Credit Sales In The Revenue Cycle

Published Date: 02 Nov 2017

One very important part of the revenue cycle is that of credit sales. According to QFinance (2009), the definition of credit sales is "a sales transaction by which the buyer is allowed to take immediate possession of the purchased goods and pay for them at a later date". There are many reasons why credit sales are important to a company. First of all, it increases customer loyalty. Taking a monetary risk for customers demonstrates that a company trust them and are willing to accommodate them. By gaining customer loyalty, a company will have the occasion to launch long term business relationships. A credit policy also indicates that a company is financially stable. A business in danger of closing does not give its customers the option of paying at a later date. A struggling business will often demand payments immediately, in order to stay afloat. Customers do not identify credit-extending businesses to be hovering on the edge of bankruptcy (Should You Extend Credit to Your Customers, 2012).

Another reason is that credit policies boost sales. Some customers are not capable of paying for a product or service in full at the time of purchase. If customers have the alternative to pay for items in monthly installments, they will be more apt to make purchases which do not fall within their present budgets. At other times, customers want to see if they are completely satisfied with a product before bringing paying for it. Offering a line of credit to these customers gives them the indication that a company is confident about its product’s quality. Promising contentment makes thrifty customers more contented with their purchases. If a customer knows that they can return a purchase, expense and hassle-free, they will likely take a risk in ordering it (Should You Extend Credit to Your Customers, 2012).

Threats

Sales to customers with poor credit (uncollectable sales and losses due to bad debts)

Credit risk is a part of doing business for the majority of companies. That’s because in a lot of industries customers expect to be given the flexibility to pay for goods and services at some point after delivery, normally 15, 30, or 60 days later. It might be expected, but granting such terms exposes a business to the risk that they won’t be paid at all. The majority of companies simply have to live with this risk and, if they don’t get paid, they write it off as a cost of doing business (Sadler, 2013).

Failure to bill customers (loss of inventory, and erroneous data)

"Maintaining the quality of the data that is used in an organization is becoming an

increasingly high priority for businesses" (Vosburg & Kumar, 2001). If good quality data is not kept in an organization then errors are sure to occur in the form of inaccurate data on sales, inventory and accounts receivable. These errors can ultimately lead to customers not getting billed for the products that they have received. This leads to loss of assets and revenue for the company which damages the bottom line.

Billing errors (pricing mistakes & overbilling)

Another threat that can arise if a company does not maintain good, clean data is that of billing errors. Billing errors lead to pricing mistakes, overbilling for items not shipped or back ordered. These mistakes lead to loss assets and mad customers (Revenue cycle procedures, 2001). Customers that experience billing errors are less likely to do repeat business with a company than those who don’t experience any billing issues.

Error in Maintaining Customer Accounts ( incorrect records and poor decisions)

Another issue that can arise from poorly kept data is that of errors taking place in maintaining customer accounts. Customer accounts that are not kept up to date lead to many mistakes taking place. Incorrect records lead to poor decisions being made and customers get mad and refusing to do business (Revenue cycle procedures, 2001). A company that drives all of its customers away because of poor record keeping is a company that is not going to stay in business for very long.

Controls

There are several things that companies can do to decrease their exposure to high-risk in regards to credit sales in the revenue cycle. The first has to do with sales to customers with poor credit. The goal is to reduce bad-debt losses (Sadler, 2013). In order to do this companies must have an independent credit approval function and good customer accounting (Revenue cycle procedures, 2001). Customers who do not demonstrate to be credit worthy should not be granted credit, nor should customers that have been granted credit previously but are presently behind on their payments.

A second areas in which a company must pay attention and implement internal controls is that of failing to bill customers. In order to combat this it is important for companies to have separate shipping and billing functions. "An employee who does both could ship merchandise to friends without billing them" (Revenue cycle procedures, 2001). All shipping documents should be pre-numbered and reconciliation of all sales documents should be done on a regular basis.

Sales orders, picking tickets, packing slips, and sales invoices should be sequentially numbered and periodically accounted for, because if every invoice can’t be matched to every sales order or packing slip, then the customer probably hasn’t been billed. It is especially important to have procedures in place in an invoice-less system, as one must ensure that every shipment is recorded, since the shipment triggers recording of the account receivable (Revenue cycle procedures, 2001).

Companies that experience billing errors end up with a loss of assets if they under-bill and customer dissatisfaction if they over-bill (Revenue cycle procedures, 2001). A control that can be put into place is the regular settlement of picking tickets and bills of lading with sales orders, data entry edit controls, and price lists. Prices should be checked against the inventory master file and quantity errors should be avoided by checking quantities on the packing slip against quantities on the sales order. Implementing bar code scanners can also reduce data entry errors (Revenue cycle procedures, 2001).

There must also be controls in place to prevent errors taking place in maintaining customer accounts. Incorrect records customer dissatisfaction and loss of future sales. In order to prevent this it is important for companies to reconcile accounts receivable ledgers with the general ledger and customers monthly statements on a regular basis. Another control function that can be used is that of edit and batch totals. This can be cone by way of validity checks being done on customer and invoice numbers so amounts are applied to the correct account. This is done by way of closed-loop verifications and field checks, in order to ensure payment amounts are numeric. Batch totals can also be run in order to detect posting errors. During this process it is important to the compare number of accounts updated with the number of checks received. These reconciliations performed by an independent party in order to ensure integrity. It is also important to send monthly statements to every customer in order to provide the customer the opportunity to do an independent review (Revenue cycle procedures, 2001).

Conclusion