This action might not be possible to undo. Are you sure you want to continue?
Introduction to Business Processes
1st edition 2010 All rights reserved © DocuWare AG, Germering; www.docuware.com
Jürgen Biffar is a member of the Board of Directors of DocuWare AG with responsibility for Finance and Products. Inspired by his parents' standards business, in the mid-1980s he developed the idea of archiving all types of documents electronically and then making them retrievable at the touch of a button. In 1988, shortly before he successfully completed his university business degree, Jürgen Biffar and two partners founded DOCUNET AG. Known as DocuWare AG since 2000 with headquarters in Germering near Munich, the company today has around 7,500 installations and is one of the world's leading manufacturers of document management systems.
Prof. Dr. Heinrich Seidlmeier
Heinrich Seidlmeier has been a professor of business economics since 1995 at the Rosenheim university and heads up the Institut für Organisation und Wirtschaftsinformatik (Institute for Organization and Business Informatics) there. The focal point of his teaching and applied research is the modeling, optimization and implementation of business processes. The economist studied business administration at the Ludwig-Maximilians University Munich and obtained a doctorate at the Institut für Information, Organisation und Management (Institute for Information, Organization and Management). He was then a consultant at A.T. Kearney Management Consulting for three years. In addition, Heinrich Seidlmeier is also a co-founder and member of the Board of Directors of Processum AG, a consulting company specializing in process-oriented document management.
Introduction to Business Processes
Office managers and those in similar roles are usually already familiar with the economic relationships and workflows at their company or public authority. This document is designed to give non-business staff an overview of how companies function and to enable them to hold their own in discussions about processes and how they may be improved.
Introduction to Business Processes ............................................1 Overview of Content...................................................................6 1. 1.1. 1.2. 1.3. 2. 2.1. 2.2. 2.3. 2.4. 2.5. Basic Commercial Principles...........................................7 Financial Accounting...................................................7 Cost Accounting .........................................................11 Financing....................................................................12 Types of Company .........................................................16 Commercial Functions ................................................16 Trading companies .....................................................17 Manufacturing companies ...........................................19 Service companies .....................................................20 Hybrid Forms ..............................................................20
3. 3.1. 3.2. 3.3.
Business Processes .......................................................24 Processes Overview ...................................................24 Winning and Qualifying Prospects...............................26 Managing Sales Discussions and Negotiations ...........31 Liability Risks ......................................................34 Business Transaction ..........................................35
3.3.1. 3.3.2. 3.4.
Purchasing Materials, Goods and Services .................39 Purchase Process ...............................................40 Terms of Payment ...............................................45 Purchasing and Financial Accounting ..................48 Sales Tax – Input Tax – VAT ...............................49
3.4.1. 3.4.2. 3.4.3. 3.4.4. 3.5.
Manufacturing or Supplying the Product or the Service.......................................................................56 The Manufacturing and Service Provision Process ...............................................................56 Impact on Cost Accounting..................................59
3.5.2. 3.6. 4.
Writing Invoices and Receiving Payments ...................63 Other Commercial Processes .........................................71
Overview of Content
Overview of Content
Companies exist to make a profit. Even non-profit-making organizations can only survive if they do not make a loss year on year. So too public services and authorities can only function if expenditure does not exceed income. Profitability is therefore essential to the survival of every company. The need for profitability determines the shape of business processes. The first chapter explains some important business terms. Since they appear so frequently it is important to understand what they mean. In the second chapter we describe different types of company and help you distinguish between them. Before taking a closer look at a company, we first need to understand what type of company it is. The third and most comprehensive chapter explains the key commercial processes necessary to provide a service: customer acquisition, the service itself and payment by the customer. This manual will help the reader understand the most important processes and be able to help improve them when dealing with a company in real life. In the following, the imaginary company Peter's Engineering will be used to illustrate the terms and processes. This company manufactures fairground rides, in particular roller coasters for fairs and amusement parks. In addition to their manufacture, Peter's Engineering also installs these rides and maintains and services them.
Basic Commercial Principles
1. Basic Commercial Principles
1.1. Financial Accounting
Profitability exists when revenue exceeds expenses, or when income exceeds expenditure. What is the difference between revenue and income and between expenses and expenditure? In a nutshell: The terms income and expenditure are used whenever there is a flow of money. If you issue an invoice for the supply of a steel beam and the payment is received, this is an income. If you purchase an industrial drill, this is expenditure. Revenue and expenses are separate from the actual flow of monies and are based on the actual supply and consumption respectively of the purchased goods. As soon as you issue the invoice for the steel beam, the customer owes you a (monetary) receivable and this is referred to as revenue, even though the payment itself may not be received until much later. The same applies to the purchase of goods and services: immediately upon receipt of goods or services and the invoice, a (monetary) payable exists, a debt and – regardless of when you pay the invoice – an immediate expense. Revenues that arise through the purchase of goods or services – in fact almost all revenues – are also referred to as sales. Companies and public authorities that file accounts (including all limited liability corporations and stock corporations) calculate profit based on revenue and expenses. Sole proprietorships and partnerships calculate profit through cashbasis accounting based on income and expenditure.
Basic Commercial Principles
Figure 1: Financial accounting terms The definition of expenses above is not especially precise. Goods and services that are used straight away do indeed generate an immediate expense. However, the situation is different for goods that are initially placed in storage or which – like the industrial drill mentioned above – are used over a period of years. Here, expenses arise only following consumption – either when the goods are removed from storage or, as in the case of the drill, expenses are spread
Basic Commercial Principles over the period during which the machine is used. These periodically calculated (and posted) expenses are referred to as depreciation or also depreciation for wear and tear. All of the terms above and the associated calculations are derived from Financial Accounting In Financial Accounting, revenue and expenses are contrasted on the income statement . If revenues exceed expenses, the income statement will show a profit, if not a loss. The income statement always relates to a period, a quarter or a year. It shows the revenue and expenses for this period. In the following period everything starts again from zero. Receivables and payables are entered on the balance sheet on which the capital assets are also found. The term 'capital assets' refers to all machinery, systems, buildings and vehicles and the goods in the warehouse which, upon purchase, did not immediately become an expense but whose expense is spread across the period of use in the form of depreciation. They are entered on the balance sheet with their current value. This value is calculated from the purchase price minus the amounts for depreciation that were posted to the income statement during the periods. Ideally, the value will be the actual value of the asset that could be achieved if it were to be sold. Capital assets and receivables are recorded as assets on the balance sheet. The balance sheet also includes all details for financing of a company: this includes cash in vault and cash assets (in bank), bank debts, capital reserves and the total of profits and losses for the expired periods. The balance sheet shows the financial status for the current key date and is not related to a specific period.
Basic Commercial Principles
Figure 2: Balance sheet and income statement When the tax office carries out a tax audit, it audits mainly the general accounts. These contain almost all of the tax-relevant documents, e.g. invoices and account statements. Why are all these terms important? 1. It is important to understand how individual business processes affect profitability, in order to understand how they can be improved. This also applies to improvements to processes by which the quality of a product is improved, in this instance the steel beam. Each improvement to a process gives rise to an expense that must be justified by means of additional revenue.
Basic Commercial Principles 2. In almost all Sales and Financial Accounting processes we are concerned with the documentation of income and expenditure, revenue and expenses, receivables and payables, for example in the form of invoices, delivery notes, etc.
1.2. Cost Accounting
While Financial Accounting is concerned with a general view of a company's situation, Cost Accounting is concerned with what it costs to manufacture and sell an individual product or service. Expenses – here referred to as costs – are broken down according to the department or area to which expenses are to be allocated. These are referred to as cost centers. If, for example, our imaginary company Peter's Engineering were to receive a delivery of steel to be made into steel beams in the metalworking shop, the cost involved, i.e. the invoice for the steel, is allocated to the "Metalworking Shop" cost center where the cost is split between those steel beams produced with the delivery of steel. Each steel beam is now a cost unit. A cost unit can be an individual product that is sold, e.g. if the steel beam is charged directly to the customer. Multiple costs units can flow into a single overall order. Certain expenses are difficult to allocate to individual cost units, e.g. the costs that arise when the head of the metalworking shop attends a training course (we talk here of "overhead costs" as opposed to easily attributable "direct costs", e.g. material). The costs that arise are first assigned to a cost center, then later allocated to individual cost units. If a company's overall expenses are allocated both generally via the cost center and specifically and directly to the individual cost units, it is possible to compare the overall costs of the cost unit against the sales revenue, the sales price. This
Basic Commercial Principles allows you to calculate the profit that you achieved with the individual item – in this case the steel beam.
