lignou BPOI-104 Iie PEOPLE's G © |UNIVERSITY Order to Cash (O2C) - Indira Gandhi National Open University Accounts Receivable Schoo! of Vocational Education and Training Course 4 ORDER TO CASH (O2C) —- ACCOUNTS RECEIVABLE UNIT 1 Introduction to Order to Cash Cycle 5 UNIT 2 Stages of Order to Cash Cycle 15 UNIT3 Credit Review 31 UNIT 4 Order Management and Invoicing 42 UNITS Collections 51 UNIT 6 Accounts Receivable 63 UNIT7 02C Operations 1 UNIT 8 Quality Checks in 02C Cyele 89 in Order to Cash Cycle 98Programme Design Committee Prof. WN. Rejasekharan Fillet Mr. Sanjay Dutt ‘Vice-Chancellor & Chairman MIC, Senior Vice President IGNOU, New Delhi ‘Accenture India Mr Pankaj Vaish Me. Sanjay Seth ‘Managing Director DCN BPO, Senior VP Accentuze ‘Accenture India Mr. PG Raghuraman Mr. Kannan Sundaresan India HPO Lead Lead, Finance BPO Accenture India Accenture India Dz Latha Pillai Prof. PS, Zacharias ro Vice-Chancellor Ex Vice-Chancellor IGNOU, New Delt Goa University Prof MS. Senam Raju SOMS,IGNOU Mz. Ravi Gupta VP, Accenture India Ms. Arunima Kumar GM, Accenture India Sachal Bhatt ‘Manager, Accenture India Prof. CG Naidu, Director Program Coordinator SOVET, IGNOU, New Delhi Course Expert Committee Prof CG Naidu, Director of NIK, Maheshesani (Ret) Program Coordinator Principai, Somani College of Commerce SOVET, IGNOU, New Delhi Jodhpur Prof. LR.Monge De AK Malhotra Sriram College of Commerce ‘Antal Institute of Technology, University of Delhi Gurgeon, Prof. Obul Reddy (Retd) Mr. Venkatraman Girish Osmania University Hyderabad Director, KPO Academy, Bangalore Prof. Sanjiv Mittal Mr. PK Singh GGSIP University, New Delhi Diectar, Skillspan, New Delhi Dr. Sunil Kumar Gupta Ms. Deepika Bhattacharya SOMS, IGNOU, New Delhi Vice President, Accenture India Mr Madhava Kumat Vice President, Accenture India Prof. BM. Lal Nigam (Retd.) Delhi School of Economics Prof, M.S, Senam Raj University of Delhi SOMS, IGNOU Prof. RK, Grover (Retd) Dr CS. Savita SOMS, IGNOU, New Delhi Shyamlal College, University of Delhi ‘Mir Manish Rurtagi Vice President ‘Accenture India ‘Ms. Arunima Kumar General Manager, ‘Accenture India ‘Mr. Snchal Bhatt Manager, Accenture India Accenture SME's ‘Ms. Sudha Subramanian ‘Mr Chittaranjan Das ‘Mr. Haresh Rao ‘Mr Sukipreet Singh ‘Mz. Madbusudhan Dorasala ‘Mr Brijesh Srivastava Mz Kishan Bhat ‘Mr Mano} Gupta ‘Me, Srinivas Varanasi ‘Mr Pravin Krishnan Baby Mz. David Vinod ‘Mr Karthikeyan Shankaran ‘Mz. Bennet Solomon Course Preparation Team Mi Ajay Sood Content Editor Director, KPO Academy, Bangalore Prof, Sanjiv Mittal (nit 1-8) GGSLP University, Dethi Course Coordinator & Format Editing Prof MS. Senam Raju SOMS, IGNOU, New Delhi Programme Revision Committee Prof. Sanjeev Mittal Mis. Deepika Bhattacharya GGSIPU, New Dethi Vice President, Accenture India Prof, Nawal Kishor Prof. Anju S. Gupta (SOH) SOMS, IGNOU Director UC, SOFL, IGNOU Prof. C.G Naidu Prof. Ashok K. Gaba SOVET, IGNOU Director, SOVET, IGNOU Mr Ravi Rama Krishnan Director, R Value, New Delhi Prof MSS Raja SOMS, IGNOU Dr. P.Y. Suresh Director IC, SOCIS, IGNOU Dr, Geetika 8. Johry (Programe Coordinator), SOVET Course Revision Team ‘Course: BOT-104 ‘Course Updated and Eaited Format Baiting Unit (1-9) ‘Mr Rabul Bhatia Prof Ashok K. Gaba and Dr. Geetika 8, Tohry Tcs Course Cooré Dr. Geeta tor & Proof Reading Sohty, SOVETPrint Production Sh Tilak Raj Sh. Yashpal AR (P), MPDD, IGNOU SO(P), MPDP, IGNOU 2021 © Indira Gandhi, National Open University saw. All rights reserved. No par ofthis work may be reproduced in any form, by mimeograph or any other means, without permission Im writing from the Indira Gandhi National Open University, Further information on the Indira Gandhi National Open University courses may he obtained from the University’s office at Maidan Garhi, New Dethi- 110.068, Printed and Published on behalf of the Indra Gandhi National Open University, New Delhi, by the Registrar, MPDD. Laser Typesetting & Printed at: Gita Offset Printers Pvt Lid, C-90, Okbla Induseial Area, Phase-1, New Delhi-110020COURSE4 ORDERTOCASH(O2C)— ACCOUNTS RECEIVABLE This Course will introduce you to the order-to-cash (O2C) cycle in a large Organisation, The 02 nsists of receiving an order from the customer (who is interested in buying products or services from a business), shipping the goods that the customer has ordered to him, sending the Invoice to the customer, collecting the payment from the customer and accounting fe ele € Unit 1: Introduetion to Order to Cash Cyele explains Order to Cash eyele in an Organisation, the various departments and teams that are a part of this cycle and their respective responsibilities. It also discusses the importance of O2C cyele to an organisation. Unit2: Stages of the Order to Cash eyele deals with various source documents used in the O2C eyele and its stages like credit review, customer set up, order management, invoice collection and cash application Unit 3: Credit review explains how a credit review is done for a customer before a sale is made to him on credit. It informs the reader of the ways to assess the creditworthiness of the customer. It also deseribes the process of setting up of a new customer before the organisation can start doing business with him Unit 4: Order Management and invoicing explains the processes of r the customer's order and fulfilling it. Once the order has been fulfilled, the goods are shipped to the customer and an invoice is sent requesting the payment for the zoods supplied ving Unit 5: Collections discusses the process of collecting the payments due from the customers, It also deals with how the performance of the collection team is: measured and how it can increase its effectiveness by resolving the customer queries quickly and by effective and focused collection calls. It further explains the uiility of third party collection agencies and means available to the supplier in ease the customer does not pay for the goods supplied Uni transactions related to O2C transactions, mana management reporting on O2C process. 6: Accounts Receivable relates to the process of cash application, accounting g customer refunds and Unit 7: 02C Operations explains the technology enablers or the tools that make outsourcing of O2C processes possible. It also discusses the day to day issues, faved by the teams running O2C processes and how they are dealt with Unit 8: Quality checks in an O2C cycle discusses about quality control measures taken by the various process teams to make sure that the service levels that have nagreed with the customer are met. Italso discusses the importance of quality conirol to the day-to-day functioning of the process teams. Unit 9: Data Analytics In Order to Cash data analytics and how data analyties in the O2C eyele helps derive meani le gives a basic understanding of ful insights on the process in order to improve the process and make right decisions.UNIT 1 INTRODUCTION TO ORDER TO CASH CYCLE Structure 1.0 Objectives 1.1 What is Order-to-Cast 1.2 Responsibilities of Different Players in the O2C Processes 1.3 Importance of Order-To-Cash to Business 14 Let Us Sum Up 15 Key Words 1.6 Answers to Check Your Progress 1.7 Terminal Questions 1.0 OBJECTIVES Afier studying this unit, leamers should be able to: ‘+ explain the concept of ‘Order to Cash’ (02C) process; © discuss major stakeholders in the O2C process and their responsibilities and concerns: * explain the significance of “Order to Cash’ processes for a business; and © describe consequences of a poorly implemented/managed O2C process. 