Overview

• Understand the expenditure cycle

• To considers the strategic implications of expenditure cycle
Objectives
After studying this chapter, you should be able to:
• Describe the key objectives and strategic implications of the
Expenditure Cycle
• Identify common technologies underpinning the Expenditure
Cycle
• Describe Expenditure Cycle data and the key expenditure
business decisions
• Identify and document the primary activities in the Expenditure
Cycle and the data produced by these activities
• Develop metrics to monitor Expenditure Cycle performance
Contents
• Expenditure Cycle overview and key objectives
• Technologies underpinning the Expenditure Cycle
• Data and decisions in the Expenditure Cycle
• Identify and document the primary activities in the Expenditure
Cycle
• Measuring Expenditure Cycle performance
The Expenditure Cycle
Lesson Overview
The expenditure cycle begins:

• When certain parts / divisions need goods / services

• Demand for goods purchased from the division should be
evaluated whether it suits the needs or not
• Acceptance of goods from suppliers must be timely and must be
checked first quality and quantity before the goods received
• Until the goods are shipped by the supplier and there is a cash
outlay paid to the supplier
• Then the payment to the supplier must be timely and accurate
 Lesson Overview
Purchase Request from Purchase Requisition Purchase Order
Inventory, Production & (Purchasing (Purchasing
Requesting Department Department) Department)

Purchase Return
Purchase Invoice Receive Goods
(Purchasing
(Vendor) (Inventory)
Department)

Flow of Purchase activity until Payment

Vendor Payment
(Account Payable)
Lesson Objectives
After studying this lesson, you should be able:
• To describes the purpose and involvement of the expenditure
cycle within the organization
• To identify supportive technologies in the expenditure cycle
• To describe the expenditure cycle data and key business decisions
related to expenditure
• To identify and document key activities in the expenditure cycle
and how data is generated in expenditure cycle activities
• To develop measurement metrics to monitor expenditure cycles
Expenditure Cycle Overview and
Key Objectives
1. Expenditure Cycle Overview
and Key Objectives
• In order to achieve overall business objectives and remain
profitable, the expenditure cycle needs to be well designed and
tightly controlled
• Poorly controlled expenditure can lead to cash flow and liquidity
problems
• An additional consideration for the expenditure cycle is the need
to balance the supply and demand for products within the
organization
• The expenditure cycle consists of two separate elements:
• Purchasing
• Account payable
• Settlement Term is: payment terms negotiated with a supplier
1. Expenditure Cycle Overview
and Key Objectives
Interact with
external suppliers
of goods / services
The goal is to provide goods /
services in a balanced quantity
and receive goods on time

Goods / services
Documents are
received from This purchase
required for all,
appropriate suppliers activity must be
such listing
and tailored to delivery authorized
activities
specifications

Illustration of Purchase Activity

1. Expenditure Cycle Overview and
Key Objectives
The purpose of It must be
Usually performed
repaying the debt ensured that
by staff in the
(Account payable) payments are
Back Office
to the supplier in made by
Department
the right amount authorized people

To ensure the integrity of Payments are made in a

the financial statements on timely and accurate
all accounts payable must manner and follow a
be accurately and settlement agreement
accurately recorded (settlement term)

Illustration of debt repayment activities (account payable)