Example of A customer orders a steel beam that must be individually manufactured for him. Peter's Engineering knows that internal manufacturing will cost around €8,000 and suggests a price of €10,000 for the beam. Of the €8,000 manufacturing costs, the costs of the materials are approximately €6,000 – in this case the steel that must be brought in. First of all, the company must purchase and pay for steel to the value of €6,000. Only much later on, once the beams have been manufactured and supplied, is the invoice issued, and there is a flow of money back to the company. The company must initially finance €6,000. It must have sufficient equity capital to do so, because the founder or the stockholders paid in sufficient equity or because sufficient profit remained from previous years and was converted to equity capital. Alternatively, and more usually, the company must obtain credit from the bank. Two questions then arise – can the company afford to pay the interest? After all, interest is an expense that reduces the profitability of the company. If the interest rate is very high or interest must be paid for a longer period during manufacture of the product, it could cost more to manufacture the beam than the price paid by the customer. Second question: will the bank loan the money? Or has the company already received so many other loans for other projects that its limit at the bank has already been reached?
Basic Commercial Principles Both these problems can be resolved through more rapid processes. The sooner the beam is ready and the invoice issued, the shorter the period for which the company requires credit and the less interest it pays. If the processes for all products and services are more rapid, fewer processes run in parallel. If this is so, there are fewer loans in parallel, overall credit requirements are lower and the risk of exceeding the credit limit at the bank is reduced.
Basic Commercial Principles Self-Test Questions: 1. What is the difference between revenue/expense and income/expenditure? a) Revenue and expenses comprise the income and expenditure following year-end closing. b) The terms income and expenditure are used to refer to flows of money, e.g. when a payment is received. Revenue and expenses are not linked to the flow of monies and arise as soon as the invoice is written. c) There is de facto no difference; the terms can be used interchangeably. d) Whereas the revenue and expenses are Financial Accounting terms, income and expenditure are Cost Accounting terms. 2. When goods are not used immediately but instead are used or consumed over a period of years, we speak of _____? a) Income statement b) Operating costs c) Depreciation d) Expenditure
Basic Commercial Principles
3. What does the term capital assets cover? a) Capital assets are all machinery, systems, buildings, vehicles and goods in the warehouse that did not immediately become an expense upon purchase. b) Capital assets are included on the balance sheet. c) Capital assets include only those goods that were not invested directly in the company, e.g. the stocks of other companies. d) Capital assets comprise all of a company's receivables and payables. 4. What is the difference between Financial Accounting and Cost Accounting? a) Whereas Financial Accounting provides a general view of a company's situation, Cost Accounting is concerned with how much money it costs to manufacture and sell an individual product or service. b) Cost Accounting distinguishes between different cost centers within a company and indicates the expenses for individual cost units. c) Whereas Financial Accounting is concerned with profit and loss, Cost Accounting is concerned only with revenues for a cost unit. d) Cost Accounting ignores depreciation. The solutions to these and to the further Self-Test Questions please see Appendix: Solutions to Self-Test Questions on page 73.
Types of Company
2. Types of Company
Every company and every authority is different. Their processes also differ yet can still be compared. Every operation or company must purchase, provide or produce, sell and pay bills and therefore we will describe these recurring processes again later. To be able to improve a process at any given company, the specific nature of the company must be understood. You must understand the major differences in processes between the individual types of company.
2.1. Commercial Functions
The following functions are necessary at every company and public authority. Purchasing Production or service provision Sales Administration
"Administration" includes accounting and human resources. We deliberately do not refer to departments since a separate department does not have to exist for every function (a kiosk owner combines all functions in a single person) and some functions can be performed by multiple departments. We shall later classify the business processes based on precisely these functions. If, when defining company types, we stress the significance of the individual functions, later on it becomes easy to discover the relevance of a process type for a company.
Types of Company Standard Products or Made-to-Order Products In the definition of company types below we distinguish the characteristics of the individual commercial functions, whether the company supplies customized goods and services or standard goods and services. This distinction is important since within companies the processes will tend to be either similar (standard) or customized. In the case of standard processes optimization of the process flow can provide major benefits. If a standard process is improved such that time or money is saved when a process is run through once, for the recurring processes this saving will amount to a considerable overall saving. For customized processes the benefit arises more through optimization of the process environment. If information is generally available more rapidly or if tools make the work easier, different individual processes can be performed more rapidly and cheaply.
2.2. Trading companies
Someone who purchases goods and sells them on virtually unmodified is a retailer. A distinction is made between retailers who sell to end consumers and wholesalers who sell to companies who themselves are resellers or processing companies.
Types of Company Sales and purchasing are the primary focus of trading companies. Temporary storage is part of service provision. A wholesaler of automobile parts operates a high-bay warehouse. The retailer stores its goods on shelves in the showroom. Many online shops obtain each order item individually from suppliers and in some cases have the supplier send them directly to the customer. They do not have a warehouse.
There is no production in retail although sometimes there are supplementary services, for example the installation of a dishwasher sold by the retailer. In process evaluation, a special check must be made on the number of customers and suppliers a trader has and how many purchase processes and sales processes arise from this per month. The higher the number, the greater the potential for cost reduction and service improvement and the more worthwhile are the process improvements. Trading companies usually run standard businesses, i.e. there are numerous purchasing and sales processes which are all identical or very similar. In retail, especially wholesale, profit per sold article tends to be low. Often the margin, the difference between the purchase price and the sales price is only 5% of the sales price. Normally a retailer will already have paid its supplier for the goods before it receives the money from the customer. The interim period must be financed, for example by means of a bank loan. Due to low margins it is especially important to keep the length of time between purchase and sale to a minimum, in order to reduce the interest burden. Fast
Types of Company processes in the processing of trading operations are therefore especially important.
2.3. Manufacturing companies
A manufacturer buys in materials, processes them and sells the "finished" goods. "Materials" include: Raw materials, e.g. pig iron, Objects already manufactured by other plants, e.g. the screws or electronics for a control device, and Raw materials for the operation of tools and machines, for example electricity, lubricants, water, etc.
"Processing" is the process in production whereby tools and machines are used to manufacture the goods (from the "materials") that are subsequently sold. Steel, screws, solder alloy, paint and electricity are all used to manufacture a steel beam, for example. Although "finished" goods are complete from the perspective of the individual company, for a customer they can be raw material, e.g. the customer uses the steel beam to manufacture a structure. In manufacturing, there are companies that produce standard products and those that produce customized goods. Manufacturers of washing machines and refrigerators sell standard products. Manufacturers of steel constructions sell customized products, as in the case of Peter's Engineering whose roller coasters are individually manufactured for each customer.
Types of Company The considerable variety of manufacturing companies and the high complexity of processes do not make it easy to readily identify potential process improvements. The analysis of the manufacturing process demands specific technical knowledge. Therefore when considering production plants we will focus on the general (business management) processes surrounding actual manufacture, which a layperson can also understand.
2.4. Service companies
Companies that neither sell nor produce goods are service companies. These include banks, insurance companies, consulting firms, software manufacturers, public authorities, hospitals, certain handicrafts and most members of the free professions (doctors, tax advisors, lawyers, etc.). Service companies do not have warehouses. For a service company the "provision of services" is the equivalent of "production" by a manufacturer. Purchasing as a separate function or department generally does not exist. In the service sector there are also companies providing standard services and companies providing customized services. An oil change for a car, an operation to remove an appendix and the drawing up of an income tax declaration are standard services. The financing of a shopping mall by a bank is a custom service.