1.1 WHAT IS ORDER-TO-CASH? Order to cash (also known as 02C for short) is the process of receiving the order fulfilling that order by providing the goods/services required and receiving payments from the customers for the goods/services provided. from the customer, The le starts with receiving a purchase order from the customer followed by making sale to the customers, shipping across the products that the customer has ordered (order management). The outgoing goods are taken out of the seller's inventory and shipped to the customer. The invoice is prepared for the goods supplied and sent to the customer as a request for payment (invoicing). The cycle ends with receiving the payment from the customers and recognising the payment against the respective customer account and invoice (collection and cash application). Similarly, in case of services, a service request is received from the customer. The service delivery team provides the required services. It is verified that the service were provided to the satisfaction of the customer as per the agreed terms. A payment clemand is then raised by sending an invoice to the customer (invoicing). ed (collection) and settled against the respective invoice The other parts of O2C eyele are: The payment is colle * Debit/Credit notes for rejections/price adjustments ete ‘© customer account reconeilationOrder to Cash (02C) ~ Accounts Receivable + review & analysis of aged debtors we ‘+ reporting (related to collections, aged debtors, sales a/c). ‘© legal actions (where customer does not pay inspite of repeated followup) Most of the sales transactions, especially between businesses happen on a credit basis i. the buyer does not pay cash atthe time of purchase, The supplier supp! the goods and then requests payment for the same and the buyer pays after some time. Till the time the goods and services are not paid for by the buyer, there is a receivable outstanding against the buyer's account with the supplier. This receivable amount is called accounts receivable (AR). 1.1 below, A typical 02C process cycle is shown in Fi : i boon Sales ae can \¥r 4. Goods! 2. Payrent Senicn ammatment Dalveres Catlectons 40. catecton 1. Payment Cemmitment nd Date ot Report Remitance O2C process cycle The steps in the O2C cycle in Fig. 1.1 are indicated (by the number) in the sequence in which they occur: 1. The sales force of the company makes a sale to the customer and receives a purchase order from the customer. 2. The sales force forwards the purchase order from the customer to the order ‘We Order management team which processes it further. 3. The Order Management team converts the purchase order from the customer to a sales order and forwards that to its production department or stores! warehouse for order fulfillment. 4. The production/warehouse delivers the finished goods as ordered by the customer. Delivery challen is prepared indicating the goods supplied & date of despatch of goods, 5. The proof of delivery is received from the customer (in the form ofa customer sign-off delivery challan or the shipment documents). In the same manner, ‘when a service is provided to the customer, the customer confirms satisfaction performance of service, in writing. 6. The proof of delivery, customer confirmation is forwarded to the order management team confirming the fulfillment and satisfactory delivery of the order/performance of service.7. The order management team raises the invoice for the order and sends it to the customer. (The invoice is a document which provides the details of the oods!services supplied to the customer and a demand for payment from the customer for the goods/services supplied). 8, The collections team from the customer calls the customer to confirm whether the invoice has been found to be in order and also to confirm the date on Which the payment can be expected, 9, The customer confirms the date on which the payment will be made. 10, Based on the confirmations received by the customers, the collection commitment report is generated (this report provides information on the payment commitments made by the customer and gives the information on how much cash can be expected and when) 11, On receiving the payment, it is adjusted against the respective customer account and invoice. This step is called cash application, (Note: In case the customer does not make the payment, reminders are sent through mails and calls. In spite of repeated reminders if the payment is not received then leval action can be initiated against the customer to recover the dues. Also, if the amount is not recovered within the stipulated time then the seller has to make a provision for doubtful debts, 1.2. RESPONSIBILITIES OF DIFFERENT PLAYERS IN THE 02C PROCESSES Within an organisation, there are five major departments which are responsible for various steps in the O2C process. These departments are: 1. Sales 2. Credit 3. Order Management and Invoicing 4. Collections Accounts receivable SS Accounts Receivable Sales >> Credit review The sales function of a business comprises of its sales force. The sales: force of the company sells the products and services manufactured, created and provided by the business to its customers. They also develop and maintain the sales channels like wholesalers, distributors, dealers. retailers, sales alliance partners ete The responsibilities of the sales department are: 1, To sell the products and services of the company to its customers to help the company generate revenues, thereby contribute to the company's profits and growth, To mect the revenue targets of the company so that it can realize its profitability and strategic goals. Introduction to Order to Cash CyeteOrder to Cash (02) ~ Accounts Receivable 3. To gather market intelligence and feedback through sales channels and customers directly, in terms of changing customer preferences. their dissatisfaction with the company's product/service, any new moves by the competitors etc. 4. Ina lot of businesses the sales force is also responsible for collecting the money due from the credit sales made to the customers. Credit: The credit function is also cynically called as the ‘sales prevention’ department. The job of the credit function is to decide whether a customer can buy goods/services on credit or not and if the credit can be provided what will the terms of credit be (like how much credit period should be provided to a customer and up to how much credit limit). Responsibilities of the credit department are: 1. _ Review the eligibility of the customers for buying on credit, by assessing their ability to pay and willingness to pay on time. 2. Determine the credit terms for the customer and communicate these to the customers and sales force. (e.g. A new customer account is reviewed for credit and it is decided that the customer will have a credit limit of Rs. 50,000 and a credit period of 30 days) 3. _ Revise the eredit terms for the customers on a continuous basis. The reasons that the credit terms may need to be revised are: © The customers’ business may be growing and they want better/liberal credit terms to respond to the opportunities before them, * Competitors may suddenly offer better credit terms trying to lure the customers away. © The customer's business may face adverse circumstances and may’ become less eredit worthy than it was earlier. * Credit policy is also dictated by the working capital position of the business itself and its own sales strategy. If the working capital is not under pressure or the company wants to promote its products by providing a more liberal credit then it may revise the credit terms. Usually credit function in an organization is in a conflict with the sales department and hence they report to different managers within the organization. The credit function is usually part of the CFO's (Chief Financial Officer) office. Order management and invoicing: Once the sales force usually has received the purchase order from the customer it turns over the order to the Order management team for further processing. Order management process has