1. Expenditure Cycle Overview and Key Objectives
1. Expenditure Cycle Overview and Key Objectives
• In Figure 10.1
• Dashed lines indicate the activities / business processes
that are the responsibility of each unit / division
• The expenditure cycle is the most important element in an
organization especially in terms of adjusting to overall business
strategy
• Well-supervised expenditure cycles can increase competitive
advantage by providing quality products and services, which will
increase the price of the product
• Another benefit of competitive advantage is being able to control
costs by providing an effective and efficient expenditure cycle so
as to increase market share
• One of the organizational strategy in increasing market share is
by using cost leadership strategy that can make the
organization look different from the same company (same
market)
• Such as reducing product prices so as to increase sales
1. Expenditure Cycle Overview and Key Objectives
• The cost leadership strategy shows which suppliers can offer
goods of good quality and at a cheaper price while in
differentiated strategy of selected suppliers that offer good
quality products and standard services
• If the organization fails to adjust the strategy then it can lead to a
failure of the organization's strategy
• On purchase activity: if not managed properly then it can cause
problems:
• The supply of unreliable goods has an impact on revenue,
production and inventory management processes
• Account Payable activities include cash disbursements and are
vulnerable to fraud such as fictitious Suppliers and invalid
invoices
• Good management of debt (account payable) payments can
prevent and dismantle errors and errors that occur
• While poor management can result in damage to cash flow
and poor supplier relationship
 Document Description
Purchase Used by the requisitioning department to provide purchase request data to the
Requisition purchasing department. Requisitioning department or inventory control prepares
purchase requisition. This document is only used in internal company.
Purchase Order Act as proof of purchase of goods such as binding contracts between buyers and sellers
(vendors). This document is prepared by the purchasing department. This document is
used by both internal and external organizations.
Vendor List List of vendors / suppliers who offer goods or services in the appropriate price. This list is
stored as part of an organizational database that can be viewed or edited by interested
sections in the expenditure cycle.
Purchase Details of the invoice and contains terms / terms of payment and conditions agreed by
Invoice both parties. This document is provided by the supplier to the company.
Goods Packing Prepared by the supplier and attached with items sent to the organization.
Slip
Receiving Provide details of each shipment of goods from supplier, item weight, purchase order
Report number, and description of shipped items. The receipt section of the goods that made this
document.
Remittance Used as notification receipt of money for goods or services that have been purchased.
Advice Sometimes this document is printed out of the system simultaneously with purchase
invoice on the same page and when making payment to the supplier, the organization can
cut the bottom of this document to be attached along with the check. This document is
prepared by the vendor.
Disbursement This document is used as proof of cash / payment expenditure to the vendor
Voucher
2. Technology that Supports the Expenditure cycle
• Enterprise Resource Planning (ERP) System
• Integrated software used to record and manage different
types of business transactions in an integrated database
• Such as: SAP and Oracle
• Provide interconnected modules such as: purchasing,
production, debt (Account Payable), cash budget and
general ledger modules
• Essentially the ERP system acts to provide a close
connection between the demand and supply functions
within the organization
• Electronic Data Interchange (EDI)
• Links that show about the exchange of data between two
different computer systems
• Which is used when the flow and volume of transactions
is very large and predictable
 2. Technology that Supports the Expenditure cycle
• Radio Frequency IDentification (RFID) Tags
• Small plastic labels attached to items / items containing data about
the item and can be scanned using an RFID reader
• Cycle of expenditure related to activities related to the circulation
of goods (movement of good)
• When the volume / quantity of goods enough then it is easier to
identify goods by using barcode or RFID so as to reduce costs and
improve data efficiency and accuracy
• Supply Chain Management (SCM) Software
• Supply Chain is an integration between suppliers and customers
aimed at the production and distribution activities of goods and
services including: quantity, location, and time to minimize costs
and increase satisfaction
• Software used is called SCM
• SCM software can be used to improve planning activities
(identifying demand for goods) and execution activities (receiving
orders, goods movement) in supply chain by using supply chain
analytics
2. Technology that supports the Expenditure
cycle
3. Data and Decisions in Expenditure Cycle
• Data and expenditure cycles
1. Inventory data
• In the case of determining the remaining stock (existing