2.5. Hybrid Forms
Many companies do not clearly belong to a single type – hybrids often exist. They can be both retailers and service providers, for example a kitchen store also installs the kitchens it sells and an automobile dealer also has a workshop. Alternatively, companies can be concerned with both manufacturing and retail: a manufacturer of gasoline-driven
Types of Company lawn mowers also imports electric lawn mowers and sells them under its own name. In addition to the manufacture of roller coasters, our imaginary company Peter's Engineering also provides services – for example maintaining the rides that are currently in service. To assess a company and its processes correctly, you need to know how important the individual areas are for the company. Their significance depends on the sales of the individual area, on the number of employees employed there and on the contribution of the division to company profits.
Types of Company Self-Test Questions: 1. How can processes be optimized at companies that sell standard goods and services and those that sell customized goods and services? a) Standard processes scarcely offer any room for improvement since by definition they are usually standardized. b) For individual processes, benefits arise more through optimization of the process environment. c) In the case of standard processes, optimization of the process flow itself can provide major benefits. d) Within a company customized processes are to be avoided on principle because they require a lot of optimization work.
Types of Company
2. What is the difference between trading companies and manufacturers? a) Whereas trading companies buy goods in and sell them more or less unchanged, manufacturing companies subject the materials they buy to further processing. b) Whereas trading companies only offer services, manufacturers offer finished products. c) Trading companies are concerned mainly with the purchase and sale and therefore also with number of customers and delivery times. By contrast, manufacturers are additionaly concerned with the manufacturing process. d) Manufacturing companies sell standard products only, whereas trading companies are "custom" business due to their numerous products. 3. Which of the following are different company types? a) Trading companies b) Manufacturing companies c) Service companies d) Processing companies
3. Business Processes
Everything in companies is executed in processes. This is why it is vital that these business processes are understood. And not all processes are the same. There are different types. But what is a process?
3.1. Processes Overview
A process is basically a sequence of steps with a clearly defined beginning and end, or with distinct input (resources) and output (as process performance). For example, as in the following key business processes, each process step needs certain mandatory information in order to be completed (e.g. how can a complaint be dealt with if there are no details of the problem?). The result is then, in turn, information. Since documents act as information carriers in many cases, "information and/or document management processes" are therefore important in companies. "Business processes" in the strict sense serve the actual business purpose and create services that are therefore "valuable", meaning customers pay for them (production processes are typical). We also talk about value-adding process, added value or core processes. Often in practice however, business processes are put on a level with commercial processes. Besides the (generally few) business processes, companies usually boast many "support processes". This second process type does not generate any direct customer value, but serves to maintain the business operations (examples include the maintenance of a machine or the payment of invoices). A third category is management processes. This involves the management of a company (e.g. planning and control) or also
Business Processes the management of personnel (e.g. issuing instructions to or reporting about employees). The fourth and final type is the pure information processes already mentioned above – in terms of acceptance, transformation, submission, storage and transfer of information. Its special characteristic is that it acts as an essential basis for the three other types of process. In all cases, "process orientation = customer orientation" applies: processes will always be triggered by customers who expect a service at the end of the process. These customers in turn have their own customers and thereby become suppliers. There are customer-supplier chains. Understanding processes therefore also means understanding companies. Take, for example, the typical commercial process chain already mentioned: "purchase – production/service provision – sale – administration", and this results in the five following concrete processes in practice: Winning and Qualifying Prospects Managing Sales Discussions and Negotiations Purchasing Materials, Goods and Services Manufacturing or Supplying the Product or the Service Writing Invoices and Receiving Payments
We shall continue to refer back to our imaginary company Peter's Engineering. Since orders for the manufacture of fairground rides vary greatly, as already mentioned Peter's Engineering is a typical example of a company that offers customized goods and services.
3.2. Winning and Qualifying Prospects
The first step is to identify a potential customer. This could be a new contact or an existing customer to whom one wishes to sell an additional product or service. To acquire new prospects all known forms of advertising can be used: Window display Advertisements in trade directories, magazines, newspapers, radio and TV Direct marketing, usually in the form of serial letters by mail but also by fax or e-mail. Online marketing: directly using your own home page, as a banner commercial for other online offers, as an entry in online business directories, as text advertisements in search engines or through involvement in social networks. Contact comes usually via a form on your own home page or via a contact email address. Trade fairs: prospects visit a stand at the fair and leave their business card, or the personnel at the stand complete a visitor log. Telephone marketing: Inbound – to answer enquiries from prospects who call directly and – outbound – to approach new contacts in order to telephone prior mailings or trade fair contacts and to reply to incoming e-mail or online enquiries.
In the very early stages of customer contact, meticulous documentation is important. This is because all statements in advertising materials and messages about your product or
Business Processes service can be demanded by the customer as "guaranteed attributes". Moreover, for the good of your own image and for sales success it is crucial that when contact with the customer becomes more involved later on, you can make precise reference to previous communications. It is of course embarrassing if, during a conversation, you do not know what information the prospect has already had from you or which colleague already spoke with him. In order to win an existing customer over to a new product or service it is especially important to have all information available concerning the relationship with this customer to date. You can then make reference to this when writing to the customer or in the next meeting. It is often the case that out of ignorance a seller tries to sell the customer the same service twice. Based on the information available at the site every conversation must therefore be prepared and the relevant content logged for follow-up later on. After having generated interest for a product or service you check whether this interest can lead to a sale. When "qualifying" the prospect the following questions need to be clarified: When, roughly, is the prospect interested in making a purchase? Does he have the money to make a purchase, i.e. has the money been "budgeted" and is the liquidity actually there? Can the contact partner make the decision by himself or are other persons involved in the decision-making process?
Business Processes Does the prospect wish to see offers from other providers? Do I as a potential supplier really have a chance or has the prospect already decided to buy elsewhere, or can I help to provide him with all the information he needs?
It will not always be possible to ask the relevant questions directly. A good salesman finds out everything during the initial discussion without the customer feeling pressured. With larger projects, a large number of discussions take place and much correspondence is exchanged before a specific offer can be produced. This can take time and will often lead to a break-off of the sales process, for example if there is no budget planned or the budget is insufficient. In any event during qualification the importance of documentation increases. If the sales process is stopped at this stage this can represent a new opportunity in one or two years time, if the prospect has then budgeted an amount for this work or general conditions have otherwise improved. Modern customer administration systems (Customer Relationship Management = CRM) enable you to log every single contact with a customer. In addition to the entries logged in CRM, all advertising letters, brochures, correspondence, offer and contractual drafts and e-mail correspondence must be archived in an orderly manner so that they are immediately available for the customer or product in question if necessary. In many cases a structured process is necessary for processing contacts with prospects, so-called leads, or to clearly improve the sales success. A typical process chain looks as follows:
Figure 3: Leads process chain In most cases different colleagues will be responsible for the individual process steps. Who is individually responsible and what steps need to be performed by any given person will vary from company to company. In general, the more people, documents and systems involved in processes, the more interfaces there are and therefore the higher the risk of error. If there are many contacts with prospects to be processed, IT-
Business Processes supported control of the process can help reduce the time required to a minimum, maximizing customer satisfaction and therefore the success rate. When acquiring and qualifying prospects, full and complete documentation of all communications that take place during the process must be ensured. To minimize the work that arises for colleagues, systems must be used that make the entry of information and storage of documents as easy as possible. For documents in particular, centralized, uniform and ordered storage must be provided. The filing cabinet on your desk and the hard drive of your PC are definitely not suitable. Even if the best systems are used, documentation and storage will never be anyone's favorite task. However, acceptance will increase as soon as colleagues begin to experience the benefits for themselves: by finding their own documentation more easily and also that of their colleagues. Acceptance will also be increased if other departments provide their information and documents in the same way, including in the same order ideally. For acquiring and qualifying prospects, customer invoices or reports from maintenance and support visits can be useful. Full documentation that is easy to find is essential for winning over a prospect to the purchase of your products or services. In the case of Peter's Engineering the number of initial contacts is relatively low. The national operators of static amusement parks and of mobile fairground rides are all known – there are fewer than 50. The best possible quality of relationship is therefore what really counts. The member of sales staff must always be in the picture about the customer and ideally have all information to hand in a customer file.