a lot of business significance and is one of the on most audited processes because this is where the revenues for the business are recognized. As a number of frauds and management malpractices have come to light, the regulatory framework has also been tightened on revenue recognition and norms. Legislations like Sarbanes Oxley Act (2002) and accounting standards like US GAAP (Generally Accepted Accounting Principles) and IFRS (international Financial Reporting Standards) also prescribe strict guideli revenue recognition ies on[Note: US GAAP: (Stands for United States Generally Accepted Accounting Principles) The accounting standards used to prepare, present, and report financial, statements for businesses in the United States. They are proposed and regulated by FASB (Financial Accounting Standards Board). IFRS: (Stands for International Financial Reporting Standards) The accounting standards used to prepare, present, and report financial statements for businesses in Europe. They are proposed and regulated by IASB (International Accounting Standards Board), Sarbanes Oxley Act (Also known as SOX) is the US federal law governing publicly held companies in the US and it covers issues such as financial reporting and disclosures, auditor independence, corporate governance and internal control assessment] The responsibilities of the order management function are: 1. Receive the customer's order and convert it into a sales order. (Note: Sales Order is an internal document generated within the selling organisation so that other departments like production, stores and shipping can be notified about the existence of the customer order and they can work to make sure that it is fulfilled on time). 2. Communicate to produetion/delivery on the delivery schedules for the order (sales order may be converted to a work order here). 3. Ensure proper fulfillment of the order. 4. Ensure that proper documentation has been done for revenue recognition. 5. Raise invoices (once the goods/services) have been delivered and send these invoices to the customer through the agreed channels (for example EDI, internet mail ete.) Collections: Collection function is critical to the financial health of the business as it determines how quickly the business can convert its goods and services into cash (cash conversion cycle) and channelize it back into business. Most of the CFOs (Chief Financial Officers) of Fortune 500 companies have the metric of average collection period’ as a part of their scorecard and monitor it closely. [Note: Average collection period is defined as the average time within which a business is able to collect its dues from its customers for the sales made on credit. It is calculated as’ (aver ze AR (Accounts Receivable) during an accounting period) (No. of days in the period) (Total credit sales during the period) Like sales, the collection teams also work with targets for the money to be collected. Their performance is measured by the effectiveness of the collection activity. The responsibilities of the collection team within an organization are: 1. Collect promptly, the payments for goods and services provided to the customers on credit. 2. Reduce order to cash e3 collection period. cle times and accelerate cash flow by reducing Introduction to Order to Cash Cycle 9rider to Cash (020) - Accounts Receivable 10 3. Enhance the working capital of the company. 4. Reduce bad debts by efficient and prompt collection. Accounts Receivable (AR): AR function is also critical as it involves accounting for the money received, answering customer queries on payments, keeping the customer accounts up to date and reconciling accounts, Within an organization ‘Accounts Receivable’ refers to a business department or division that is responsible for receiving payments from the customers against the invoices and recognizing and reconciling the payments received from the customers against the outstanding dues and periodic review of unpaid invoices reported as Account Receivables. ‘The responsibilities of the Accounts receivable team within an organization are 1. Book keeping of the Accounts receivable (the money due from the customer} 2. Prompt application of cash by recognizing the payments made by the customers are against their outstanding invoices and accounts. 3. Reconciliation of invoices, payments and customer accounts. 4. Sharing the report on unpaid invoices (Accounts Receivable report) with the collections team, to help them follow up with the customer and collect payments, Summary: Within an organisation, the O2C process has five departments which have different responsibilities. Sales department is responsible for selling to the customers. Credit department decides how much to sell to a customer on credit and how long the credit period can be. Order Management and invoicing teams are responsible for making sure that customer orders are fulfilled to his satisfaction and the invoice is sent to the customer prompily. Collections team is responsible for prompt collection of the credit dues. AR (Accounts Receivable) department is responsible for making sure that the payments received are properly applied to various customer accounts. For example, Hi-tech Computers manufactures and sells computers to businesses and individuals. When a new customer, let us say Magna Retail, indicates an intention to buy computers from Hi-tech Computers, the salesman of Hi-tech computer would receive the order from the customer (Magna Retail). To be able to sell computers on credit, the Credit department of Hi-tech computers will assess the financial position of the customer and decide the credit limit and credit period. After the credit terms are decided, the order from the customers will be passed on to the Order Management team for fulfillment. The order management team will manufacture and supply the computers or supply from the existing finished goods inventory. They will also send the invoice to the customer alter the computers have been supplied. The collections team will pursue the customer to collect payments for the supplied goods and the accounts receivable team will apply the payment received from Magna Retail against the proper invoice, 1.3. IMPORTANCE OF ORDER-TO-CASH TO BUSINESS ‘The O2C process is very important to the business as sale of goods and services to customers and getting paid for the goods and services sold to them is central to any business’ growth and sustainabilitySelling its produets and services, brings in the money for the business that pays for all activities of the business (like HR, Finance, Legal, Production, Labour te.) and profits to the owners of the business, When a company sells its products and services to its customers in a profitable manner, the business of the company grows. It allows the company to pay its suppliers and employees, produce more ‘goods. pay taxes, employ more people and in turn sell to more customers in more locations, ‘The advantages of a properly managed O2C process are: |. Where credit process is strong, it helps the company correetly evaluate the credit worthiness of customers and set the credit period and credit limit correctly. This inturn ensures the customers is in a position to pay for the goods/services sold to them. 2. Ithelps in keeping a proper record of the orders and related paper work for proper revenue recognition (this is very important in today's business environment where revenue recognition is a critical financial activity), It keeps the customers happy by properly supplying them with their orders as per their instructions 4. Ithelps raise invoices to the customers properly so the company can request for the payments from its customer in a timely fashion 5. Italso helps collect the dues in time so that the business has adequate cash {o meet its own expenses and invest in its own growth, 6. Collection of dues in a timely manner also helps reduce bad debts. 