Revenue cycle refers to all the undertaking of a business entity which generates revenue in exchange of commodities either being goods or services.
In a merchandising company the revenue cycle consist of key stages which are crucial in administration of revenue generated in relation to goods sold as well as goods purchased for sale by the merchandising firm. The key stages of a revenue cycle system include the purchase, which involves the procurement of inventories for resale, purchase of inventories is carried out by the procurement department, the second stage is the sales stage which is administered by the sales department, in which the sales are either made on cash basis, credit basis or an integration of both cash and credit where there exists partial cash payment and a partial credit, in all this forms of sales discounts may be advanced at varying conditions and rates. The third stage is the collection of dues from the customers who bought from the merchandising firm, goods on credit or on cash basis. Since these sales cause a reduction on the inventories for sale, then the sales must be linked to the warehousing or stores department which is also linked to the inventory procurement department in order to ensure the merchandising entity does not come to a state of null inventories which would cause it to incur sales losses.
With such multiple departments existing then an efficient revenue cycle system must be put in place, an argument might be raised on the relevance of such many departments, simply the answer is to counter fraud by separation of responsibilities among such related departments with independent administration.
In such a system a subsidiary ledger must be incorporated, the subsidiary ledger gives records of individual products consisting of remainder of a general ledger controlling account. The key function of subsidiary ledger is to monitor amounts due from credit customers, amounts the merchandising firm is indebted to the suppliers of its inventories and specific amounts lying in the inventories: from the discussion then this part become inevitably relevant in the revenue cycle.
In case any discount was received on making such purchases then such discount is also captured in the system and entered credited on discount received account. This is to enhance coherence on amount leaving the firm to make purchases and actual amount spent
Going to the sales department the nature of the sales embraced by the merchandising firm determines how the revenue cycle will be structured for efficient control of revenues as well as their realisation. When sales occur the first thing to be noted is whether it’s on cash basis or credit basis another thing to bear in mind is the criteria of offering such credit since different merchandise entities have different credit policies and hence such factors must be clearly captured in the system.
When a cash sale occurs the amount received is debited in the cash account and the amount goods sold is automatically credited in the inventory asset account in-order to reflect amount sold and remaining quantity, it also updates the cash balance where the cash held by the firm is automatically updated to reflect all such cash from sales any discount offered is as well reflected by debiting the discount offered cash account this eliminates all loop holes for doctoring such sales and related activities.
In case sales are made on credit then the amount of goods sold on credit is credited on the inventory asset account and the amount of such credit entered on individual account on the debit side and later all the individual credit sales automatically updated on the general ledger of credit sales this facilitates fast identification of amount the firm is owed by its credit customers in total, it’s also helps for easier processing of invoices for customers who have delayed to pay for such goods on time as well as write off some debt as bad debt in-case the customer fails to pay for them. The general ledger also helps the firm take a precautionary measure in-case its credit sales goes beyond a certain threshold since this is obvious injurious to the firm. When the credit sales are made the cash received automatically updates the cash account with the received amount, writes off the debts in the individual debts account by crediting the individual account with the amount paid as well as reducing the general creditors account with the amount paid. Another thing to note with the system is that when credit sale happens the firm is always definite in its credit policy in which the customer may pay the amount due on instalment or on a lump sum before the expiry of a given period after such sales, may be one month. In case it happens on instalment basis then the system updates all accounts as detailed above and likewise if happens on the lump sum basis. In case the customer exceeds the defined period for paying the debt the system is automated to give a notice of such exceedings and the sales department will issue an invoice prompting the client to pay his or debt as soon as possible this form of integrated system avoids loss of revenues as bad debts as well delayed receiving of revenues that ought to be at hand.
Sometimes the indebted customer may wish to pay by bank cheques due to security reason such as carrying too much cash by hand, in such a case the revenue system may be linked to the bank account in which any amount deposited by the customer automatically reflects in the cash account of the merchandising firm in their office and the customer’s credit account is credited with the amount of cash equivalent to that of a cheque. This mostly happen where customers pay for their credit without noticing the sales department of the merchandising firm. This form of integration will involve integration of the banking system in the firm’s revenue system.
At time the customers may return goods prior sold to them this will involve reversal of all such transaction without fraud since the system will restore all accounts to their initial state.
A question may be raised for reason of having such a complex system in administering the revenues of a merchandising entity. The reason is because such an entity survives on revenue and thus the more complex it is the better since it closes all loop holes for manipulation.
Such a revenue tracking system is also relevant as it aids in auditing of the firms processes without the loss of audit trail and also enhances that each depart is responsible for its actions since if it colludes with another then it will bear the outcomes of its actions unlike where manipulation is easier if all responsibilities were delegated to a single department.
Moreover the system clearly indicates time and date when such transactions occurred whom authenticated them as well as all the party involved. Therefore making later follow up more easier and thus such a system inculcates a sense of responsibility and professionalism.
It’s then clear that with such an integrated revenue system in an entity then chances of loss of revenue are definitely almost impossible and the entity can remain in a going concern as long as other factors remain constant and the firm can easily generate terminal statements of income by consolidating the readily available information from its department and thus know the size of its revenues generated in a specific duration of time.
References
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