Business Processes Peter's Engineering is hoping to expand its order books abroad. Although occasionally it attends trade fairs abroad, usually the member of the sales team responsible for the region makes initial contact by phone and arranges a personal meeting at the location. Following such contacts it can often take years before a sale is made, especially if a new ride was purchased from a competitor only shortly beforehand. Due to the low sales volumes for Peter's Engineering a structured process is not particularly important, neither to maintain existing customers nor for new contacts with prospects. It boils down to correct resubmission and good appointment management by the salesman himself. It is therefore all the more important to document correspondence in full, especially since the responsibility for a region can change over a period of years.
3.3. Managing Sales Discussions and Negotiations
Following the successful qualification of a prospect the actual sales negotiations then take place. During these negotiations the following are agreed: the precise qualities of the product or the exact scope of the service, the date or time period for the delivery or service, the necessary support by the customer himself, the price and the terms of payment
It is crucial that at the time the deal is made both supplier and customer are in agreement on the above points in detail and that this agreement is documented. If not, disputes could arise
Business Processes after delivery leading to demands for improvement or for a reduced price on the part of the customer. Documentation is so important because in the event of a dispute only this documentation will provide proof of the agreement made. A basic distinction is to be made between businesses selling standard goods and services and those selling customized goods and services. With standard goods and services, the product or service is defined by itself (simple consumer goods and services) or by a corresponding description: brochures, data sheets or online descriptions. If an offer is made in writing, the descriptions are attached to the offer and individually listed as "Appendices" in the offer itself. If, in individual cases, no offer is made, the customer can be sure that the product or service matches the published description and is valid at the time of purchase. This makes it clear that for standard products and services the reliable archiving of each version of product and service descriptions is important in order to later be able to demonstrate the properties promised at the time of sale. Whilst in standard business the negotiation process tends to be simple, in individual businesses numerous process steps by a number of different persons are usually necessary. The following steps can occur before the actual sale is made:
Figure 4: Process steps for closing a sale Complete documentation and efficient control of such a negotiation are essential. Internally the documentation is required mainly for the detailed specification and calculations for production and order processing to be able to track the agreements between the internal departments,
Business Processes to be able to re-open negotiations at a later date in the event that they are broken off, and for more straightforward handling of similar inquiries.
It can also happen that not all details are described in the order, in which case the supplier and the customer need to be able to decipher, based on the previous correspondence, how a particular service description is to be interpreted. The negotiation process must be rapid and reliable. Prospects require rapid reactions to their enquiries so that they have more time to make decisions. Rapid responses promote a positive overall impression and make it more likely that the order will be won. At the same time, the less time required by a sales executive to negotiate an order, the more orders he can win. A rapid negotiation process promotes the immediate availability of all necessary information and fewer journeys and waiting times internally.
3.3.1. Liability Risks
As described, for both standard and customized products and services, documentation of communications with the prospect helps prevent unwarranted additional demands or claims. The general terms and conditions of business are important here (as process input). These normally lay down the deadlines for offers, terms of payment, warranties, limitations of liability or other subjects like the terms and conditions of use of software or other intellectual property. In the event of a dispute, you must always clarify whether the general terms and conditions of business were part of the order and if yes, what version of the conditions. Previously the terms and conditions were simply included in small print on the back of the letter paper.
Business Processes Nowadays they are attached to an e-mail, printed on the pages following the offer or a link is provided to the version published on the home page. The situation is still more complicated if, when placing his order, the customer generally refutes all of the terms and conditions of his supplier and declares his own to be valid. In business-to-business trading (B2B) generally all agreements made are valid – and therefore it is important that these agreements are documented. For B2B, the special protection afforded to consumers by the law frequently takes precedence over any agreement that is to their disadvantage. This means that the documentation only helps the seller to a limited extent. On the other hand there are more and more industries (e.g. financial services) in which the provider is under obligation to ensure everything is properly explained to the consumer. The customer must confirm in writing that it received such an explanation and the provider must carefully archive the confirmation.
3.3.2. Business Transaction
The successful conclusion of a sales negotiation is the business transaction. Depending on the business type there are different types of documentation as follows: "Retail Store Bulk Goods" (food, etc.): Anonymous documentation is provided by means of a sales slip for the customer. Usually the transaction is stored electronically with the product or product category description, prices, sales tax, totals, payment, and change given. The negotiation itself is not documented. "Retail Store Durable Goods" (domestic goods, etc.): The customer's name and address is generally recorded with the sales transactions. The sale is made by entering an order if
Business Processes the goods are not in stock or by immediately issuing an invoice. In the second instance payment is normally made straight away which, in a similar way as with the sale of mass goods, is also documented by a sales slip. All data is stored. The negotiation itself is not documented. If an invoice is immediately issued upon conclusion of the business transaction and if the payment is made, these process steps are relevant for financial accounting. What is meant by this is explained in the chapter "Issuing Invoices and Receiving Payments". "Written Orders": The customer sends an order online, by email, fax or post. Following receipt of the order by the supplier, the transaction comes into force, unless the supplier raises an objection. In addition an order confirmation can be sent to the customer although this is not compulsory. If its content does not agree with the order, the order confirmation takes priority, unless contested by the customer. This is with the exception of (minor) malice or if the customer enjoys special protection from the law as a private consumer. "Formal Purchase Agreement": An individual purchase agreement is negotiated and recorded in writing. Normally the supplier and customer sign the agreement together. Once both parties have signed, the transaction is considered to have been completed. For all types of business transaction, all entered data and documents generated must be permanently archived. Archiving is performed either to be able to furnish evidence in the event of a dispute or based on legal regulations, e.g. those from the financial authorities. Peter's Engineering is a company that offers customized goods and services. The negotiation process is as shown in
Business Processes the example above. Depending on the size of the project, several repeats of the loop are necessary because multiple versions of an offer are exchanged between the relevant sales executive at Peter's Engineering and the customer. A design phase frequently takes place first that is paid for separately by the customer, before the order for the manufacture of the fairground ride is actually given. The workflows during order processing are difficult to standardize due to the differences between the projects and the customer. For this reason the rapid availability of information, for example of whichever supplier price lists are most current, and the conscientious documentation of negotiations are particularly important.
Business Processes Self-Test Questions: 1. Put the most important business processes into the correct order a) Concluding a transaction, i.e. the actual sale b) Invoicing and payment monitoring c) Fabrication or the provision of a service d) Acquiring prospects e) Purchasing of materials and services 2. Why is meticulous documentation of business processes important at the early stage of acquiring customers or negotiating a sale? a) Guaranteed attributes can be demanded by the customer. b) Your own image and sales success increase if, by means of the documentation, reference is made to previous communications. c) Agreements between buyers and sellers are traceable. d) Without documentation of the customer acquisition, no formal sales agreement can be made.
3.4. Purchasing Materials, Goods and Services
Every concern must purchase goods, including all public authorities, schools and service providers. A distinction is made on the one hand between materials, goods and services that flow directly into a product or overall service (In the case of Peter's Engineering this is for example the steel for manufacturing the beams and the roller coaster wagons, which are obtained from a supplier. The services of the independent structural engineer are also included). On the other hand materials, goods and services must be bought in for the ongoing operation of the plant. Power, office materials and cleaning services are typical examples from every plant. The first group that is sold on as part of a delivery or service is posted separately in Financial Accounting as a material usage and allocated in Cost Accounting to a cost unit, e.g. a steel beam, or to the customer project "Roller coaster". In trading companies there are no separate cost units for trading goods – each individual good is its own cost unit, as it were. In any event the purchase price of the material usage affects the margin directly and therefore the profitability of the individual sales business. Accordingly Sales in particular has an interest in the cheapest and correctly calculated purchase, because its service is normally measured according to the margin or the profit of the sold products or services. The second group, which cannot be directly allocated to an individual good or service, is posted in Financial Accounting under overheads and allocated in Cost Accounting to a cost center or split between multiple cost centers. Normally each cost center has a manager, for example the head of department or the foreman. These are those with the strongest
Business Processes interest in keeping the overhead costs of their cost center as low as possible.
