to be. This is a really good learning experience for you - in a few months you will be working in the real world, and you will have to figure out a lot of stuff on your own :)
Up next: Finish revenue cycle, start expenditure cycle
Due next week: Quiz 1 on Monday (2/27)
Revenue Cycle
The revenue cycle includes all of the things a company does to interact with it’s customers, basically selling stuff and getting paid for it. It doesn’t matter which cycle we are talking about, it is important to remember that a well-functioning AIS will make sure that the following objectives are met; 1) transactions are properly authorized, 2) recorded transactions actually happened; 3) everything is recorded; 4) recording is accurate; 5) assets are safeguarded; and 6) managers can make good decisions. Note that some of these are financial reporting in nature, while others are operationally focused.
The revenue cycle’s cast of characters is organized in three primary categories. Sales interacts with the customer, Operations gets the product out to the customer, and Finance/Accounting makes sure that we get paid.
There are four primary steps within the revenue cycle:
Sales order entry
Shipping
Billing
Cash Collections
Sales order entry involves four sub-steps. First, we have to take the customer’s order. This involves documenting the details of the sale (item #, quantity, price, etc.) on a sales order. One thing that companies use to make this process is easier is a customer master file, which is basically a database containing things like contact information about customers, so that the company doesn’t have to ask for those details again when there is a repeat customer. We discussed two electronic/automated order management methods, one involving a direct link between the systems of customer and supplier (electronic data interchange), and one where no orders are needed because the vendor takes care of the ordering process (vendor managed inventory).
Once the details of the order have been obtained, a few things have to happen to make sure that the order is OK. The second major step involves checking the customer’s credit. This can be done either using general authorization, where companies rely on a credit limit, or specific authorization where someone (usually a credit manager) looks at things on a case-by-case basis. Specific authorization is appropriate when 1) The firm is dealing with a customer for the first time; 2) The customer is going over their credit limit; or 3) The dollars are big enough that it is worth it to have someone look at things. Sometimes the customer’s credit status can be linked into their customer master file record so that the credit check process is automated.
The third step within Sales Order Entry involves checking inventory availability. The question here is whether or not we have the stuff necessary to fulfill the order. We don't necessarily have to have the items in inventory at the time of the sale, but we at least need to be able to have them ready by the time the customer wants them.
Note that if we don't have the items available, then we need to go through the back order process, which notifies either manufacturing that they need to make more stuff, or purchasing that they need to buy more stuff. At this point, best practices dictate that the customer should have the option to 1) cancel the order; 2) request a hold until we can send all of the items, or 3) request a partial shipment if some of the product is available.
If everything is all set, then we can finalize the order. This involves updating the quantity available field in inventory (putting our claim on the items), sending an acknowledgment to the customer, and notifying the warehouse and billing departments about the order.
The last "step" in the revenue cycle responding to customer inquiries - just note that there should be a group dedicated to handling problems.
The next major step is shipping, which involves picking and packing the order, and formally shipping the order out.
In picking and packing the order, we basically want to compile the stuff that the customer ordered. A warehouse clerk is usually going to do this based on a picking ticket, which is an internal document telling them what items to pick up and how many. Note that we don't just send over the sales order, because that contains a lot of information that the warehouse clerk doesn't need to know. I walked through an example on how barcode scanners make this process easier, where warehouse clerks use a handheld scanner to scan a barcode on the picking ticket, then they scan a barcode on the shelf underneath the item they pick. Then the system double checks that the two match up, and the clerk enters in how many items they took, which automatically updates the inventory subsidiary ledger. Pretty cool process.
We spent Friday talking about ACL and how it relates to the extra credit project. Don't worry if it is overwhelming - I expect it to be. This is a really good learning experience for you - in a few months you will be working in the real world, and you will have to figure out a lot of stuff on your own :)
Subscribe to:
Posts (Atom)
Posts