7. Ithelps the business by maintaing a good cash conversion cycle (turning, the inventory of finished goods into cash, by selling the goods and collecting the payments), The adverse consequences of a poorly managed 02C process are as follows: 1. IFthe eredit process is weak then the company will end up supplying good 's fo customers who are not credit worthy and may not pay for the purchase on time. This will result in direct loss to the business. servi 2, Ifthe order management process is weak then the goods will not be shipped across to the customers in time or in appropriate quantities: I the invoicing process is weak then the invoices will not be raised in time or they will be error prone which will lead to customer dissatisfaetion and their not paying the money in time. 4. A weak invoicing process will also lead to improper recognition of revenue eg. even if the company may have supplied to the customer and received the payment for it, the revenue may not be recognized in the Profit & Loss ale if the supporting documentation is not properly recorded and maintained 5. If the colleetions process is weak then the company will not be able to collect its dues in time and will have provision for bad debts which will affect its profitability 6. Ifthe eash application process is weak then the payments received will not be applied to proper accounts against the correct invoice which will result Introduction to Order to Ca Cele‘Order to Cash (020) Accounts Receivable in dissatisfaction among the customers as they will be pursued for the money that they have paid already. It will also result in wasted collection effort, The above points make it clear that managing the O2C process is critical to the ‘main successful running of a business financially as well as operationally. Cheek Your Progress 1) in the blanks: a) is responsible for converting the purchase order received from the customer to sales order. ») is responsible for selling the products and services to the customers. ©) The maintenance of sales related documentation to enable revenue recognition is the responsibility of. 4) The . team calls the customers to make sure that the customers pay on time. °) oeane team recognizes the customer payments against appropriate invoices, Dn) . team ensures that invoices do not have any errors, 2) State whether the following statements are True or False: a) Ifthe collections are not done in time then the business needs to make provisions for bad debts. b) For smooth functioning of the sales process. it is recommended that the Credit team and the Sales team work closely together and report to the same manager ©) Sales order is sent to the customer along with the invoice. d) Prompt collection eases the pressure on the working capital af the company. 1.4 LET US SUM UP Order to cash is the process of receiving and recording an order from the bio customer for purchase of goods/services, fulfilling the order. invoicing the customer, collecting the payment against the goods/services sold and recognising the payment against the proper invoice and customer account in the books of our accounts. There are five major stakeholders in the O2C process within the organisation i.e sales (sells the products/services to the customers), credit (decides credit terms for the Customer ie. credit period and monetary credit limits), order management (receives the order, records it properly, fulfills it and raises invoice for the goods supplied or services provided), collections (collects the payments) and accounts receivable (applies the payments to the appropriate invoices and keeps the accounts related to O2C cycle). Order to Cash process is critical for the financial health of any organisation, as a poorly managed process can lead to dissatisfied customers, payments from the customers not being received on time, revenue not getting recognized properly and lower profitability due to aelor of bad debts on the books of the companyIntroduction to Order to 1.5 KEY WORDS Cash Cycle Accounts Receivable: The money due from the customers to whom goods/ services have been sold on credit. Bad Debts: Money receivable from customers (on account of sale of goods or services) which cannot be collected from them. Cash Application: The process of accounting the payments received from the customers against the respective invoices and customer accounts Collection: The process of following up with the customers to remind them for the payments that are due or confirming when the payments can be expected and collecting the same. Collection Team: The team/department within an organisations that is responsible for collecting the payments due from the customers for the goods and services provided on credit Credit Manager: The manager who decides whether a customer can be provided ods/services on credit and if so then on what terms. He/she also decides if the credit terms need to be revised for a customer from time to time. Invoice: A document sent by seller to the buyer, listing the details of the goods sold/services provided and requesting payment against them Order Management: The process of receiving an order from the customer to supply goods, fulfilling the order and ensuring the shipments of the goods to the customer on time, followed by raising an invoice on the customer, .¢ Order: A document sent by the buyer to the seller, ordering the goods to be bought. Ifthe seller confirms the purchase order then it turns into a contract. between the buyer and the seller, for purchase/sale of goods & services. Sales Order: An internal document within the seller's organisation to communicate to various departments like production/warehouse etc. to supply goods against the purchase order received from the customer. Warehouse: The facility where the inventory/goods are stored before being shipped to the customers. 1.6 ANSWERS TO CHECK YOUR PROGRESS 1) Fill in the blanks:- a) Order Management b) Sales c) Order Management d) Collections €) Accounts Receivable/Cash Application f) Order Managemenv/Invoicing True or 1) True b) False c) False d) True 1.7 TERMINAL QUESTIONS 1, Explain the responsibilities of the following stake holders in the O2C process: a. SalesOrder to Cash (020) Accounts Receivable b. Order management Credit d. Accounts Receivable Explain the consequences of poorly managed Order to eash processes. In astep by step manner explain the O2C process in brief starting trom the receipt of purchase order from the customer.UNIT 2 STAGES OF ORDER TO CASH CYCLE Structure 2.0 Obieetives 2.1 Souree Documents in Order to Cash Process 2.1.1 Purchase Order Sales Order Invoice 2.14 Goods Received Note 2.15 Goods Despatch Note 2.16 Credit Memo Remittance Advice Bank Statement 2.1.9 Customer Account Statement 21.10 Dunning Letters 21.11 Legal Notice 2.1.12 Service Contract sin Order to Cash Process 2.3 Let Us Sum Up 24 Key Words Answers to Check Your Progress 2.6 Terminal Questions 2.0 OBJECTIVES Mier studying this unit, learners should be able to: + identify various steps/stages in the O2C eyele and what happens in them; ‘+ list out source documents used in 02C eyele; and * explain the different stages in order to cash process. 