3.4.1. Purchase Process
The following decisions are important for consideration of the purchase processes: Standard purchasing versus individual purchasing Manual versus system-supported purchasing
With standard purchasing there is no negotiation of the price or properties of a good or service. Instead, goods or services are ordered based on the product description and price list. The person who makes the purchase must ensure that this information is up to date and available at the time the order is made, so that the price is not higher than expected or that its properties are other than expected. If necessary you must check with the supplier and to be on the safe side, specify the price list, the product description and its version in the order. All documents are to be archived for subsequent verification. In the case of individual purchasing, properties and price will be individually negotiated and documented in the offer and the order. These must be archived and, logically, the accompanying correspondence also. For archiving the same reasons apply as given in the chapter 3.3 "Managing Sales Discussions and Negotiations" for customized goods and services – here however from the perspective of the customer. For both purchase types it is important to be able to access the documentation of the previous transactions. Questions such as "Who did we order that from last time?" or "What did the article/service cost back then?" are typical in a purchasing situation. Your prompt, reliable answer saves time and makes purchasing negotiations easier. Standard and customized
Business Processes purchases can be made both manually and with the help of the system. We speak of manual purchasing if a person makes a purchase in person, by telephone or in writing, without the order being entered in the central ERP or a separate order system. Such manual orders are usually performed by the cost center managers, the heads of department or their members of staff. Normally the check on the delivery or service and the calculated price is made by the same person. The order documentation must be readily available for the check. With manual purchasing too, ordering, goods receipt and invoice verification can be performed by a number of individuals. The process at Peter's Engineering is as follows:
Figure 5: Purchasing process chain The more likely errors are, the more important it is to clearly define error correction processes and have good documentation.
Business Processes If paper documents are sent back and forth they can easily get lost. Therefore an electronic shipment method is ideal, especially if the offices of the Head of Production, Financial Accounting and Incoming Goods are some distance from each other. In the case of system-supported purchasing, the order with its individual items is entered in the ERP or order software. This can be done either by the purchasing department or by the person who triggers the order. The goods receipt is then entered directly in the system. Incoming invoices are cleared directly in the system with the electronic order. Such systems are used whenever repeat orders for a large number of different articles need to be made or where the same system is also used to calculate manufacturing costs. In such cases all of the articles usually required are stored with their price and delivery information in an article database. If certain articles are required they are searched for in the software and a print-out (or electronic transfer) of an order to the relevant supplier is triggered. Examples of this are companies with serial production, for example car manufacturers and suppliers, or wholesalers and major retailers. Even for Peter's Engineering such a system can be advisable if, at the same time as growth, a standardization of manufacturing methods is possible. If the buyer creates an order in the system, an order number will be printed on it. This order number is specified by the supplier in its delivery notes and invoices. When the delivery note and invoice reach the buyer's accounts department, the corresponding order is found very rapidly using the printed order number. By contrast, with manual purchasing searching for the order can take longer. System-based purchasing is usually highly standardized. The purchase of steel at Peter's Engineering described above also
Business Processes follows a specified process. At most companies at least some portion of purchases are made ad hoc: For example: someone needs a new chair, there is no more coffee, a projector is needed for the conference room, fuel for heating must be ordered, the delivery truck needs new tires, an external architect must be consulted for the project. At very large companies such purchases can also be made with the help of the system – whenever it is worth entering, maintaining and ordering the coffee, office chair and the heating fuel centrally as an article in the system. However these purchases are usually made manually and a single employee is responsible for ordering, checking the goods or the service, checking the calculated price and any terms of payment agreed. In other words even if most of the purchases at a company are system-based, there are always (usually small) orders that are made manually. Typical process of an ad-hoc order: 1. A colleague orders an article directly from a supplier, for example from an office supplier and requests delivery to his department or directly to him. 2. The article arrives at the mail room or at Incoming Goods. Due to the complete address the article can be immediately forwarded to the colleagues. 3. A few days later the invoice arrives at the mail room. Since the address is complete, it is forwarded to colleagues by the interoffice messengers. 4. The colleague checks the invoice either by comparing it against his order or against other price information that he may have. 5. He signs off the invoice and sends it to the accounts department via the internal mail system. 6. At the accounts department the invoice is posted.
Business Processes 7. During the next weekly payment run the colleague triggers payment of the invoice.
3.4.2. Terms of Payment
No matter who does the purchasing, when the transaction is concluded the goods or service must always be paid for. Normally an invoice is received following delivery. The invoice will record the deadline by which payment should be made, for example 30 days from the date of invoice. In addition to "payment on receipt of invoice" normally received by bank transfer or by check, there are also: Advance payments prior to provision of the goods or service Cash in advance (by check or by bank transfer) Cash payment on collection (e.g. in retail) Cash on delivery (supplier receives payment from customer when goods are transferred) Payment by credit card or by bank direct debit, except in retail usually as advance payment
(There is also payment by bill of exchange. However since this payment method is very complicated and is hardly ever used it will not be described here.) Different modes of payment have (as key process input) an impact on the sales or purchase process at the supplier and at the customer and therefore on the entire production or service process. If you pay for the goods prior to delivery, the money required must be available beforehand and any cash on deposit canceled. The decisive factor for method of payment is generally the buyer's credit rating. The following is possible:
Business Processes The customer's credit rating is known: The customer will be supplied up to a certain limit of open invoice amounts and payment requested on receipt of invoice. The limit depends on the customer's credit rating and is determined using information from a bank, a query at a commercial credit agency or based on the level of credit insurance. The customer's credit rating is not known: This normally applies in the retail industry and in B2B transactions where the number of customers is high and the volume of individual business tends to be low. There is no point in making a credit check here. Payment is made in cash or by credit card, direct debit, cash in advance or cash on delivery. In certain industries and in countries with a record of good payment behavior and with efficient debt collection law, deliveries are made on open account for this type of business. The customer's credit rating is known to be critical: in this case payment is made by cash in advance, cash on delivery, credit card or by bank direct debit.
Delays in the payment process can easily lead to delivery delays. Even if a customer's credit rating is basically sound, an accidentally unpaid invoice for a previous delivery could cause a supplier to cease supplying him. For very major projects, advance payments are usual which are made before the service starts or before the first partial delivery. If advance payment is delayed, service is also delayed. In this example, it is easy to see how important it is to think in "process chains", i.e. beyond the workplace/department. The on-time payment of invoices can, in the case of smaller suppliers in particular, be extremely important. For the boss a rapid payment receipt is important and therefore they know the
Business Processes payment behavior of every single customer. As a result, those customers who have never had problems paying are treated accommodatingly, however there are no systematic credit checks. The situation at a large company is different. The sales or service department usually only finds out about late payments when the credit check in Financial Accounting triggers a delivery stop. The final and possibly most noticeable benefit of trouble-free payments by the purchaser is the use of discount. Cash discount is a price reduction of normally 2% to 3% granted by a supplier if the payment is made rapidly. For example, the terms of payment on an invoice could be as follows: "Payable within 8 days minus 2% discount or in 30 days by no later than xx.yy net". The use of discount is attractive for every buyer: he receives a discount of 2% for making a payment 22 days early. Over a period of a year, this is the equivalent of an interest return of over 30%! Conversely, the granting of cash discount for the supplier represents an interest burden of over 30% per annum. Why then do suppliers ever grant a discount? Because discounts are a part of the discount concept. Because it is common in the industry. Because the use of discounts is an indication of customer liquidity.
The last point is particularly important: no sensible buyer misses out on possible cash discounts. Unless he has major liquidity problems the potential discounts are insignificant to him or he does not have his processes under control.
