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 :)