Order To Cash Notes PDF

.. Indira Gandhi National Open University BPOI - .
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School of Vocational Education and Traning
Order to Cash ()2C)-
Accounts Receivable
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Finance and Accounti
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-Indira Gandhi
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Indira Gandhi National Open University
School of Vocational Education & Training
BPOI-004
Order to Cash (02C) .;
.Accounts Receivable
Course
4
ORDER TO CASH (02C) - ACCOUNTS
RECEIVABLE <,
UNIT 1
Introduction to Order To Cash Cycle 5
UNIT 2
Stages of Order To Cash Cycle 16
UNIT 3
Credit Review 34
UNIT 4
Order Management and Invoicing 47
UNITS
Collections 56
UNIT 6
Accounts Receivable 70
UNIT 7
02C Operations 85
UNIT 8
Quality Checks In 02C - Cycle ·98
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Programme Design Committee
Prof. V.N. Rajasekharan Pillai Mr. Sanjay Dutt Prof. M.S.Senam Raju
Vice-Chancellor & Chairman MIC, Senior Vice President, Accenture India & Course Coordinator
IGNOU, New Delhi Ex Member, MIC SOMS, IGNOU, New Delhi &
Member, MIC
Mc. Pankaj Vaish Mr. Sanjay Seth
Managing Director DCN BPO, Senior Vice President, Accenture India Mr. Ravi Gupta
Accenture Vice President, Accenture India
Mr. Kannan Sundaresan
Mr. P.G. Raghuraman Lead - Finance Bl"O, Accenture India & Ms. Arunima Kumar
India BPO Lead, Accenture India & Member, MIC General Manager, Accenture India
Member, MIC
Prof. P. S. Zacharias Snehal Bhatt
Dr. Latha Pillai Ex Vice-Chancellor & Member, MIC Manager, Accenture India
Pro Vice -Chancellor, Member, MIC Goa University Prof. e.G. Naidu, Director
IGNOU, New Delhi Program Coordinator
SOVET, IGNOU, New Delhi
Course Expert Committee
Prof. c.o. Naidu,Director Prof. N.K. Maheshwari (Retd.) Mr. Manish Rustagi
Program Coordinator Principal, Somani College of Commerce Vice President, Accenture India
SOVET, IGNOU, New Delhi Jodhpur
Ms. Arunima Kumar
Prof. J.R.Monga Dr. A.K.Malhotra General Manager, Accenture India
Sriram College of Commerce, Ansal Institute of Technology, Gurgaon
university of Delhi Mr. Snehal Bhatt
Mr. Venkatraman Girish Manager, Accenture India
Prof. Obul Reddy (Retd.) • Director, KPO Academy, Bungalore
Osmania University, Hyderabad
Mr. P.K. Singh
Accenture Subject Matter Experts
Prof. Sanjiv Millal Director. Skillspan, New Delhi Ms. Sud la Subramanian
SOMS, G.G.S.l.P. University, Delhi Mr. Chi taranjan Das
Ms. Dccpika Bhattacharya Mr. Haresh Rao
Dr. Sunil Kumar Gupta V ice P, esidcnt, Acccnrurc India Mr. Sukhpreet Singh
Editor & Course Coordinator Mr. Madhusudhan Dorasala
SOMS. IGNOU, New Delhi Mr. Mudhava Kurnar I~r'i:c>.;r Srivastava
Vice President. Acc--nture India ,I ISd I
Prof. B.M. Lal Nigam (Reld.)
. M,illoi ( . )IJ
Delhi School of Economics Prof. M.S.St'llalll Raiu
;\Ir Srini\·' 11 .I(,S)
University of Delhi Editor & Course Coordinator
:\ir. Pra, \.! i 11.11I!~ 'I
SOMS. IGNOL'- l\.ew Delhi
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,()MS. IGNOU. New Delhi Dr. C.S. Saviur Mi. ;-.J ·11 ,
Shyamlul C, llcgc University of Delhi l\t. r.....ar,,! \

\11 Benn\.'l rI!
Course Preparation Team

Mr. Ajay Sood Prof. Sanjiv Mural !)rul, f\..L~,':;\..':I.U11 J-\.J.llI
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(Unit 1-14) G.G.S.I.l'. University, Delhi "'U'vJ\. IG:-':OU. Ncw Delhi
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I
COURSE 4 ORDER TO CASH (02C) -
ACCOUNTS RECEIVABLE
This Course will introduce you to the order-to-cash (02C) cycle in a large
Organisation. The 02C cycle consists 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 for it.
Unit 1: Introduction to Order to Cash Process explains Order to Cash cycle 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 02C cycle to an
organisation.
Unit 2: Stages of the Order to Cash cycle deals with various source documents used
in the 02C cycle and its stages like credit review, customer set up, order management,
invoicing 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 describes 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 receiving 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 goods
supplied.
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 utility of third party
collection agencies and means available to the supplier in case the customer does not
pay for the goods supplied. .
Unit 6: Accounts Receivable relates to the process of cash application, accounting

transactions related to 02C transactions, managing customer refunds and management
reporting on 02C process.
Unit 7: 02C Operations explains the technology enablers or the tools that make
outsourcing of 02C processes possible. It also discusses the day to day issues faced by
the teams running 02C processes and how they are dealt with.
Unit 8: Quality checks in an 02C cycle discusses about quality control measures
taken by the various process teams to make sure that the service levels that have been
agreed with the customer are met. It also discusses the importance of quality control to
the uay-today functioning of the process teams.
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UNIT 1 INTRODUCTION TO ORDER TO

CASH CYCLE
Structure
1.0 Objectives
1.1 What is Order-to-Cash?
1.2 Responsibilities of different Players in the 02C Processes
1.3 Importance of Order-To-Cash to Business
1.4 Let Us Sum Up
1.5 Key Words
1.6 Answers to Check Your Progress
1.7 Terminal Questions
1.0 OBJECTIVES
After studying this unit, you should be able to :
• explain the concept of 'Order to Cash' (02C) process;

• discuss major stakeholders in the 02C 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 02C process.
1.1 WHAT IS ORDER-TO-CASH?
Order to cash (also known as 02C for short) is the process of receiving the order
from the customer, fulfilling that order by providing the goods/services required
and receiving payments from the customers for the goods/services provided.
The cycle starts with making sale to the customers, receiving a purchase order
from them, followed by shipping across the products that the customer has
indicated to buy (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 receivingthe payment
from the customers and recognisiing the payment against the respective customer
account and invoice (collection and cash application).
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Order to Cash (02C) - Similarly, in case of services, a service request is received from the customer. The
Accounts Receivable
service delivery team provides the required. services. It is verified that the service
were provided to the satisfaction of the customer as per t e agreed terms. A
payment demand is then raised by sending an invoice to the customer (invoicing).
The payment is collected (collection) and settled against the respective invoice.
The other parts of 02e cycle are legal action (in case the customer does not pay),
reconciliation, control, audit and reporting.
Most of the sales transactions, especially between businesses happen on a credit