2.1 SOURCE DOCUMENTS IN ORDER TO CASH PROCESS Source Documents are the documents which contain source information on internal and external commercial transactions done by a business. They are used {o convert a commercial transaction into an accounting transaetion so that the organization can recognize the transaction in its books of accounts. For example, aan invoice issued by a vendor (seller) to a customer (buyer) is used by the vendor to recognise revenue and accounts receivable. The same invoice is used by the customer to recognise the liability (accounts payable) and also make the pay alter matching it with the purchase order and GRN rent‘Order to Cash (020) ~ Accounts Receivable 16 They are usually referred to verify and reconcile commercial and financial transactions within the business organisation or outside and/or to resolve any ambiguity/dispute related to the transaction, For example: Auditor may refer to delivery challan (which in the source document to evidence despatch of goods to buyer) to verify whether sale has taken place and revenue recognition is correctly done in the books of account. Some of the frequently used source documents in case of O2C processes are: 1 Purchase order 2. Sales order 3. Invoice 4. Goods received note 5. Credit Memo (or credit note) 6. Remittance Advice 7, Bank statement 8. Customer account statement 9, Dunning Letters 10. Legal Notice 11, Service contract 2.1.1 Purchase Order A Purchase Order is also referred to as a PO. A PO is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services that the seller will provide to the buyer. Sending a PO to a seller constitutes @ legal offer t0 buy products oF serv Acceptance of a PO by a seller usually forms a contract between the buyer and seller. Acceptance of the PO ean be communicated by the seller by mail or electronic channels like EDI and Intemet. POs also usually specify additional conditions such as terms of payment and other commercial terms for liability and freight responsibility, and required delivery date. A purchase order usually contains: * PO number, © Issue date ¢ ID and address of the supplier, © Delivery date, * Billing address, © Shipping address, * Terms of payment A list of services/produets (including specifications and reference or part numbers of the items to be purchased, with quantities and prices)POs allow the buyer to clearly communicate their intention to the seller and in the event that the buyer refuses to pay for produets/services delivered, seller can take legal recourse to recover the dues. Also, when seller raises invoices on the buyer, the invoice is compared with the purchase order to make sure the goods and their respective prices and quantities as per invoice match with what was ordered as per PO. A sample of the purchase order is provided in P2P (Course 3), Unit 3. 2.1.2 Sales Order the sales order, sometimes abbreviated as SO, is created when an order for goods and a service is received by a business from a customer. A sales order is an internal document of the company, meaning it is generated by the company itself. The customers PO is the originating document which triggers the creation of sales order: A sales order should record the customer's originating purchase order reference. Sales orders are sequantially numbered for internal control purposes. Sequentially numbered sales orders allow better monitoring of order management process to censure all orders are attended to and no order is missed or omitted, In a manufacturing environment, a sales order may be converted into a work order to show that work is about to begin to manufacture, build or engineer the produets the customer wants. \ sample sales order is provided in Appendix V 2.1.3 Invoice An invoice or bill is a commercial document issued by a seller to a buyer, indicating the products, sold with their quantity and agreed prices or services provided with and requesting payment for the same. A sample of the invoice is provided in P2P (Course 3), Unit 3. 2.1.4 Goods Received Note (GRN) Also referred to voods have been re GRN, it is a written acknowledgement that the specified ved by the customer. GRN indicates detail of goods received along with quantity of goods so received It is used by customers to verify beyond that and pay only for the goods received and nothing A sample of the GRN is provided in P2P (Course 3), Unit 3. 2.1.5 Goods Despatch Note (GDN) GDN is a document prepared by seller stating quantity of goods despatched to customer, This document acts as proof of goods despatched by seller to customers. 2.1.6 Credit Memo credit memo (or credit note) originates from the supplier's end, When the goods are returned to the supplier or an excess payment is made to the supplier (by Stages of Order to Cash CycleOrder to Cash (02C) ~ Accounts Receivable 18 mistake), the customer can prepare a debit note or the supplier can prepare a credit note. The credit note reduces the receivables from the customers to the extent of goods returned or excess payments/over charges against any invoice Electronics Co Credit Memo So Proauctio oeeciston yum __UnkPrce Amount 2.1.7 Remittance Advice Remittance advice is a letter sent by the customer to the seller, after the payment for the goods and services has been made. It provides the details of the payment: © Date of payment © Mode of payment (EFT/Cheque/WT) and the account number in whieh the payment has been made. © Total Amount Paid and the currency © List of invoices that have been paid with this payment and the amount paid against each invoice. spective Remittance Advice is used by the cash application team of the seller to recognise payment and reconcile it against the respective invoices. Without this information the payment cannot be recognised and remains in the suspense account. ‘A sample of a remittance advice is provided in Appendix I (at the end of this unit) 2.1.8 Bank Statement Bank statement is report sent by the bank to its customers. It lists all the financial transactions occurring over a given period of time (month/quarter’year) on a bank account. A bank statement is used by the cash application team to verify that the payment sent by the customer has been received in the bank account of the seller. This along with remittance advice provides the information that is needed to apply cash, 2.1.9 Customer Account Statement Customer account statement is sent by the seller to the customer (usually every month or at the customer's request). It lists the transactions that have been donewith the customer and also indicates the outstanding account balance and the outstanding (unpaid invoices) against the customer's account A sample of a Customer Account statement is provided in Appendix II (at the end of this unit) 2.1.10 Dunning Letters These letters are sent by the seller to remind the customer to make the payment. The language of the letter always must be polite and yet firm, The seller waits {or the payment to be made by the customer after sending a dunning letter. If the payment is not received, another letter is sent. Each successive dunning letter uses increasingly firm language as the customer does not make the payment and is the customer of the consequences of non-payment like putting a hold on any further sales to the customer and/or legal action. also w A couple of sample dunning letters are provided in Appendix III (at the end of this unit) 24.11 Legal No e After repeated collection attempts, if the customer does not pay, the seller can take the legal recourse to recover the dues. The legal notice is a communication sent by the lawyers of the seller to the customer informing him of the legal action being taken and informing him that he may need to appear in the court of law at a particular date to clarity his position on why the payment has not been made. A sample of a legal notice is provided in Appendix IV (at the end of this unit) 2.1.12 Service Contract Service contract is an agreement between a service provider and a customer and outlines the commercial terms of the services to be provided (pricing), the service level agreements and the responsibilities and liabilities of both the parties in ached, case the agreement is b The usual components of the service contract are 1. ‘The type of services to be provided by the service provider to the customer. The pricing structure of the services to be provided (amount to be billed per transaction or fixed amount per month or perman hour of service ete.) 3. At what point in time, invoice will be raised and credit terms. 