1
Knowledge Component
2 Business Processes 2.6 Sales Management 2.6.1 Identify activities connected with the sales process, such as order
acceptance, credit evaluation, delivery, invoicing, recording and
settlement of receivables.
2.6.2 Identify the documents relating to sales process, point of origination,
flow of documents and purpose.
2.6.3 Assess the business risk connected with activities related to the sales
and receivable process.
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.
Business Processes P
AR
T B
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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.
Figure: An overview of the Sales Cycle
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
Inv
oic
ing,
Del
iver
ing
Go
od
s &
Rec
ord
ing
Sett
lem
ent
of
Rec
eiva
ble
s
Rec
eivi
ng
Cu
sto
mer
Ord
ers
Cu
sto
mer
Eva
luat
ion
& O
rder
Acc
epta
nce
Sen
din
g
Qu
ota
tio
ns
Quotation Customer Order
Invoice Receipts Sales Order
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.
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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
Sales Order Form
Customer’s Name:
Customer’s Address:
Order No:
Order Date:
Item No Description Qty Price Amount Rs.
Sub Total
Tax
Total Amount
Prepared by………… 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:
Sales Person:
Document No:
Quantity Description Price 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
………………………………….
Invoice No:-
Invoice Date:-
Due Date:-
Description 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. /Other
Recipient’s Signature: - ………….. Customer’s Signature;-…………………….
Date:-……………… 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:-
…………………………………
Customer Name and Address:-
…………………………………….
Invoice No:- Invoice Date:- Cus. No.:- Order No:- Order Date:-
Item No. Description Qty Unit Price Total Amount Rs.
Sub Total
Tax
Total Credit
Comments:- Authorised by:-
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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 order may be
cancelled by the customer
after it is accepted by the
seller.
Sales contract should be signed between a seller
and a buyer and it should include all the terms and
conditions of sales.
Accept orders for which
the seller has no capacity
or ability to deliver
according to sales terms.
Therefore customers may
become dissatisfied.
Sales order should be evaluated by an authorised
person in terms of quantity, delivery date,
availability of raw material and other resources.
Inform the customer about the possible delivery
dates, quantities or rejecting the quantities.
Supply goods to non-
credit worthy customers.
So, balance may not be
recoverable. (Risk of bad
debts)
Before an order is accepted, customer evaluation
should be carried out and identify the
creditworthiness of the customer. This may be
done by an independent person. Credit limits and
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.
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Create bogus customers in
the system.
Customer creation should be done by someone
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.
Access to customer master file should be restricted
to other users of the staff.
Inventory sourcing
Supply low quality goods
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 there is an excess or
a shortage of the
delivered quantity.
When dispatch note/gate pass/ delivery note/issue
note is raised, it should be compared with the
customer order and the packing list.
All the delivery notes should be signed by an
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
or delay in delivery
Production schedules are prepared in order to
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
Under invoicing, over
invoicing or duplicate
invoicing.
Invoices should be checked by one person and
approved by another person.
Invoicing should be computerised.
Invoices should be serially pre-numbered.
Monthly statements should be sent to customers
and get the balance confirmed.
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Delivery may not be
invoiced.
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
goods that are not
dispatched.(Fraud risk)
Monthly statements should be sent and balance
should be reconciled.
Duties should be properly segregated.
Payment
Under payment or over
payments/ Not making
payment.
Follow-up is regularly done. Any action taken
should be documented.
Sales should be held until the payment is made.
Sales returns
Sales returns may not be
recorded or fictitious
sales returns may be
recorded.(Fraud Risk)
Before a credit note is raised, all sales return notes
should be approved by an authorised person.
All credit notes should be approved.
Adequate amount may
not be provided in the
books of accounts for bad
and doubtful accounts.
A system/policy should be developed to determine
the appropriate amount for bad and doubtful
amount.
System should be developed to obtain age analysis
of receivables and accuracy of age analysis should
be reviewed by another person.