basis i.e. the buyer does not pay cash at the time of purchase. The supplier
supplies 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,
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there is a receivable outstanding against the buyer's account with the supplier.
This receivable amount is called accounts receivable (AR).
A typical 02e process cycle is shown in Fig. 1.1 below.
2.Pur<hase
Order
1. Pur chase
Order
:l.Sales
vrJoi!:l
8.CotlltttlOtl
C.II
1) Proof of
9. P~\\',"ent " GO':)fls/ Deh ••~r
Ccmrmtmeut ~o:!l\H( e
O;;):liv er ed
'5 Proof of Oellv~ry
11 P.a:ym~nt
10 (.,II~dl.:-n ~~Il_d O.e.t3ilsof
Cot;'fI'lltltlei'\\ R<eu)-Itt·~n<,,::
R~')Q,t
(.,h
M.,)~}'h\'lUnn
Fig. 1.1
The steps in the 02e 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
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.
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5. The proof of delivery is received from the customer (in the form of a customer .Introduction to Order
to Cash Cycle
sign-off on a Goods Received Note or the shipment documents).
6. The proof of delivery is f~~warded to the order mana~ement team confirming
the fulfillment and satisfactory delivery of the order.
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
goods/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 legal 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 bad 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 02C process. These departments are:
1. Sales
2. Credit
3. Order management and Invoicing
4. Collections
5. Accounts receivable.
> Sales :} Credit review )

Order
Management ~ Collection )
Accounts
Receivable
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Order to Cash (02C) - Sales: The sales function of a business comprises of its sales force. The sales
Accounts Receivable
force of the company sells the products and services manufactured, created and
provided by the business to its. customers. They also d velop and maintain the
sales channels like wholesalers, distributors, dealers, retailers, sales alliance
partners etc.
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 and profits, thereby contribute to the company's
profits and growth.
2. To meet the revenue targets of the company so that it can realize its
profitability and strategic goals.
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. In a 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 credit 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 may want betterlliberal
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 credit worthy than it was earlier.
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• Credit policy is also dictated by the working capital position of the business Introduction to Order
to Cash Cycle
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
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
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 guidelines on revenue
recognition.
[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 (Federal 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).
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Order to Cash (OlC) •
Accounts Receivable 2. Communicate to produc~ionldelivery on the delivery schedules for the order
(sales order may be converted to a work order here).
3. Ensure proper fulfillment of the order .
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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 etc.)
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:
(Average AR (Accounts Receivable) dming an accounting period) ..

. X (No. of days ID the penod)
fl'otal credit sales dming 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 cycle times and accelerate cash flow by reducing
collection pehod.
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 queriesori 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 or the processes followed by this
department to get payments.
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The responsibilities of the Accounts receivable team within an organization are: Introduction to Order
. to Cash Cycle
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.
Summary: Within an organisation, the 02C 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 promptly. 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, Hitech 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 Hitech Computers, the salesman of Hi-tech
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computer would receive the order from the customer (Magna Retail). To be able
to sell computers on credit, the Credit department of Hitech 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 after 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 02C process is very important to the business as selling to the customers and
getting paid for the goods and services sold to them is central to any business'
growth and sustainability.
Selling its products and services, brings in the money for the business that pays
for all activities of the business (like HR, Finance, Legal, Production, Labour
etc.) 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.
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Order to Cash (02C) -
The advantages of a properly managed a2C process are:
Accounts Receivable
1. It helps the business by keeping the cash conversion cycle (turning the
inventory of finished goods into cash, by selling the goods and collecting the
payments).
2. It keeps the customers happy by properly supplying them with their orders as
per their instructions.
3. It helps 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).
.. 4. It helps raise invoices to the customers properly so the company can request
for the payments from its customer in a timely fashion. \
5. It also helps collect the dues in time so that the business has adequate cash to
meet its own expenses and invest in its own growth.
6. Collection of dues in a timely manner also helps reduce bad debts.
The adverse consequences of a poorly managed a2C process are as follows:

1. If the credit process is weak then the company will end up supplying
goods/services to customers who are not credit worthy and may not pay for
the purchase on time. This will result in direct loss to the business ..
2. If the order management process is weak then the goods will not be shipped
across to the customers in time or in appropriate quantities.
3. If 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 dissatisfaction and their
not paying the money in time.
4. A weak invoicing process will also lead to improper recognition of revenue
e.g. even if the company may have supplied to the customer and received the
payment for it, the revenue may not be recognized if the supporting
documentation is not properly recorded and maintained. This will also result
in poor performance.
5. If the collections process is weak then the company will not be able to collect
its dues in time and will have to provision for bad debts which will affect its
profitability .
6. If the cash application process is weak then the payments received will not be
applied to proper accounts which will result 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 and if the payments are not applied
in time then the resulting cash will show up as a liability in the Company's
accounts.
The above points make it clear that managing the a2C process is critical to the
successful running of a business financially as well as operationally.
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Introduction to Order
to Casb Cycle
Check Your Progress
1. Fill in the blanks:

a. is responsible for converting the purchase order received
from the customer to sales order.
b. is responsible for selling the products and services to the
customers.
c. The maintenance of sales related documentation to enable revenue
recognition is the responsibility of _
~ \.,) d. The team calls the customers to make sure that the
customers pay on time.
e. team recognizes the customer payments against
.appropriate invoices.
'£,.,-\) f. team ensures that invoices do not have any errors.
2. State whether the following statements are True or False.
a. If the 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.
\l') c. Sales order is sent to the customer along with the invoice.
'2- \:) d.. Prompt collection eases the pressure on the working capital of the
company.
1.4 LET US SUM UP
Order to cash is the process of receiving and recording an order from the
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
'accounts.
There are five major stakeholders in the 02C process within the organisation i.e.
sales (sells the products/services to the customers), credit (decides on which
customer should be provided what credit terms, 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 02C cycle).
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Order to Cash (02C) - Order to Cash process is critical for the financial health of any organisation, as a
Accounts Receivable
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 a l?t of bad debts on the books of the company.
1.5 KEY WORDS
Accounts Receivable: The money due from the customers to whom

goods/services have been provided on credit.
i
Bad Debts: The credit given out to other parties (borrowers or customers), in the
form of services or goods or money, by the business which cannot be collected.
Cash Application: The process of recognizing the payments received from the
customers against the respective invoices and customer accounts.
Collection: The process of following up with the customers reminding them for
the payments that are due or confirming when the payments can be expected.
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
goods/services on credit and if so then Oh 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 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.
Purchase Order: A document sent by the buyer to the seller, ordering the goods
to be bought. If the seller confirms the purchase order then it turns into a one-off
contract between the buyer and the seller.
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.
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Warehouse: The facility where the inventory/goods are stored before being Introduction to Order
to Cash Cycle
shipped to the customers.
1.6 ANSWERS TO CHECK YOUR PROGRESS