Business Processes In the case of large companies, the latter can sometimes lead to the questionable behavior of making smaller or "weaker" suppliers wait 20 days for payment but still deducting a discount. It is clear how important the rapid, efficient processing of invoices and payments is, both to maintain the relationship with the supplier and to benefit from discount income. This also applies at Peter's Engineering. Due to very high safety requirements, Peter's Engineering relies on its suppliers to provide services of the very highest quality. In addition, the granting of discounts in the industry is normal and offers Peter's Engineering considerable savings potential.
3.4.3. Purchasing and Financial Accounting
The receipt of an invoice and its payment are the initial process steps that must be documented in Financial Accounting. The financial authorities prescribe that invoices must be stored for a certain period of time specific to each country. (For example, in Germany this period is 10 years.) The same applies to the documentation of payments. A payment can be documented in a cash ledger, by a bank statement or as an accounting record in the Financial Accounting system. For the tax office the storage of supplier invoices is so important because these invoices serve as proof of expenditure. All expenditure reduces the profit of a company. Since the taxes payable depend on this profit, every invoice also reduces the tax burden of the company. In addition to taxes on profit – which range between 30% and 50% depending on the region – VAT is also important.
3.4.4. Sales Tax – Input Tax – VAT
The seller must add sales tax, for example 19% of the price, to the actual sales price of goods and services. This tax must be paid over to the tax authorities. At the same time, input tax deduction applies in most countries for companies who do business in the home country. When Peter's Engineering receives a delivery of steel, the supplier first invoices his (net) price. The sales tax that applies in his country, e.g. 19%, must be added to this price to arrive at the total invoice amount (gross). Once the supplier has sent the invoice, it owes the tax office the sales tax and must pay it over by the end of the month. Conversely, Peter's Engineering as purchaser may immediately request its tax office to refund the sales tax listed on the steel delivery invoice as "input tax". Repayment by the tax office also usually takes place at the end of the month. The question arises as to what is the point of first paying this amount over to the tax office and then reclaiming it? In fact the idea of not applying sales tax to business transactions between companies is frequently discussed. Indeed when selling abroad the rules state that for a foreign company no sales tax need be applied. More crucially, the question can be asked as to how sales tax is actually received by the state if every purchaser can reclaim it as input tax. The answer is simple: the end consumer, i.e. the private consumer cannot demand repayment of sales tax. He pays the full sales tax amount to the seller and the seller pays over this amount to the tax office. However, he (the seller) is reimbursed the sales tax on the goods purchased by him as input tax to the business. The amount is smaller since he buys in the goods more cheaply than he sells them. The
Business Processes bottom line is that he only pays sales tax on the difference between the purchase price and the sales price, i.e. for the added value that he created for the goods. Since with the individual company only this added value is actually taxed, the tax is called value added tax. It means that each company along the manufacturing chain pays VAT on the added value it creates. Example calculation … (purchase price + input tax + margin + VAT …) This common calculation method is of particular interest due to widespread sales tax fraud which costs European countries many billions of euros every year. The principle is simple: A newly established company gets a dummy company to send it an invoice for 1 million euros, plus 19% sales tax. The company submits the invoice to the tax office and requests a refund of the input tax in the sum of €190,000. The tax office refunds the amount. The head of the company moves abroad with the €190,000. To stop this, the state has implemented a number of measures. Among other things, due to tax fraud the rules on the storage of invoices are particularly strict and for electronic mailing across Europe an electronic signature is required on an invoice. The basic principle behind this is simple: since both purchaser and supplier must retain a copy of the invoice, in the event of suspicion the tax office can check both sides and ensure both the identity of the invoice and its correct posting. As explained above, Peter's Engineering can reclaim sales tax from the tax office as input tax, as soon as an invoice has been received. Provided there is no fraudulent intent, the input
Business Processes tax can be reclaimed immediately – even long before the invoice is paid (if for example a generous payment date was negotiated with the supplier). In this way until the invoice is paid the company receives the sales tax amount – in our example 19% – as an interest-free loan from the tax office. It is therefore important that incoming invoices are processed quickly, in order to secure the liquidity benefits of input tax refunds. The tax authorities set fixed deadlines for submission of monthly sales tax returns, which must under all circumstances be met. Note: some types of business do not have to levy VAT on their services and therefore cannot reclaim input tax. These include small companies, most public authorities, some public and municipal bodies like schools and kindergartens, and in some cases doctors, farmers, etc. In addition to the duty to document and to store, for the tax authorities commercial law prescribes the full and complete documentation of all business transactions. The company itself also has a keen interest in being able to monitor its profitability on an ongoing basis. Financial Accounting must comply with all these requirements. Often, just a few days after the end of the month detailed figures on expense and revenue for the previous month must exist – for example because the parent company wishes to be able to access the group figures promptly. Monthly closing like this is associated with additional work for the Financial Accounting department. It is therefore all the more important that ongoing accounting processes, especially processing of incoming invoices are always processed efficiently and on time. When an invoice is posted this immediately gives rise to a payable in financial accounting. A payable is a debt in the sum of the amount invoiced by the supplier. Through this the
Business Processes supplier becomes a creditor in the creditors' ledger. The part of accounting concerned with purchasing and with vendor invoices is therefore called Accounts Payable. Usually the expense is posted at the same time as the payable and the costs are assigned in Cost Accounting. However, it can happen that initially only the payable is posted. This is the case if Financial Accounting does not yet know what type of expense to post (a clerk cannot identify every single article name of a computer component or a lubricant) or what cost centers or cost units to allocate them to. When posting the payable normally the payment deadline is also entered in the system. If all invoices are posted immediately as a payable together with the payment deadline, a company is able to plan very precisely when what payments are due as part of its cash management. This allows cash on deposit to be available at the right time or the expansion of credit to be agreed with the bank. The advanced posting of an invoice initially only as a payable is always advisable if invoice verification as a whole takes a long time. If company processes enable rapid processing of incoming invoices, there is no need for the extra effort of multiple postings.
Business Processes Self-Test Questions: 1. What are the differences between "material usage" and "overhead costs"? a) The term "material usage" includes services, whereas overhead costs cover goods. b) Material usage refers to a delivery or a service whereas overhead costs are not related to an individual delivery or service. c) Material usage refers to an entire company, overhead costs only to a cost center. d) Material usage exists only at manufacturing companies; overhead costs arise mainly at service companies. 2. What are the differences between a "standard purchase" and a "customized purchase"? a) For purchases of standard goods and services, unlike purchases of customized goods and services there are no negotiations concerning the price or attributes of a good or service. b) For purchases of customized goods and services there is no possibility of archiving the correspondence. c) Purchasing of standard goods and services takes place between manufacturing companies and end customers, purchases of customized goods and services between manufacturing companies and trading companies. d) Purchases of customized goods and services are made manually, sales of standard goods and services are made with the support of the system.
3. When someone makes a purchase in person, by telephone or in writing, without the order being entered in the central ERP or the company's own order system, we speak of: a) Purchase of human resources b) System-supported purchasing c) A manual purchase d) Controlled purchasing 4. If the order and its individual items is entered in the ERP or order software, we speak of: a) Automatic purchasing b) Methodical purchasing c) Controlled purchasing d) System-supported purchasing 5. Why in Purchasing does it make sense to manage documents electronically? a) Questions such as "Who did we order that from last time?" or "What did the article/service cost back then?" can be quickly answered. b) Paper documents can otherwise be lost. c) A smooth payment process can be very valuable, due to the exploitation of discounts, among other things. d) Commercial law prescribes the full and complete documentation of all business transactions. e) Electronic archiving means that the payment transaction can be made in electronic form only, e.g. by credit card payment.
6. Should invoices be archived in Financial Accounting? a) Yes, the financial authorities prescribe that invoices must be stored for a certain period of time specific to each country. b) Yes, invoices serve as verification of an expense. c) No, because financial accounting software contains all of the necessary data in an audit-proof format. d) No, because invoices are only required internally.