4. Service level agreements, which is a commitment by the provide services of a set standard/quality ervice provider to 5. Non-disclosure agreement (to be followed by both the customer and service provider) 6. Treatment of intellectual property if provided by the customer or service provid 7. Sharing of costs between the service provider and customer i.e. which costs, ‘Stages of Order to Cash Cycle 19Order to Cash (O2C) ~ Accounts Receivable 20 can be charged to the customer and which ones will be included in the price of services e.g. if there isa need to provide a service at the customer location by having a person from the service provider travel to that location then the travel costs may be charged to the customer separately on such travel 8. Penalties that the service provider is liable for, in case there is a breach of agreement from his side. 9. Penalties that the customeris liable for, in case there is a breach of agreement from his side. 10. In case the matter goes into legal dispute. then which court will have jurisdiction to settle the matter legally. A service contract is referred to in order to establish pricing information/quotes in the sales order and invoice raised by the service provider. It is also used to recognise revenue e.g. if the service contract mentions that the customer will ‘make an advance payment annually for the services to be provided by the service provider, the amount collected at the beginning of each partly every year as revenue i.e. if the annual service fees are Rs. 1 advance), then the revenue of Rs. 1000 is recognised every month. will be recognised 000 (paid in 2.2 STAGES IN ORDER TO CASH PROCESS There are broadly three stages in the O2C eycle ie. pre-invoicing, invoici post-invoicing. 1. Pre-invoicing stage: which includes a. Credit review b. Customer account setup c. Order Management 2. Invoicing a. Issuing the invoice and sending it to the customer Post-invoi ing stage: which includes a Collect nn follow up b. Cash Application 4. Quality checks and audits, as applicable, at each stage ‘The quality checks and audits do not happen in any particular sequence. They can happen during any stage of the O2C eyele depending upon the criticality of each process stated above Pre-invoieing stage Credit review ; The credit manager reviews the financial health of the customer's business and makes an assessment of the customer's capacity to pay the dues on time, Usually there is a contlict between this function and sales because the credit manager keeps a control on the credit sales by specifying the credit terms for each customer account, They can even refuse any credit sales to a particular customer if they have doubts about the customers’ credit worthinessDue to this, sometimes the credit department is also called as “sales prevention department” within the organisation. They have a moderating influence over amount of goods services sold to the customer at a time. Due to this conflict the credit managers and the sales force report to different senior managers within the company. Customer account set up: When a new customer is added to the organisation's list of customers its details need to be captured and the customer needs to be setup in the organisation's customer database. Key details that need to be captured are: a) Customer name, b) Customer address (both billing address & shipping address) ©) Expected mode of payment @) Credit limit ©) Terms of Payment Some of these particulars may also change for the customer e.g. purchase manager, bill-to address, ship-to address. In such a case the details need to be updated again in the customer database when this information is received from the customer, The customer setup team (which is usually the part of credit department), carries out these responsibilities. Order Management: Order management is the process that enables businesses to create, validate and manage customer orders, track thei fulfillment and shipment status and recognize the resulting revenues. The customer sends a purchase order usually to the sales person or to order management desk. Based on whether the goods or services can be provided as per the schedule stated by the customer, the PO is confirmed back. This PO is converted toa sales order within the business. The other accompanying documentation needs to be retained for revenue tecognition purposes. The sales order serves as the document for order fulfil production and shipments departments. Iment for inventory. Invoicing: After the goods are shipped to the customers / the services have been provided and the proof of delivery is received, the invoicing proc is responsible for requesting a payment from the customer, The invoicing team is responsible for generating these invoices and sending them to the customers. They are also responsible for reviewing the invoices, fixing any discrepancies and handling any disputes or disagreements that the customers may have about the invoices, Sometimes they may also need (o consult sales people while resolving the disputes. Invoicing team is ally a part of the order management team, Inv icing Stage Collections follow up: This involves calling the customer once the invoices have been sent. It is done with the purpose of making sure that the invoices have been received, that there are no disagreements with the prices quoted con the invoice, to ascertain the date by which the payment can be expected and remind the customer about any overdue invoices. Stages of Order to Ca CyeteOrder to Cash (02€) ~ Accounts Receivable: This is the most important and critical process in the entire O2C cycle. Cash Application: This involves recognizing and applying the payments received to the respective customer invoice. This is an important activity and needs to be done accurately because any error here will show dues in a customer account while they would have paid up or less dues in a customer account where payment may not have been received. Inaecuracy will result in a lot of collection effort getting wasted. Quality Checks and audits: Quality management is the basis of any good performance & holds true in case of OTC process also. The outsourced processes undergo quality checks and audits frequently to verity the following: 1 Whether the data entered (be it order entry. invoice generated or cash application) is supported by the right source documents. Whether data entry is accurate. Whether the process is in good health and under proper control (the process metrics are within the statistical control limits). Whether the quality benchmarks for the process need to be revised (raising. the bar), Some examples of the quality parameters that are measured are: 1 Accuracy of data entry for customer setup. (customer set up process). 2. Accurate and timely fulfillment of the order (Order management process) 3. Accuracy of invoicing (Invoicing, process) 4, Percentage of collection calls made to the right party (within the customer's organisation) (Collection process) 5. Percentage of cash collected vs. promises made by the customers to pay (Collection process). 6. Unapplied cash (Cash application process) Check Your Progress 1) After the purchase order is received from the customer, a) _ team is responsible for its fulfillment. b) is raised after the proof of delivery of goods to the customers is received. °) is the term used for recognizing payments received from the customers against existing receivables id) eee sw involves assessing the ability of the customer to pay the dues on time, €) When the invoices become overdue, .nncccnnne are sent t0 the customers to asking them to pay immediately. 