:
1 a) Order Management b) Sales c) Order Management

d) Collections e) Accounts Receivable/Cash Application
f) Order ManagementlInvoicing
2 a) True b) False c) False d) True
1.7 TERMINAL QUESTIONS
1. Explain the responsibilities of the following stake holders in the 02C process:
a. Sales
b. Order management
c. Credit
d. Accounts Receivable
2. Explain the consequences of poorly managed Order to cash processes.
3. In a step by step manner explain the 02C process in brief starting from the
receipt of purchase order from the customer.
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UNIT 2 STAGES OF ORDER TO CASH
CYCLE
. Structure
2.0 Objectives
2.1 Source Documents in Order to Cash Process
2.1.1 Purchase Order
2.1.2 Sales Order
2.1.3 Invoice
2.1.4 Goods Received Note
2.1.5 Credit Memo
2.1.6 Remittance Advice
2.1.7 Bank Statement
2.1.8 Customer Account Statement
2.1.9 Dunning Letters
2.1.10 Legal Notice
2.1.11 Service Contract
2.2 Stages in Order to Cash process
2.3 Let Us Sum Up
2.4 Key Words
2.0 OBJECTIVES

• identify various steps/stages in the 02C cycle and what happens in them;
• listout source documents used in 02C cycle; 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
to convert a commercial transaction into an accounting transaction so that the
organization can recognize the transaction in its book of accounts. For example,
an invoice issued by a vendor to a customer 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 payment after
16 matching it with the purchase order and GRN.
/
/
They are usually referred to in case there is any confusion, ambiguity, dispute ' Stages of Order to
.Cash Cycle
about the transaction or to verify and reconcile commercial and financial
transactions within the business organisation or outside and to settle disputes and
ambiguities. For example. an auditor finds out that against an invoice of Rs. 4500,
the customer made a payment of Rs. 4300. Then he can also ask for a credit note
issued against that invoice for Rs. 200 (or a debit note from the customer for the
same amount). If the credit/debit note is not available then the invoice can not be
shown as fully paid and the balance amount needs to be shown as receivable from
the customer in the account books.
Some of the frequently used source documents in case of 02C 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 supplier constitutes a legal offer to buy products or services.

Acceptance of a PO by a seller usually forms a once-off contract between the
buyer and seller so no contract exists until the PO is accepted. Acceptance of the
PO can be communicated by the seller by mail or electronic channels like EDI
and Internet.
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
17
/ I
Accounts Receivable • ID and address of the vendor
..
• Delivery date,
Billing address,
•
~t
Shipping address,
" >t
• Terms of payment
• A list of services/products (including specifications and reference or part
numbers of the items to be purchased, with quantities and prices)
POs allow buyers to clearly communicate their intentions to sellers and in the
event that a buyer refuses to pay for products/services that were delivered, seller
can take legal recourse to recover the dues.
r .
It is also referred to for comparison and matching when the invoice is presented to
the buyer for payment. At that time invoice is compared with the purchase order
to make sure the goods and their respective prices and quantities that have been
invoiced match with what was ordered by the buyer.
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 is

received by a business from a customer. A sales order may be for products and/or
services.
A sales order is an internal document of the company, meaning it is generated by

the company itself. A sales order should record the customer's originating
purchase order which is an external document.
Rather than using the customer's purchase order document, an internal sales order
form allows the internal audit control of completeness to be monitored as a
sequential sales order number can be used by the company for its sales order
documents. .;-
tiJ
The customer's PO is the originating document which triggers the creation of the
sales order. In a manufacturing environment, a sales order can be converted into a
work order to show that work is about to begin to manufacture, build or engineer
the products the customer wants.
A sample sales order is provided in Appendix V
18
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/
2.1.3 Invoice Stages of Order to
. Cash Cycle
An invoice or bill is a commercial document issued by a seller to a buyer,

indicating the products, quantities and agreed prices for products, or services with
which the seller has already provided the buyer and requesting payment for the
products and services provided.
A sam~le of the invoice is provided in P2P (Course 3), Unit 3.
2.1.4 Goods Received Note

t
: Also referred to as GRN, it is a written acknowledgement that the specified

goods have been received at the other end (usually by the customer).
It is used by the suppliers as a proof of delivery and to support their claims for
payment (invoices) and by customers to verify and pay only for the goods
received and nothing beyond that.
A sample of the GRN is provided in P2P (Course 3), Unit 3.
2.1.5 Credit Memo
A credit memo (or credit notej originates from the vendor's end. When the goods
are returned to the vendor or an excess payment is made to the vendor (by
mistake), the customer can prepare a debit note or the vendor can prepare a credit
note. The credit note reduces the vendor's receivables from the customers for the
goods returned or excess payments/over charges against any invoice.
Cs"cElectronics
S,...y
Cc
g"" J21 ~/II'. NSW, A_frw:IIN
rd : ('~ISli! ~Z:1'3''''':(U),"Z U:!f'
Credit Memo
, ••• iI ~.r"'~!s~~l'.h!c ~tJJIJ.fill
ABNFTax Reg. No : 1234567B9R
Computw" Spares Lld Credit Memo No CM1002

100 City Road Date .31/0112003
South""t" YourRei PO 5100

MeIboume. Viatoria 3000 DurRel !N1001
Australia Terms: Cash
Sales P"rson John
Attention: Mr HendNson .lob No.. JB1DOO

Te' : 9300 0000
Fax,' 9300 0001
SN# Product ID Description Qty UM Unit Price Amount

To ac:tju5tlN 1001 item 1. being unit
pri_ ovefbifled at $2.1>40.0 <>8
in.tead 01 $2.000.00 .,.
1 CNB3000 Hewlett-PMkard 4281 Noli!bool< 2e.a $40.00 $80.00
Total Be1ore: Tax: $80.00

Total Tax $a.OO
Total After Tall $SS.OD

19
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/ I
2.1.6 Remittance Advice
Accounts Receivable
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 (EFf/ChequeIWT) and the account number ino which the
1
payment has been made.
• Total Amount Paid and the currency J
• List of invoices that have been paid with this payment and the respective
amount paid against each invoice.
Remittance Advice is used by the cash application team of the seller to recognise
I
payment and reconcile it against the respective invoices. Without this information
the payment cannot be recognised and remains in the suspense account.
I
A sample of a remittance advice is provided in Appendix I (at the end of this unit)
2.1.7 Bank Statement
Bank statement is a 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.
2.1.8 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)
2.1.9 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 for
the payment to be made by the customer after sending a dunning letter. If the
20 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 also Stages of Order to
CasbCycle
warns the customer of the consequences of non-payment like putting a hold on
any further sales to the customer and/or legal action,
A couple of sample dunning letters are provided in Appendix III (at the end of
this unit)
2.1.10 Legal Notice
After the repeated collection attempts, if the customer does not pay, the seller can
t 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 clarify 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)
2.1.11 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 case
the agreement is breached.
The usual components of the service contract are:

1. The type of services to be provided by the service provider to the customer.
2. The pricing structure of the services to be provided. (amount to be billed per

transaction or per man hour of service etc.)
3. Service level agreements
4. Non-disclosure agreement (to be followed by oth the customer and service

provider).
5. Treatment of intellectual property if provided by the customer or service

provider.
6. Sharing of costs between the service provider and customer i.e. which costs,
out of the expenses incurred by the service provider, can be charged to the
customer and which ones will be included in the price of services e.g. if there
is a 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.
21
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/ \
I
Order to Cash (02C)- 7. Penalties that the service provider is liable for, in case there is a breach of
Accounts Receivable
agreement from his side.
8. Penalties that the customer is liable for, in case there is a breach of agreement
from his side.
9. 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
provider, the amount collected at the beginning of each year will be recognised
partly everyyear as revenue i.e. if the annual service fees are Rs. 12,000 (paid in
advance), then the revenue of Rs. 1000 is recognised every month.
2.2 STAGES IN ORDER TO CASH PROCESS
There are broadly three stages in the otc cycle i.e. pre-invoicing, invoicing and
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
3. Post-invoicing stage:
a. Collection follow up
b. Cash Application
4. Quality checks and audits
The quality checks and audits do not happen in any particular sequence. They can
happen during any stage of the 02C cycle and for any of the teams involved
(order management, invoicing, collections, query resolution, cash application etc.)
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 conflict 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.
22
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/
Due to this, sometimes the credit department is also called as "sales prevention Stages of Order to
, Cash Cycle
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.
Some of the details that need to be captured are:
.. 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 their 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 to a sales order within the business. The other accompanying
documentation needs to be retained for revenue recognition purposes.
The sales order serves as the document for order fulfillment for inventory,
production and shipments departments.
Invoicing: After the goods are shipped to the customers I the services have been
provided and the proof of delivery is received, the invoicing process 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 disagree~ents that the customers may
have about the invoices. Sometimes they may also need to consult sales people
while resolving the disputes.
.,\,\V
~ ) ~ing team is usually a part of the order management te~m.
23
/
Order to Cash (02C) - Collections follow up: This involves calling the customer once the invoices have
Accounts Receivable
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 on the invoice, to
ascertain the date by which \he payment can be expected and remind the customer
about any overdue invoices.
This is the most important and critical process in the entire 02C 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. Inaccuracy will result in a lot of collection
effort getting wasted.
Quality Checks and audits: Quality 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 verify
the following:
1. Correctness of the transactions and whether the data entered is supported by

the source documents.
2. Whether the process is in good health and under proper control (the process
metrics are within the statistical control limits).
3. 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)
24
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/
Check Your Progress Stages of Order to
Cash Cycle
After the purchase order is received from the customer,

a) '. team is responsible for its f~lfillment.
b) is raised after the proof of delivery of goods to the
customers is received.
c) ______ is the term used for recognizing and settling the payments
received from the customers against existing receivables.
i1J~ involves assessing the ability ~f the customer to pay the
dues on .time.
e) When the invoices become overdue, . are sent to the
customers to asking them to pay immediately.
f) The cash application team needs and
________ documents to apply cash against the specific invoices.
2 State whether the following are True or False.

a) 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.
c) The penalties, in case the agreement is breached by either the customer or
the service provider, are specified in the legal notice.
d) For smooth functioning of the sales activities, it is recommended that the
credit and sales department report to the same manager.
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 ordergoods received note. invoice and credit
note. These documents are used to 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 before raising the invoice to
demand payment from the customer. They include credit review, customer
account 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 invoicing activities include collection and cash application.
Apart from the above quality checks and audits are done to ensure that the .
transactions are happening accurately and at the desired speed. This also helps
take corrective action in case things are not going as planned. 25
/
/ I
Order to Cash (02C)·
Accounts Receivable 2.4 KEYWORDS
Cash Application: The process of recognizing the payments received from the
customers against the invJices raised against them.
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 retumed the goods or received damaged goods
which were then not accepted.
Credit Review: The process of assessing the customer's ability to pay his dues in
time.
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 y the seller.
Invoicing: The process of raising invoices for the goods and services provided to
the customer.
Source Documents: The documents which contain source information on internal

and extemal 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 book of accounts.
1. a) Order Management b) Invoice c) Cash Application

d. Credit review e) Dunning letters f) Remittance advice, bank statement
2. a. False b) True c) False d) False
26
/
Stages of Order to
2.6 TERMINAL QUESTIONS Cash Cycle
1. Explain the use of the following source documents in the 02C cycle:
a) Sales order
b) Invoice
c) Credit note
d) Purchase order (customer's)
e) Remittance advice
f) Service Contract
2. What is the importance of credit review process in 02C? Also explain why it
should be segregated from sales function.
3. Explain what happens in the following stages:
a) Invoicing
b) Cash Application
c) Collection follow up
d) Customer account setup
27
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/
Order to Cash (02C) •
Accounts Receivable
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 24-Sep-2007 by wire transfer to your Bank
Account.
Invoice # Invoice Amount ($)

532202 19,720.97
532267 6,763.61
532289 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 Regards
(Antonio Girelli)
~
Purchase Manager
Kaiser Power Inc.
(Note to the students: '$' stands for US dollar. It indicates the currency of
payment. The remittance advice sample shown above is that of a US Corporation
'Kaiser Power Inc.' making a payment to a vendor 'Spanner Electrical
Machines' .)
/
/
I
Appendix 11: Sample of the Customer Account Statement Stages of Order to
Cash Cycle
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.
If you have any query on the invoices, please highlight the same and bring it to
our immediate 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.
• Currency GBP
Invoice PO Invoice Balance
Number Number Invoice Date Amount Amount
11356 17862895 1O-Jun-2004 12,768.00 12,768.00
11429 17862911 15-Jun-2004 13,654.00 13,654.00·
11488 17863029 24-Jun-2004 10,342.00 10,342.00
Yours Faithfully,
Collector Name
Telephone Number:
FaxNumber:
E-mail Address:
(Note to the students: GBP stands for British Pound. It indicates the currency of
invoicing and payment.)
29
/
/
I
Appendix Ill: Sample of the Dunning Letters (first reminder)
Accounts Receivable
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 led to further action being taken.
Currency GBP
11356 17862895 IO-Jun-2004 12,768.00 12,768.00
11429 17862911 15-Jun-2004 13,654.00 13,654.00
11488 17863029 24-Jun-2004 10,342.00 10,342.00
Yours Faithfully,
Collector Name
Telephone Number:
Fax Number:
E-mail Address:
30
/
/
Sample of the Dunning Letters (subsequent reminder) stages of Order to
Cash Cycle
--------- ..
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 account on
immediate CREDIT STOP.
As no reason has been given as to why payment has not been sent, for example
any issues which you may have on the invoices shown, we will have no
alternative but to place the CREDIT STOP on your account 7 days from today's
date if payment for the full amount is not sent, or alternatively we are notified of
any issue you may have on any of the invoices shown.
If this course of action is required, we will look at pursuing further Legal Action
against you, which may well led to additional costs been added to the outstanding
debt.
Currency GBP
11356 17862895 1O-Jun-2oo4 12,768.00 12,768.00
11429 17862911 15-Jun-2004 13,654.00 13,654.00
11488 17863029 24-Jun-2004 10,342.00 10,342.00
If you do believe payments has already been made, please supply cheque number
& date of payment, or if paid by Credit Card, the card details & date your account
was debited.
Yours Faithfully,
Collector Name
Telephone Number:
FaxNumber:
E-mail Address: 31
/
/
Accounts Receivable
AppendixIV: 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 now passed your account to Legal Representatives who will now issue a
Summons, 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 return post