3.5. Manufacturing or Supplying the Product or the Service
The processes by which products are manufactured or services provided vary as much as companies themselves. We will therefore limit ourselves to a few general, mainly informational, process components that are important to a company's survival. From a business perspective it is important that the products or services a) contain all of the guaranteed properties and b) are provided or produced for the planned cost. The importance of clarity concerning the promised attributes on the part of the buyer and seller is already clear from the description of the sales negotiation. Brochures, data sheets and other product descriptions or properties and services specified in the sales document itself are part of the sale agreement and the seller must ensure they are met. To secure these properties every manufacturer draws up specifications based on which the product or service is manufactured or provided. The goods and services processes are defined in general work instructions or specific work orders. The attributes of the product are defined in design drawings, construction plans, circuit diagrams and other types of description. Many services are provided without prior description solely based on the learned abilities and experiences of employees.
3.5.1. The Manufacturing and Service Provision Process
At Peter's Engineering, prior to manufacture, the steel beam for a roller coaster is precisely defined by a constructional drawing. The drawing must be on hand at all times during its
Business Processes manufacture in the workshop. If the steel beam then goes to the paint shop, it is sufficient to specify the color. Due to his training, the painter knows how to mix the color or shade, how to use the air brush, and the number of layers to apply. Before a full roller coaster ride is manufactured a number of individual plans on the computer are created – one for each component. An overall manufacturing plan specifies the sequence in which the components are to be manufactured. Some manufacturing steps are carried out by hand, others are automated using computer-controlled machines. For manual work, the plans must exist on paper; for the computercontrolled machines some of the manufacturing data can be transferred electronically from the construction program. Since the rides made by Peter's Engineering are custom constructions with high safety standards, following manufacture every component must be examined by the relevant employee for quality control purposes. The employee must document the inspection, for example by making an appropriate note and by signing the construction plan. However, Peter's Engineering does not just need to ensure that the manufactured components and the entire roller coaster or the entire Ferris wheel have been checked meticulously. The technical qualifications of the members of staff must be proven. This proof does not affect the manufacturing process, provided it is ensured that the right colleague makes the check and that his name or signature is legible in the test log. Furthermore, Human Resources must ensure that the education, training and professional development of its employees is documented in full. In the case of series production, quality assurance of individual components or complete products can be performed
Business Processes either by checking each individual item or by means of random samples. Checks must in all cases be documented in full and without delay. Why is the documentation of production processes, the manufacture, testing, and employee qualification and permanent storage of this documentation so important? This documentation is mainly of importance in the event of a liability or warranty case. If a deficiency or fault arises, the manufacturer must be able to prove that it manufactured the product or provided the service with due care. Only in this way can unjustified liability claims or financial penalties and, in the worst case scenario, imprisonment be averted. Whilst liability and warranty claims usually arise concerning defects that are not obvious (hidden), the acceptance of a product or a service by the seller proves in principle that the supplier provided his service. In retail this takes place automatically: the customer takes an article from the shelf, looks at it and decides to buy it. By paying for the item at the cash desk, he in effect "accepts" the article. At Peter's Engineering the transfer of a fairground ride is a complex process. Using the contractual documents, the customer checks precisely whether everything was manufactured as agreed. Next the legally prescribed approval by an external, public inspectorate takes place, e.g. a Technical Inspection Agency. Peter's Engineering gets the purchaser to confirm acceptance by signing the acceptance log. The acceptance log records any small defects that need to be rectified by Peter's Engineering. With large projects, the acceptance log signed by the customer normally triggers issue of the final invoice.
3.5.2. Impact on Cost Accounting
The documentation of the manufacturing process described above is used mainly for quality control, to prevent unauthorized liability claims and, ultimately, to initiate final invoicing. Alongside this the manufacturing or service process must be logged for the check on cost-effectiveness. A top quality product and satisfied customers do not help much if in the end your own costs are higher than the price paid by the customer. To prevent this from happening, the costs must be known. When a product is manufactured or a service provided, a distinction is made between two types of cost: direct costs and indirect costs. The overhead costs mentioned above in the chapter 3.4 on incoming goods are those costs incurred for the administration, business management, planning, research and development and the setup of manufacturing. Direct costs are the material costs, energy costs, occupancy costs and personnel costs incurred in the manufacture of an individual item or in the provision of a service and which can be directly allocated to this service (this can also be an order or project). Indirect costs and direct costs are included in the calculation of the sales price. To calculate the price the overhead costs are split, i.e. apportioned between the items to be manufactured (under various procedures). Direct costs are included directly in the price calculation. How are these costs calculated in financial accounting? Costs are determined as part of cost accounting. They are sometimes also split off into a separate department. Costs that arise through a third-party service or a purchased good are entered by the relevant personnel normally when the incoming invoice is posted. In addition to the financial accounting ledger, which is crucial to be able to draw up the balance sheet and
Business Processes for tax calculations, the bookkeeper enters the relevant cost center in the posting record and, if direct allocation is possible, also the cost unit. As mentioned in Chapter 1.2 on cost accounting, the cost center is usually the department and the cost unit the individual product or a project. By totaling up the postings made to a cost unit the individual costs can be calculated for the individual product. This means that the directly attributable direct costs are then posted to the cost unit (figuratively speaking: "It bears the costs"). What is important for the process is the question as to how the accountant knows what cost center or cost unit an invoice should be posted to. Usually only the technical colleague knows this, e.g. the head of the technical department, the workshop or manufacturing. If an ordering system is used at a company the person who enters the order can also specify the cost center and cost unit when they do so. If not, when approving the invoice he or she can enter the necessary information on the document. The correct entry of cost center and cost unit can be difficult if multiple invoices need to be posted rapidly at the same time. When planning the processes you should therefore check precisely who can specify the necessary details when and how rapidly and what needs to be done if an employee is away on vacation. At Peter's Engineering, when approving the invoices the cost center manager also enters the invoices since he or she knows for which order the material in question is required. Sometimes a delivery needs to be split between several cost units, if for example the raw steel for two projects needs to be ordered and delivered at the same time. In addition to the external costs, which are always documented by an invoice, the "internal" costs must be
Business Processes entered precisely in order to calculate prices. The most important factor is the working time. For companies that supply customized goods and services, the workload of the individual employees varies from case to case. Here the employee himself enters the number of hours worked on his work report. These work reports are entered in Cost Accounting and the working time assigned to a cost unit. If an individual order is calculated to some extent "according to the work", the work reports serve as evidence for the customer. It is therefore important that work reports are drawn up and filed very carefully. When very expensive tools or devices are used, then in addition to the number of hours worked, "operating hours" are also entered and billed. When Peter's Engineering plans a fairground ride, in addition to the construction drawings the individual work orders for the workstations and members of staff are also created and printed out. These work orders contain a form field at the end in which the colleagues can enter the number of hours. The work orders then become work reports that are collected together in the project folder and later archived.
Business Processes Self-Test Questions: 1. Why, during manufacture, is meticulous documentation so important? a) In the event of a fault, documented quality assurance and proof of technical qualifications can avert financial penalties or imprisonment. b) When the delivery is accepted, proof of the service provided can be given. c) Accurate documentation can allow economic viability to be examined. d) If product defects are documented within the company, the customer cannot later expect to have a warranty honored. 2. Which of these statements about Cost Accounting are correct? a) In addition to the external costs, which are documented by an invoice, "internal" costs must be entered precisely in order to calculate prices. b) To allocate an expense to a cost center or cost unit correctly, when planning the processes you must check precisely who can provide the necessary information when and how rapidly and what needs to be done if an employee is away on vacation. c) Cost accounting is always cross-company and can never be assigned to a separate department. d) By totaling up the postings made to a cost unit the individual costs can be calculated for the given product.