1) The cash application team needs. and documents to apply cash against the specific invoices.2) State whether the following are True or False:- Stages of Order to Cash Cycle 4) Remittance advice is sent by the vendor to its customer confirming the receipt of payment from the customer. b) Dunning letters are sent before the legal notice. ©) The penalties, in case the agreement is breached by either the customer or the service provider, are specified in the legal notice. 4) Forsmooth functioning of the sales activities, it is recommended that the credit and sales department report to the same manager. 3) Write short notes 01 a) Purchase order b) Sales order ¢) Goods Received note d) Goods Despatch Note ¢) Dumming letters 2.3 LET US SUM UP Some of the source documents that are used in the Order to cash processes are the customer’s purchase order, sales order, goods dispatch/Delievery challan. invoice and credit note. These documents are used 10 convert a commercial transaction into an accounting transaction and can also be used to audit and Verify these transactions. Pre-invoicing activities are the activities that happen belore raising the invoice to demand payment from the customer. They include credit review, customer aecount setup and maintenance and order management. Invoicing activities include raising the invoices for the goods and services provided to the customer. Accuracy is very important in this process. Post invoi n and cash application Apart from the above quality checks and audits are done to ensure that the transactions are accounted accurately, supported by right source documents and completed in a timely manner, This also helps take corrective action in case things arenot going as planned. 2.4 KEY WORD: tion: The process of recognizing the payments received from the inst the invoices raised on them, for goods sold/services rendered. Cash Applis customers agi Collection Call: A telephonic communication with the customer to confirm the receipt of the invoice and to ascertain when the customer is going to make the payment. Credit Note: A document prepared by the seller to indicate the money due from the seller to the buyer. Credit note may be raised by the seller in case the buyer has over paid for the goods, has returned the goods or received damaged goods which were then not accepted,Order te Cash (02C) — Credit Review: The process of assessing the customer’ ability to pay his dues So in time. This is also known as assessing “credit worthiness Goods Received Note: A document prepared by the buyer on receiving the shipment of goods. A GRN can be considered a s proof of delivery by the seller Invoicing: The process of raising invoices for the goods and servi to the customer. ss provided Source Documents: The documents which contain source information on internal and external commercial transactions done by a business. They are used to convert a commercial transaction into an accounting transaction so that the organization can recognize the transaction in its books of accoun Good Despatch Note: A document prepared by the seller stating the quantity of goods despatched to the customers. GDN is a proof of goods despatched by the seller to customer. 2.5 ANSWERS TO CHECK YOUR PROGRESS 1. a) Order Management b) Invoice c) Cash Application d) Credit review e) Dunning letters f) Remittance advice. bank statement a) False b) True c) False d) False See from content. 2.6 TERMINAL QUESTIONS 1 plain the use of the following source documents in the O2C eycle: a) Sales order b) Invoice ¢) Credit note d) Purchase order (customer's) e) Remittance advice f) Service Contract 2. What is the importance of credit review process in O2 it should be segregated from sales function. Also explain why Explain what happens in the following stages: a) Invoicing b) Cash Application ©) Collection follow up @) Customer account setupAppendices Appendix I: Sample of the Remittance advice Kaiser Power Inc. Steven Lewis Manager-Accounts Receivable Spanner Electrical Machines 2413, Main St Des Moines KS Dear Mr. Lewis, The following invoices were paid on 2: Bank Account. Sep-2017 by wire transfer to your Invoice # Invoice Amount (8) 202 19,720.97 6,763.61 11,437.57, 532330 20,285.74 532340 5,973.54 Aggregate Amount Paid 64,181.43 Please acknowledge the receipt of the payment, Warm Regard (Antonio Girelliy | Purchase Manager Kaiser Power Inc, (Note to the students: payment. The remitrane $' stands for US dollar. It indicates the currency of advice sample shown above is that of a US Corporation Kaiser Power Inc.’ making a payment to a vendor “Spanner Electrical Machines'.) Stages of Order to Cash CycleOrder to Cash (020) ~ Accounts Receivable Appendix II: Sample of the Customer Account Statement Dear Sir/Madam, STATEMENT OF ACCOUNT We would like to draw your kind & instantaneous attention towards below mentioned invoices which are overdue/falling due and request payment for these invoices at the earliest. Ifyou have any query on the invoices, please bring it o our immediate attention and if any of the paid invoices are still shown in the below. statement, then please provide us with details of payment (like mode of payment Cheque BACS, Cheque Number, Date of Cheque, Date of Cashing, Total Amount etc.), so that it will assist us in resolving the issue. Curreney GBP Invi PO Invoice Date | Invoice Amount Number | Number Amount _|_ Balance 11356 17862895 | 10-Jun-2015 | 12,768.00. | 12,768.00 11429 17862911_| 15-Jun-2015 | 13,654.00 | 13,654.00 11488, 17863029 | 24-Jun-2015 | 10,342.00 | 10,342.00 Yours Faithfully, Collector Name Telephone Number: Fax Number: E-mail Address: (Note to the students: GBP stands for British Pound. It indicates the currency of invoicing and payment.)Appendix III: Sample of the Dunning Letters (first reminder) Dear Sir/Madam, We note from our records that we do not appear to have received payment for the invoices listed below. Please be aware that the "Terms of Payment are strictly payment within 30 days from date of invoice. The items highlighted are now outside these terms ‘on your account. At this time, we are unaware of any reason for non-payment, and therefore must ask for immediate payment. If you are however aware of any query on these items, please contact us immediately so we can discuss these with you. Failure to respond to this letter by either sending payment in full, or contact being made concerning any issue you may have could lead to further action being taken. Currency GBP Invoice | PO Invoice Invoice Balance Number | Number | Date Amount | Amount 11356 17862895 | 10-Jun-2015 | 12,768.00 | 12,768.00 11429 17862911_| 15-Jun-2015 | 13,654.00 | 13,654.00 11488 17863029 | 24-Jun-2015 | 10,342.00 | 10,342.00 Yours Faithfully, Collector Name Telephone Number Fax Number: ip nail Addre: Stages of Order to Cash Cyclerider to Cash (02C) ~ Accounts Receivable ‘Sample of the Dunning Letters (subsequent reminder) Dear Sir/Madam, At this time, we are disappointed to note that you have not responded to our previous reminder to send payment for the invoices highlighted below. which are now in excess of 30 days past due ‘We must now ask for your immediate action on this matter, which if'not adhered to will leave us with little alternative other than to place your aecount on immediate CREDIT STOP. ‘We will have no alternative but to place the CREDIT STOP on your account 7 days from today, if payment for the full amount is not sent, or alternativ are notified of any issue you may have on any of the invoices shown, ywe If this course of action is required, we will look at pursuing further Legal Action against you, which may well lead to additional costs being added to the outstanding debt. Curreney GBP Invoice | PO Invoice Invoice Balance Number | Number | Date Amount Amount 11356 17862895 | 10-Jun-2015 _| 12,768.00 | 12,768.00 11429 17862911 | 15-Jun-2015 | 13,654.00 | 13.654.00 11488 17863029. | 24-Jun-2015 | 10,342.00. |. 