• Proof that payment has been made or
• A legitimate reason for non-payment.
This feedback must be received no later than 5 working days from the date of this
letter. If this does not happen we will have no alternative to proceed with this
action.
Currency GBP
11356 17862895 1O-Jun-2004 12,768;00 12,768.00
11429 17862911 15-Jun-2004 13,654.00 13,654.00
11488 17863029 24-Jun-2004 10,342.00 10,342.00
Should you wish to discuss this matter, please contact the relevant Accounts
Contact listed below.
Yours Faithfully,
Collector Name
Telephone Number:
Fax Number:
32 Esmail' Address: ,
J
1
I
I
/ 1
Appendix V: Sample sales order Stages of Order to
Cash Cycle
HITECH ELECTRONICS SALES ORDER

,
4129, Main Street I
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
. .~
- .- -
Deliver by:
7120/2006 Alex Duncan UPS 56536369
8/512006
UNIT
QTY UNIT DESCRIPTION TOTAL
:PRICE
!
10 Nos. '1 RAM Chips (128 MB) $60.00 $600.00
,
!
20 Nos. I Display controller (5259) $50.00 $1000.00
--.--~---- ... _ .._.". __ _---------
...
___ • ____________ •• ______ M __
..,.....
,.....
_.._.._......
_......
L...........................................
- __ __ _--- ........• .......................... ..... ...
SUBTOTAL 1600.00
..... , -' .. "----_._._-"."-_ .. ..._-----_._---- ---.-- .. ..-.....--~-.--.-..-....
-, "
1. Please send two copies of your TOTAL $1600.00

invoice.
2. Enter this order in accordance with
the prices, terms, delivery method,
and specifications listed above.
3. Please notify us immediately if you
are unable to ship as specified.
4. Terms of payment: To be paid .
within 30 days of receipt of invoice
5. Send all correspondence to:
Alex Duncan
Authorized by Alex Duncan 7/20/2006
(Note: '$' stands for US dollar. It indicates the currency of sale and invoicing. The sales
order sample shown above indicates that Alex Duncan, a salesman for Hitech Electronics,
has created a sales order for a customer "Integrated Circuitry".)
/
/
r
UNIT 3 CREDIT REVIEW
Structure
3.0 Objectives
3.1 Introduction
3.2 Selling on Credit
3.3 Credit Review and Approval
3.4 Customer Account Set Up
3.5 Let Us Sum Up
3.6 Key Words
" 3.8 Terminal Questions
3.0 OBJECTIVES
• describe the credit approva! process and also 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.
3.1 INTRODUCTION
You have been introduced to the 02C cycle in the previous units. We have
discussed the stages in the 02C cycle (i.e. receiving the order, managing/fulfilling
the order, invoicing the customer, collecting the payment and applying cashlbook
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 02C cycle.
Out of the above stages of the 02C cycle, the processes that are usually
outsourced are credit review, order management (except actual fulfillment),
invoicing, collections and AR.
We will now discuss the stages of 02C 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
34 responsibilities are.
/
/
I
.\
Credit Review
3.2 SELLING ON CREDIT
Most of the commercial transactions globally happen on credit Le. the customer
I
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 very similar to lending to the customer.
Before lending to a borrower, the lender usually does a credit check which makes
t
••
an assessment of the borrower's ability to pay back the loan in time. Similarly,
before that credit is provided, it is in the interest of the seller that a check on the
credit worthiness of the customer is done. 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.
Apart from the above situations, another place where the customer's credit
worthiness is checked is the issuance of credit cards. While issuing a credit card
to a prospective customer, the issuer checks on the following:
• Customer's proof of income/salary,
• Employment/occupation
• Other factors that may influence the customer's ability to pay the credit card
dues (for example how many financial dependents he/she may have, does the
customer have any bad credit history with any previous credit card issuer etc.)
If the customer's credit history is adverse or the income is not adequate then the
credit card issuer may choose not to issue a credit card to the customer in
question.
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Order to Cash (OlC) -
Accounts Receivable 3.3 CREDIT REVIEW AND APPROVAL
.Credit review is usually do~e by a specialized department called 'Credit

department' in the seller's/supplier's organisation. In some organisations the
Credit team is a part of the Accounts Receivable (AR) team or it could be a
separate department as well.
Usually credit function in an organization is in 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 ~ales targets and those of the organisation), may
sell to customers who may not be creditworthy. In such cases the business of their
.. employer will be hurt when the payments are not received on time .
. It is said that a credit sale is not a sale till the payment is received. Until then it is
considered as a gift to the customer. The credit 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.
Hence the credit department and sales department report to different managers
within the organization. The credit function is usually part of the CFO's (Chief
Financial Officer) officelfinance 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 credit period and limit).
The Objectives of the credit function are as follows:
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.
3. Revise the credit terms for the customers on a continuous basis.
If a new customer is not found credit worthy enough, the credit manager may
prohibit credit sales to it. If an existing customer shows erratic payment behaviour
e.g. payments not being made on time, making excuses for delaying payments
after the goods have been delivered etc. credit manager may also decide to stop
,
any further credit sales to it.
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The credit review is also driven by the selling o~ganisation's credit policy. The ~redlt Review
policy I?ay be liberal or conservative. It is usually influenced by factors like how
tough the competition is in the markets where the company is selling its products
and services, working capitallliquidity
.
position of the c~mpany and selling
strategy of the company. For example, if the working capital position of the seller
is tight then the credit policy will be more conservative. If the competition in the
-,
market is high, then the credit policy may have to be liberal to attract wholesalers
and retailers to stock mo~e products of the seller company and to push their sales
more compared to competitor's products.
The credit manager assesses the customer's creditworthiness on the following

criteria:
-
a. Ability to P;Y, on time
b. Willingness to pay
The customer who is being extended credit can be a business or an individual. In

case of an individual customer (e.g. while issuing a credit card) the credit
assessment is usually done by:
1. Checking the credit history of the customer: In the US, there are various credit
bureaus which track the credit history of individuals and provide this
information to banks and credit card issuing agencies, for a fee.
2. Checking on the customer's proof of income
3. Assessing the customer's current net worth and liabilities e.g. does he own a
car or a house, how much loans has he already taken for the house/car that he
owns, what is the amount that he spends every month servicing these existing
loans, what is the size of his family, how many earning members are there in
the family etc.
In case the customer is a business organisation, then its ability to pay on time is
assessed by looking at its financial statements and checking on its profitability
ratios and liquidity ratios.
Profitability ratios provide an indication of the profit margins of the business.