3.6. Writing Invoices and Receiving Payments
As soon as an order is carried out or the goods have been transferred, an invoice is normally written. It is in the interests of the seller to issue the invoice as quickly as possible in order to receive payment as quickly as possible. In the case of large projects it is common to split invoicing and therefore payment, e.g. a third of the invoice amount when the order is placed, a third when work is commenced and a third following completion. In this instance three invoices are entered for an order. From a process perspective it is important to know who writes the invoice in the company and how this person receives the necessary information: that an invoice needs to be issued, who is to receive the invoice, how much is to be charged and what terms of payment apply. As in Purchasing, when writing an invoice a distinction is made between customized goods and services and standard goods and services. In both cases a special software is normally used for issuing an invoice (billing). Normally, the minimum functionality provided by this software is administration of customer addresses, counting of article items and calculation of sales tax. However, in companies that provide standard goods and services and also in many companies that provide customized goods and services, management by IT systems goes well beyond this. The customer's order or commission is entered in the system immediately upon receipt. The system has a database containing all products and services offered by the company. When entering orders the items are selected and a check made as to whether the prices defined in the system agree with those specified by the customer in their order. If the customer quoted lower prices in their order – and you do not wish to accept these – you first need to notify the customer of
Business Processes the price discrepancy and ask him whether he still wishes to go ahead with the purchase. If the customer specified higher prices we can either use these or – in order to be fair – charge the customer the lower price. In addition, when entering orders individual items can be entered manually and their description and price can e.g. be taken from the purchase agreement. The order is processed after having been entered, for example the goods are removed from the warehouse and sent, a car is manufactured, the telephone connection is set up or the project carried out. If the order includes the delivery of goods, a delivery note must be created which is always included with the goods or is transferred together with the goods. It often looks exactly like the invoice and contains precise details of quantity and articles, but no prices. The delivery note is often attached to the shipping carton in a transparent, self-adhesive plastic envelope and also functions as the address label. Delivery notes are written using the same IT system as invoices. The information in the delivery note must match up with the content of the delivery precisely. Upon receipt, the buyer must check the goods against the delivery note and immediately lodge a complaint if there are discrepancies. If the buyer does not respond, the goods are considered to have been delivered as described in the delivery note. When goods are ready for delivery, the relevant order is called up in the system and after just a few entries the delivery note is created and printed. When Order Processing reports that the goods have been delivered, the order is accessed again in the system and the invoice is created and printed with a few entries in the invoice.
Business Processes How order processing makes its report depends very much on the type of business. In retail, where the goods are only removed from the warehouse, the delivery note and invoice can be issued when the order is entered. This requires that the goods are in stock and that company processes ensure immediate delivery. For practical purposes, the delivery note is printed out in the warehouse and directly attached to the goods. Before the invoice is sent it may be necessary to apply an "artificial deadline", so that the invoice does not reach the customer before the goods. In other cases the invoice is not drawn up until the shipping agent reports delivery. Alternatively, Financial Accounting issues the invoice later again, as soon as the receipt confirmation signed by the customer has been received at the company. A copy of the delivery note frequently serves as proof of receipt. For wholesalers and in mail ordering the date on which an invoice is created is especially important: due to small margins, the sooner the invoice is sent, the sooner payment should be received. Having to wait regularly for the return of a receipt confirmation can be expensive. With big, complex projects such as the construction of a roller coaster by Peter's Engineering the writing of a closing invoice is a complex process. A check must be made as to whether all services have been provided. The logs and confirmations must be inspected and compared against the offer. Normally a final acceptance log from the customer must exist. Any defects can lead to a price reduction. Usually during the project there are changes in comparison to the original offer caused by additional work for which Peter's Engineering is not responsible (e.g. special environmental conditions) or due to change requests by the customer. All of this must be documented and be available for invoicing purposes. Following invoicing the customer almost always has
Business Processes additional questions on individual items and it must be possible to reply to these questions rapidly. Only following their full clarification is the customer normally ready to pay. As soon as an invoice has been written and sent, the company has a receivable with the customer. The customer is now the debtor. To document this, the invoice is posted in Financial Accounting. The part of accounting concerned with the administration of outgoing invoices, receivables and incoming payments is called Accounts Receivable. When the invoice is posted as a receivable the sales revenue and a new debt are normally entered in Financial Accounting. Sales tax of e.g. 19% must be added to the price agreed with the customer. This sales tax immediately becomes a payable and is paid over to the tax office with the next tax return, normally following the end of the month – even if the customer has not yet paid. Here the reverse effect occurs of that with input tax on purchases which the tax office may refund to us before we have paid our invoice. The writing and posting of outgoing invoices respectively are two separate transactions that are often performed by different persons or even departments. Separate systems are also frequently used: invoicing is in the ERP system and posting in Financial Accounting. In most cases posting is by means of electronic transfer of invoice data from one system to another – once per day as a "batch job". Once the outgoing invoices have been posted, accounting then turns to monitoring the incoming payment. The financial accounting software shows at all times what invoices are due and when. When a payment is received it is posted "against" the receivable. Payments are usually made electronically by bank transfer, direct debit, credit card or check. Normally upon payment the customer specifies the invoice number as the
Business Processes payment purpose and this number appears on the check or on the bank statement. Using the invoice number or if necessary the customer name and invoice amount, the accounting clerk identifies the relevant receivable and carries out the posting in the system. The receivable is cleared by the posting. Overdue receivables are listed separately by the financial accounting software and result in reminder letters. It is common for automatic "reminder runs" to take place by which the software prints out reminders which are then mailed to customers. Customers who have overlooked an invoice will – grateful to have been reminded – immediately send in payment. All other "intentional" late payers will not be unduly concerned by an automatic reminder notice, especially not those sent by e-mail, which usually end up in their SPAM folder. However a written reminder notice sent by post is important since the customer is officially in arrears as soon as it is received and the supplier is entitled to demand interest on arrears. Therefore a copy of reminder notices should be stored until the payment has been received. Here electronic archiving is particularly valuable because it is cheaper than storage of hard copies and after one or two years all reminder notices can be deleted. The figure below provides an overview of the whole process.
Figure 6: Overview of whole process
Business Processes Self-Test Questions: 1. From a process point of view, what is important when writing an invoice? a) Who writes the invoice? b) How the person who writes the invoice finds out what is to be invoiced? c) How the person who writes the invoice finds out that an invoice must be issued? d) How high the average invoice amount is? 2. What information is important for invoicing? a) During the course of the project, have changes arisen in comparison with the original offer? b) Who is responsible for possible changes to the original offer? c) Have the desired services been performed? d) What the customer's bank details are? 3. What processes can follow invoicing? a) Invoices are posted. b) Invoices are checked for missing content. c) The incoming payment is monitored. d) Reminder notices are written.
4. What documents can be necessary following a customer order? a) Invoice b) Delivery note c) Confirmation of receipt d) Offer
Other Commercial Processes
4. Other Commercial Processes
In this manual we have limited ourselves to business processes that are directly required for the provision and utilization of services. There are however many other supporting processes essential to a company's survival, above all HR-related processes, especially Monthly pay slips Travel expenses claims Vacation planning Sick notes
These four processes are extremely important and often hide considerable potential for improvement, which in turn not only helps save time and money but also to increase employee satisfaction. In Financial Accounting there are important, recurring processes that have not been mentioned here, in particular those processes related to business planning. These are in addition to monthly, quarterly and annual closing. Depending on the size and structure of the company, colleagues from different divisions and subsidiaries must be incorporated into these "overlapping" processes. Although it is relatively easy for the layperson to understand processes in Human Resources – because almost everyone can relate to them – understanding of planning and closing processes in Financial Accounting and also in manufacturing, does require specialized knowledge.
Other Commercial Processes Basically, for the optimization of business processes the same principle applies as with golf: neither can be learned from a text book alone but above all through practice! And this practice is the best way of starting your own company.
Appendix: Solutions to Self-Test Questions
Appendix: Solutions to Self-Test Questions
Self-Test Questions Page 14 - 15 Right answers: 1b, 2c, 3ab, 4ab
Self-Test Questions Page 22 - 23 Right answers: 1bc, 2ac, 3abc
Self-Test Questions Page 38 Right answers: 1daecb, 2abc
Self-Test Questions Page 53 - 55 Right answers: 1b, 2a, 3c, 4d, 5abcd, 6ab
Self-Test Questions Page 62 Right answers: 1abc, 2abd
Self-Test Questions Page 69 - 70 Right answers: 1abc, 2abc, 3acd, 4abc