10,342.00 If you do believe payments have already been made, please supp! number & date of payment, or if paid by Credit Card, the card det your account was debited. y cheque is & date Yours Faithfully. Collector Name Telephone Number: Fax Number: E-mail Address’Appendix IV: Sample of the Legal Notice LEGAL ACTION NOTIFICATION Dear Sir/Madam, We note from our records that you have failed to respond to any of our previous reminders concerning the invoices highlighted below, which remain outstanding despite our repeated attempts to clear them from your account. As mentioned in our previous letter, your account has now been placed on CREDIT STOP, until it is now brought fully up to date. We have passed your account to Legal Representatives who will now issue a ‘Summon, for the total account balance. This summons will be issued in Sussex. County Court against your company, and interest will be included at the statutory rate, currently 8% and Costs and administration charges will also be added In order to prevent this action proceeding any further, we require either: + Immediate payment by retu post * Proof that payment has been made or + Allegitimate reason for non-payment. This feedback must be received no later than 5 working days from the date of this letter. Currency GBP Invoice | PO Invoice Invoice Balance Number | Number _ | Date Amount _| Amount 11356 17862895 | 10-Jun-2015 | 12,768:00 | 12,768.00 11429, 17862911 _| 15-Jun-2015 | 13,654.00 | 13,654.00 11488 17863029 | 24-Jun-2015 | 10,342.00 | 10,342.00 Should you wish to discuss 1 the relevant Accounts Contact listed below matter, please cont Yours Faithfully Collector Name Telephone Number: Fay Number: E.mail Address Stages of Order to Cash Cycle 29Order to Cash Accounts Receivable Appendix V: Sample Sales order HI-TECH ELECTRONICS SALES ORDER 4129, Main Street Wichita, KS 23486. BILL TO: SHIP TO S.O. NUMBER. Antony Girelli Barbara Lott 16382965 Integrated Circuitry Integrated Circuitry Customer code: 51276-4129, Main Street 4129, Main Street LAKELAND, FL 23486, LAKELAND, FL 23486. S.O DATE | SALESMAN | SHIPPED | CUSTOMER |] TERMS 7/20/2017 | Alex Duncan | UPS 56536369 Deliver by 8/5/2017 lory | unit | DESCRIPTION unit | Tor. PRICE 10___| Nos._| RAM Chips (128 MB) 360.00 _|_S600.00 20 [Nos _ | Display controller (5259) 350.00 | _S1000.00 SUBTOTAL 1600.00 TOTAL $1600.00 1. Please send 1wo copies of your invoige, >. Enter this order in accordance with the prices, terms, delivery method. and specifications listed above 5, Please notify us immediately if you are unable to ship as specitied ls. Terms of payment: To be paid within 30 days of receipt of invoice Send all correspondence to: Alex Dunean Authorized by Alex Duncan : 7/20/2017 (Note: °$' stands for US dollar. It indicates the currency of sale and invoicin, The sales order sample shown above indicates that Alex Duncan, a salesman for Hi-tech Electronic has created a sales order for a customer "In Circuitry").UNIT3_ CREDIT REVIEW Structure 3.0 Objectives 1 Introduetion v3 Selling on Credit 3 Credit Review and Approval 34 Customer Account Set Up 3.5 Let Us Sum Up 3.6 Key Words 3.7 Answers to Check Your Progress 3.8 Terminal Questions 3.0 OBJECTIVES Afier studying this unit, learners should be able to: ‘+ describe the credit approval and customer set up process; + explain the major stakeholders in the credit approval process and their responsibilities and concerns; and * measure the performance of the credit approval and customer set up process. NTRODUCTION You have been introduced to the O2C eyele in the previous units. We have issed the stages in the O2C eycle (i.e. receiving the order, managing/fulfilling the order, invoicing the customer, collecting the payment and. applying cash: book keeping), the various stakeholders involved (sales functions, credit function, order management. invoicing, collection and AR teams), their respective responsibilities and the source documents that are used in the O2C cycle. Outof the above stages of the O2C cycle, the processes that are usually outsourced are credit review, order management (except actual fulfillment), invoicin; collections and AR. We will now discuss the stages of O2C process in detail. In this unit we look at credit review of a customer and its importance to business, We will also look at the various stakeholders in the order management process and what their responsibilities are. 3.2. SELLING ON.CREDIT Most of the commercial transactions globally happen on eredit ie, the customer does not pay for the purchases immediately in cash. The seller/supplier delivers goods and services on credit and collects the payment after a few days of delivering these. Selling goods and services on credit is ver Before lending to a borrower, the lender similar to lending to the customer. sually does a credit check which makesOrder to Cash (02C) ~ Accounts Receivable an assessment of the borrower's ability to pay back the loan in time, Similarly. it is in the interest of the seller that a check on the eredit worthiness of the customer is done before selling goods/providing services on credit basis. If the credit is, extended to customers who are not credit-worthy, the seller could either not receive the payment in time or may not be paid at all. Credit worthiness is checked by a department called Credit Department, which is headed by a Credit Manager. Based on the assessment of credit worthiness and the decision reached as a result of this assessment, the credit terms are decided, If the customers are not found to be credit worthy enough then seller may also refuse to sell goods on credit and may choose to sell these on cash or on advance payment basis, 3.3_ CREDIT REVIEW AND APPROVAL Credit review is usually done by a specialized department called ‘Credit department in the seller’s/supplier’s organisat team is a part of the Accounts Receivable (AR) team or it could be a separate department as well. nn, In some organisations the Credit Usually credit function in an organization isin a conflict with the sales department The conflict of interest arises because the sales force in their effort to sell more (in order to meet their sales targets and those of the organisation), may sell to customers who may not be creditworthy. In such cases the business of the organisation will be impacted when the payments are not received on time. The job of the eredit department is to decide whether a customer can buy goods! services on credit and if so, what should be the terms of credit (i.€. eredit limit and period). The eredit team exercises a moderating influence on the sales activity and puts a limit on how much credit can be provided to a customer and for how many days For example: Customer A can be sold goods upto USD 5000 only whieh should be collected within 60 days. Here credit limit is USD $000 and eredit period is 60 days. Hence the credit department and sales department report to different mana, within the organization. The credit function is usually part of the CFO's (Chief Financial Officer) office/finance department The Objectives of the credit function are as follows: 1. Review the eligibility of the customers for buying on credit, by asses their ability to pay and willingness to pay on time. Determine the credit terms for the customer and communicate these to the customers and sales force. 3. Revise the credit terms for the customers on a periodic basis. Ifa new customer is not found credit worthy enough, the credit manager may prohibit credit sales to it, Ian existing customer shows erratic payment behaviour 4g. payments not being made on time, making excuses for delaying payments