These include Gross Margin, Operating Margin and Net profit Margin. Other
profitability ratios are return of assets, return on capital and return on equity. They
also indicate whether the business will be able to protect its profitability and will
stay profitable when it faces adverse conditions.
Liquidity ratios indicate whether the business has adequate cash and liquid as~ets
so that it can meet its short term obligations. Some of the liquidity ratios are
Current ratio and Quick ratio. High liquidity indicates that the business is in a
better position to make timely payments to its vendors and creditors. The cash
generated by the business is assessed by looking at its cash profits (net profit plus
noncash expenditure like depreciation and amortisation).
• 37
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a. Ability to pay is dependent on financial health of the company which is
Accounts Receivable
also influenced by the competitive environment that the business operates
in and its position vis-a-vis competition. So the credit review process also
.;
takes into account thecustomer's competitive environment while
assessing the credit worthiness.
b. Willingness to pay is assessed by doing a reference check on the

customer with some of its existing vendors and how promptly the
customer makes payments to them.
Some of the other sources of information are rating agencies like Dun &
Bradstreet and Compustat which track the financial information on the companies
and also analyse and rate them on their credit jYorthiness. This rating information
is made available to its clients for a fee.
Some businesses like to keep a credit review scorecard which evaluates each
customer on parameters like turnover, assets and capital, reputation of company
and its promoters, growth prospects of the industry etc. and also on financial
parameters like growth, profitability, liquidity, debt exposure, working capital
efficiency, cash flow status etc. The score card can also include past payment
behavior, references and credit ratings. Appropriate weights can be assigned to .
the various parameters. After the credit review is done the credit department .
suggests the credit terms which are: .
1. Credit Limit
2. Credit period
1) Credit limit: It indicates the maximum monetary value up to which the goods
,
and services can be provided on credit to the customer e.g. take a case of a.
customer who has been provided with a credit limit of USD 10,000. Goods
worth USD 7,500 have already been supplied to it for which the payment is
j
yet to be made. Now the customer places another order for goods worth USD
5,000. If the goods are supplied to the customer as ordered then the value of
credit extended to it will be USD 12,500 which will exceed the credit limit
fixed for the customer. So the seller can refuse to supply the goods until:
• Either the payment for the previously supplied goods is made or

• Customer makes an advance payment of at least USD 2500 along with the
second order of USD 5000.
• Seller discusses the situation with the customer and the customer agrees to
modify the order to a maximum value of USD 2,500 so that the credit limit is
not exceeded. I
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• At the request of the customer a credit review is done again and the credit Credit Review
limit revised to a higher amount.
Most of the computer systems, in the supplier's organisation, that manage and
fulfill the orders received from the customer are pr~grammed to automatically
check the credit limit and whether
~ it is being exceeded if the order is .supplied. In
such a case the systems flash a warning and do not allow the order to be
processed any further.
2) Credit period: This is the time period for which the credit is extended e.g. if
the credit period is 30 days then the customer is expected to pay within 30
days of invoicing. If the payment is not received within the credit period the
respective invoice becomes overdue and this may not go in favour of the
.. customer when the next credit rating by the supplier happens e.g if the credit
terms are expressed as 'Net 30' it means that the customer has 30 days within
which to pay the invoice.
In case the credit review does not result in a rating that is within the minimum
acceptable limits then the customer can be refused credit and may have to buy
from another supplier or may have to make the purchase by paying in advance or
paying on delivery. To encourage customers to pay earlier than the credit period,
some suppliers also provide an incentive by passing on an early payment discount
e.g. if the payment terms are expressed as '1/15 net 30' it means the customer can
avail 1% discount over the invoiced amount if the payment is made within 15
days otherwise the full amount may be paid within 30 days.
A
Jt
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Fig 3.1 Credit Analysis and Review
/
Order to Cash (02C) - In an outsourced environment, the credit review process is outsourced to an
Accounts Receivable
outside team (credit analysis is done by the outsourcing service provider) which
collects information (as discussed already e.g. profitability ratios, liquidity ratios,
payment history,·D&B rating, information obtained through reference checks etc.)
which may be relevant for the credit review and does a preliminary analysis of the
credit worthiness. Then the credit rating is recommended to the client (credit
manager) who takes the final decision on the credit terms. These credit terms are
then communicated to the customer and the sales person who manages the
customer.
A process map of the credit review process in an outsourcedenvironment is

provided in Fig. 3.1 above.
The credit check is a sensitive process and requires that the information gathered
during this process be handled in strict confidence.
Performance measurement of the credit review team
Process metrics are measured and tracked to monitor the quality of the processes.
In an outsourced environment, especially, these metrics become the basis of
performance measurement of the outsourcing services provider and further
improvement of quality. The metrics that are tracked andreported from credit
review are:
1. Accuracy: refers to the correctness of the data that are entered into·the
system while collecting the rating related data from various sources. The
accuracy metric that is measured for credit review is:
a. No. of transactions with data entry errors reported per month.
2. Turnaround Time (TAT): This is the average time taken to process a credit
review request. The TAT metric that is measured for credit review is:
a. Average time to review credit for a customer
3. Productivity: This refers to how many requests have been completed within a
given amount of time. The productivity metrics that are measured in credit
review are:
a. No. of credit review requests received per week

b. No. of requests closed per 'week
c. No. of credit applications received per week
d. No. of credit applications processed per week
e. No. of credit requests completed within 8 business hours.
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Summary: The credit department does the credit review for a customer to whom Credit Review
the goods/services are to be sold on credit. The review is done to assess the
customer's ability to pay and willingness to pay. This is done by analyzing the
financial position of the customer like profitability and liquidity, doing reference
checks on the customer and also getting data from rating agencies. If the custome
is not found to be credit worthy then credit sales can also be refused to it. .
Based on the credit review process the credit terms (credit limit and credit period)
are arrived at. In an outsourced environment the credit review process'is carried
out by the service provider team. This team collects data from various sources and
enters into the system. A final credit rating of the customer is arrived at and based
on this rating, the credit terms are decided.
3.4 CUSTOMER ACCOUNT SET UP
Before a supplier starts doing business with a new customer, its account needs to
be set up in the database with all the necessary details about it.
Setting up the customer account allows the vendor' s/supplier' s systems like sales
order generation, shipment systems and invoicing systems to process transactions
related to the new customer.
The customer details that are usually captured in the process are:
• Customer name
• Ship to address (where the goods will be sent)
'. Bill to address (where the invoices will be sent)
• Tax id information
• Contacts within the customer organization (buyer and procurement managers

on the customer side, AP desk contact details on the customer side)
• Credit terms (credit limit and credit period)
• Taxation terms (types of taxation and rates applicable)
• Payment terms (like who bears the risk of in transit goods, who pays for
freight/insurance etc.)
• Discounts, penalties and tolerances.
Some organisations also sign a master contract with its. customers. This contract is
signed for a fixed duration and governs the prices that can be charged to the
customer 1,)[ various services/goods (quotes), the terms of service like service
level agreements, the terms of payment, confidentiality agreements, discount
terms (I"d My contractual obligations that may be placed on supplier as well as
customer and the penalties involved in case these obligations are not fulfilled as
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. Accounts Receivable they do business with each other. This agreement may be reviewed, renegotiated
and revised after its expiry. Some terms like pricing and service level agreements
may be modified in renewed contracts.
In case such a contract is signed then a copy of the contract is also uploaded and
attached to the customer account. This may be referred to by various people while
they service the customer and resolve disputes and answer queries of the
customers.
In. an outsourced environment the customer set up process looks like the one
shown below (Fig. 3.2):
,"
(Note: The process diagram shown above is a typical one.

