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

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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.