stock level) to ensure the amount of inventory to be
purchased which includes:
• Total inventory required by customer (sales process)
• The amount of inventory that is predicted to be sold
(stock on hand)
• The inventory quantity data needs to be updated
periodically for goods expenditure and receipt of goods and
quantities of goods ordered to suppliers but not yet reached
• Inventory data generally includes:
• Non-financial indicators, such as: the quality of the
goods received
• Data of important dates at the time of purchase order,
such as: order date, confirmation date, expected date
and delivery date
3. Data and Decisions in Expenditure Cycle
• Data and expenditure cycles (continued ...)
2. Supplier data
• Which includes: supplier name and address as well as a
detailed list of suppliers
3. Purchase Order data
• Which cover:
• Unpaid purchase orders (Open purchase order), consist
of: the status of each item ordered goods
• The goods receiving data, consisting of: the list of goods
received from the supplier and the status of the goods
that have been updated (received or not yet received).
This data is used to check data on purchase invoice and
payable data (account payable)
4. Payable Data is created and updated by the expenditure cycle,
like:
• Invoices received from suppliers and stored in accounts
payable
5. Account Payable data is also stored in the cash out file
3. Data and Decisions in Expenditure Cycle
• Business decisions on the expenditure cycle
• Strategic level decisions related to the expenditure cycle
include:
• Determining the optimal level of inventory (maximum
stock), including previous month's sales information or
an analysis of next month's sales forecast, lead time in
ordering of goods to suppliers, stock information now
(stock on hand, stock ordered by customer and reserved
stock suppliers but not yet received the goods)
• Decide which suppliers provide quality and product
service at the best price
• Determining if there is more cash then can make a
purchase to the supplier if the supplier offers a discount
on the product
• Determine payments to suppliers in terms of
maximizing cash flow
4. Expenditure Cycle Documentation
System Flowchart
• The purchaser requisition officer receives a purchase request
document from the production, inventory department and
miscellaneous department
• The accepted purchase request document will be collected and
archived first and then processed
• At the time of processing, the data in the purchase request will
be input into the computer, and then the computer will bring up
inventory data from the inventory file and previous sales data
from the sales file
• Then the computer displays sales and inventory data to the
monitor screen and the purchasing staff will check the detail
data of the goods and suppliers as requested by other
departments
System Flowchart
• Then the data purchase requisition will be saved into the
purchase requisition file and then will update the data items
ordered to the inventory file
• Then the computer prints a purchase requisition and the
purchasing staff provides the documents to the production
department, inventory department and miscellaneous
department as proof of demand for goods to be purchased
• Then the data purchase requisition will be processed into a
purchase order
System Flowchart
System Flowchart
System Flowchart
5. Monitoring the Cycle Performance of
Expenditure Cycle
• Process performance needs to be measured to see how far
the results achieved and the objectives achieved in the
expenditure cycle
• The purpose of the expenditure cycle:
• Clearly specify requests for goods or services from
relevant departments (parts of production, inventory
and other departments) to generate purchase orders
as required and authorized
• Goods must be received on time and meet the
appropriate quantity and quantity and should be
checked before being fully accepted
• Payments to suppliers must be timely and in
appropriate amounts
• To do the monitoring needed metric
5. Monitoring the Cycle Performance of
Expenditure Cycle
Sample: Accurate Application

Purchase Module
1. Purchase Request
2. Purchase order
2. Purchase order
3. Good Received
3. Good Received
4. Purchase Invoice

39
4. Purchase Invoice

40
5. Purchase Return

41
5. Purchase Return

42
6. Purchase Payment

43
6.Purchase Payment

44
Lesson Summary
After studying this lesson, the student be able to:
• Describe that the expenditure cycle begins:
• When certain parts / divisions need goods / services
• Demand for goods purchased from the division should
be evaluated whether it suits the needs or not
• Acceptance of goods from suppliers must be timely and
must be checked first quality and quantity before the
goods received
• Until the goods are shipped by the supplier and there is
a cash outlay paid to the supplier
• Then the payment to the supplier must be timely and
accurate
Unit Summary
After studying this chapter, you be able to:
• Describe the key objectives and strategic implications of the
expenditure cycle
• Identify common technologies underpinning the
expenditure cycle
• Describe expenditure cycle data and the key expenditure
business decisions
• Identify and document the primary activities in the
expenditure cycle and the data produced by these activities
• Develop metrics to monitor expenditure cycle performance
Question & Answers