Modifications/variations of it may be implemented in different organisations
depending on the industry they function in, the geography they work in, the type
of customer that they sell to and the structure and size of their organisation)
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The controls that are required to be implemented during this process are: Credit Review
a. The customer's name and credentials should be checked in the system before
the .set up to avoid setting up duplicate ids.
b. The setup should be.authorized by the appropriate authority from the sales
group.
c. The setup request should be accompanied with a set of papers carrying

information provided by the customer directly
d. If the proper documentation or the authorization is not in place the request

should be sent back to the sales person requesting more information.
e. In case the issue is not resolved as per the agreed SLAs (Service Level
Agreements), the escalation matrix should be followed to report the issue to
the higher authorities within the client organization.
For good financial controls, customer setup team should be separate from order
management team.
Performance measurement of the customer setup team

As discussed earlier, metrics are tracked for outsourced processes to measure the
quality of execution. The process metrics that are tracked and reported from
customer setup are:
1. Accuracy: refers to the correctness of the data entered to set up the customer.
The accuracy metrics that is measured for customer setup is:
a. No. of transactions with data entry errors reported per month.
2. Turnaround Time (TAT): This is the average time taken to create a new
customer record or modify the details of an existing customer. The TAT
metrics that are measured for customer setup are:
a. Average time to set up a new customer

b. Average time to service a modification request
3. Productivity: This refers to how many requests have been completed within
a given amount of time. The productivity metrics that are measured in
customer setup are:
a. Ho. of customer setup requests receiveq per day

b. No. of set up request closed per day
c. .'~o.of modification requests received per day
d. No. of setup request closed within 8 business hours
e. No. of set up requests put 'on hold' for clarification, per day
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Check Your Progress
Accounts Receivable

a) For good control, the credit department and sales department should be
'.
kept functionally separate ..
b) Credit assessment for an individual is done in a similar manner as that for
an organisation.
L\ii) c) Before customer account is setup, it should be checked for duplicate ids.
f2- d) Credit department cannot refuse credit to a customer. Only sales person
can decide about that.
(
\. \,,' ) e) Credit check is not an activity that needs to be done again and again.
...) a) The credit review of a new customer is done by the _
\ \;'\ manager.
b) A sale is not a sale until is received. Till then it is a
_____ to the customer.
c) The two parameters that specify the credit terms are _
and _
d) Customer account set up should be by a proper authority
from the sales group .
. \ e) "Average time to set up a new customer' is a metric for _
'2- f\\\ )
\.. in customer setup.
3.5 LET US SUM UP
Most of-the commercial transactions, especially between businesses happen on

credit. The supplier delivers the goods and services first and then collects the
payment later. To make sure that only those customers who are credit-worthy are
being sold to on credit, the seller needs to assess the customer's ability to pay the
dues on time.
This activity is called as credit review and carried out by either the credit
department or accounts receivables department in the seller's organisation. The
credit department reviews the credit worthiness of the customer and specifies the
credit terms (credit limit and credit period), that will apply to the customer's
account. Credit review is not a one-time activity and needs to be done regularly
because the customer's ability to pay on time may change with changing business
conditions.
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After the credit review is done, the customer's account needs to be set up in the Credit Review
seller's customer master database. The customer's details like name, Tax id, bill
to and ship to addresses, contact persons on the customer's side, credit terms,
taxation terms and payment terms etc.
After the customer set up the seller can start doing business with the customer.
3.6 KEY WORDS
Cash Profit: The cash generated by the business out of operating profits from a
.. particular period. It is equal to the net profit plus non cash expenditure (e.g .
depreciation, amortization etc.)
Cash Sale: A sale made to a customer where the payment is received in cash
immediately at the time of sale.
Credit Limit: The monetary limit of the credit extended to a customer.
Credit Manager: The manager within the selling organisation who takes the
decision on whether a customer is credit worthy and on what terms credit may be
extended to it.
Credit Period: The time limit within which the goods and services supplied on
credit, need to be paid for.
Credit Sale: A sale made to a customer where the goods and services are
delivered first and payment is received later.
Current Ratio: The ratio of Current assets to current liabilities of a business. It

indicates the ability of the business to meet its short term obligations .
.,
Early Payment Discount: An incentive provided to the customers, to whom
credit sale has been made, to pay earlier than the credit period e.g. If the credit
terms are indicated as "2/15 net 30" it means the customer can avail 2% early
payment discount if the invoice is paid within 15 days otherwise the full amount
on the invoice is payable within 30 days.
Gross Margin: The ratio of gross profit to total sales expressed as a percentage.
Gross profits are the profits derived by deducting direct cost of goods sold (direct
cost of manufacturing like material, power and labour etc.)
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Metrics: Metrics are measurements taken on an activity to measure its quality
Accounts Receivable
e.g. how much cycle time does it take to process a request (turnaround time), how
'many requests can a person process in one hour (produc ivity) etc.
Operating Margin: The ratio of operating profit to total sales expressed as a

percentage. Operating profits are the profits derived from regular operations of the
company i.e. operating revenue (less other income) - operating expenses (direct
cost of material, labour, sales, administration and overheads).
Net Margin: The ratio of net profit (profit after tax) to total sales expressed as a
percentage:
Quick Ratio: Also called the 'acid test ratio'. It is measured as the ratio of
(Current assets - Inventory/stocks) to current liabilities of a business. It indicates
the ability of the business to meet its short term obligations. It is complements the
information derived from the current ratio as it discounts the stock which may not
be immediately saleable.
1 a) True b) False c) True d) False e) False

2 a) Credit (manager) b) payment, gift
c) credit limit, credit period d) authorized/approved
e) turnaround time
1. Why should the customer account setup team be kept separate from the order
management team?
2. What are the controls required in customer account set up?
3. State the metrics that are used to measure the performance of the credit review
process .
.~ 4. What is the importance of a proper credit review process?
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UNIT 4 ORDER MANAGEMENT AND
INVOICING
Structure
4.0 Objectives
4.1 Introduction
4.2 Order Management Process
4.3 Order Entry and Booking
4.4 Order Fulfillment and Shipment
4.5 Invoicing
'.
4.6 Let Us Sum Up
4.7 KeyWords
4.0 OBJECTIVES
• . explain order management process;

• describe the significance of order management process in day-to-day business;
• explain the tasks involved in order fulfillment and shipment; and
• measure the performance of the order management process.
4.1 INTRODUCTION
In this unit we will discuss the order management process and its significance.
Order management is the process that enables the seller/supplier to create,
validate and manage customer orders, track their fulfillment and shipment status
and recognize the resulting revenues.
In other words, the order management process in an organisation consists of:
1) Receiving an order from the customer

2) Processing that order and fulfilling it (making sure that the goods and services that
the customer has ordered are provided to it)
3) Invoicing/billing (raising an invoice and sending it to the customer asking for
payment for the goods and services supplied).
4) Maintain the documentation regarding the sale so that the revenue can be properly
recognised. ;. .
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Accounts. Receivable 4.2 ORDER MANAGEMENT PROCESS
Order Management process has significant effect on other processes like

invoicing, collection and cash application. A weak order management process can
directly affect the revenue and hence the financial performance of the business .
.
The customer sends a purchase order (directly to the sales person or to order
management desk through mail or through electronic channels like EDI, web,
email etc.). The contents of the purchase order received from the customer are
compared with the following:
1) Prior contractual terms: Prices stated on the purchase order are compared with the
prices quoted on the master contract signed with the customer. The taxation, payment
and delivery terms stated on the purchase order are compared with the contractual
terms agreed with the customer.
2) The quantity ordered is also compared against existing finished goods inventory,
existing orders from other customers and it is assessed whether the goods ordered by
the customer can be delivered as per the schedule requested by the customer.
3) A comparison is also made with the credit limit that is provided to the customer and
how much goods/services have already been provided for which the payment is yet to
be received
4) Whether the purchase order received is a not duplicate one. Processing a duplicate
order results in the working capital getting unnecessarily stuck apart from wasted
fulfillment and shipping costs since the order has already been shipped or getting
fulfilled against the copy of the PO received already.
In case any of the terms stated on the PO are different from those stated in the
contract, the sales person or the order management gets in touch with the
customer to request a modified PO. In case the quantity ordered cannot be
supplied as per the customer schedule then the customer is contacted again and a
new delivery date is negotiated with the customer. The customer then submits a
new PO after cancelling the previous one.
If the credit limit provided to the customer is getting exceeded with the current
order then the customer is asked to either pay the existing dues or bring down the
value of the order so that the credit limit is not exceeded
If the purchase order is found to be a duplicate one then it is cancelled as the

previous PO received would already be in the process of getting serviced!
fulfilled.
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If no discrepancies are found in the purchase order then it is confirmed to the Order Management
and Invoicing
customer (thru mail/email/faxlEDI etc.). The act of confirmation indicates that the
vendor/supplier can service the purchase order and supply goods as per the terms
stated on the PO. It also automatically converts the purchase order as a one-off
contract between the supplier and customer.
4.3 ORDER ENTRY AND BOOKING
The order booking team, after confirming the purchase order to the customer,
converts the PO to a sales order. The other accompanying documentation needs to
.. be retained for revenue recognition purposes .
The sales order serves as the document for order fulfillment for inventory,
production and shipments departments. In case the goods to be supplied are
already manufactured then the sales order is sent to the store/warehouse to
package the goods and ship them to the customer. In case they are to be
manufactured or customised to a specification provided by the customer, then the
sales order goes to the production department for next steps to be taken.
Let us take the following examples:

1) An online book seller receives the customer's order to supply some books on
the internet. In this case, the books are already available for shipment. The
order is sent to the warehouse to package the books that have been ordered by
the customer and ship them to the customer's address.
2) A textile machinery manufacturer builds machines to the specifications of the

customer. The machine parts are bought from the suppliers and kept in the
inventory. When a customer's purchase order is received, it is converted into a
sales order and sent to production to build a machine as per the specifications
provided by the customer.
PO
Sales
received SO for\Narded to
order
and \Narehouse/prodn.
created
checked
Fig 4.1 : Order Entry
4.4 ORDER FULFILLMENT AND SHIPMENT
The order fulfillment team receives the sales order created by order booking team.
The order's delivery schedule is prepared based on the lead time stated in the
order, exis ing orders under process, inventory positions and manufacturing
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If the order is to supply goods then these goods are gathered and packed for
Accounts Receivable
shipment and the shipment is scheduled. In case the customer has asked for some
services to be provided, then the service calls are scheduled along with the
production department, so that the production team can assign a person (or
persons) to provide the required service,
The order fulfillment team also entertains any change requests made by the
customer including any cancellations of the orders as well. This also depends on
the stage of order fulfillment which may be irreversible in some cases. In such
cases the order fulfillment team can reject the modification requests as well.
SO
received Order shipped to
and customer
checked
Fig. 4.2 : Order Fulfillment and Shipment
4.5 INVOICING
Before we talk about the invoicing process, let us discuss the types of invoices.
Invoices are generally of the following types:
1. Standard invoice: This is the most common type of invoice that is used for
invoicing the customers. The standard invoice is, as its name suggests, an
invoice, bill or fee notice for the products supplied to the customer.
2. Service invoice: Service invoices are used to charge the customers for
services provided. Instead of quantity/units of goods supplied, a service
invoice carries the unit of work done e.g. no. of transactions completed within
a period or no. of hours worked for the customer. This is used by the
businesses that provide services to the customers like consultants, lawyers,
sub-contractors etc.
3. Recurrent invoice: This is an invoice which is sent with a fixed frequency

(weekly, monthly or quarterly) to the customers. The examples of such
invoices are utility bills, telephone bills, lease/rent invoices etc.
4. Ad-hoc invoice: Ad-hoc invoices are sent to the customer in case there are
some extra charges which the customer may have agreed to pay apart from the
cost of goods and services. Let us take an example. You had agreed to supply
the goods to the customer and not charge transportation costs to him.
Suddenly due to increase in the fuel prices it is no longer possible for you to
absorb the transportation costs yourself. You talk to the customer about this
and he agrees to bear the partial cost of transportation. In such a case, a
regular invoice will be sent to the customer when supplying goods and an ad-
50 hoc invoice for his share of the transportation costs will be sent to him later.
/ I
absorb the transportation costs yourself. You talk to the customer about this Order Management
and Invoicing
and he agrees to bear the partial cost of transportation. In such a case, a
regular invoice will be sent to the customer when supplying goods and an ad-
. hoc invoice for his share of the transportation costs will be sent to. him later.
5. Pro-forma invoice: A pro-forma invoice is generally used for items prior to

selling. For example, you want to take a loan to purchase a car and you talk to
a car dealer for this. The dealer provides a pro-forma invoice which indicates
the all the costs associated with the purchase of the car (Cost of the car itself,
taxes, registration charges, first ye,ar's insurance etc.). This pro-forma invoice
can be shown to a bank. Based on this pro-forma invoice, the bank agrees to
make the loan (let us say 80% of the cost of the car). The bank pays the dealer
directly. The balance 20% is paid by you. When the car is actually sold this
pro-forma invoice is returned to the dealer and he issues a regular invoice for'
the car purchase.
6. Quotation invoice: Quotation invoices can be created and, at a later date, if

the quote is successful, converted to an invoice, or deleted if the quote was not
accepted.
After the goods are shipped to the customers / the services have been provided
and the proof of delivery is received (for example a copy of the customer's GRN
or the shipment documentation counter signed by the customer or any other
acknowledgement from the customer like mail/fax), the invoicing process is
responsible for requesting a payment from the customer.
The request is made by sending an invoice to the customer. As discussed earlier,

the invoice lists the products/services supplied, the agreed rates at which these
should be charged and the payment details (how to make the payment and where
to send it),
..•.
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.~...
I $"1)
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Invoicing process is automated in most of the businesses and requires very little
Accounts Receivable
manual intervention and usually gets overlooked for this reason. However
invoicing accuracy is the single most important factor that influences efficiency
and effectiveness of other processes like revenue recognition, collections and
receivables management.
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 o~ disagreements that the customers may
have about the invoices.
Once the invoice has been issued, it cannot be cancelled or reversed. This is
.. usually done so that the revenue earned by a company can be reported objectively
and without anyone manipulating it.
In case the adjustments need to be made to the invoices, for price correction or
correction ofthe quantity of goods supplied etc. we have to use credit notes. As
discussed earlier, in case the invoiced amount needs to be corrected, the seller
issues a credit note which can be adjust against a cash refund to the customer or
against future purchases by the customer.
There are two kinds of credit notes:
1. Partial credit note: Partial credit note adjusts the partial amount stated on the
invoice e.g. you supplied 10 cartons of paper reams to the customer at USD
80 per carton but the customer returned two cartons (stating that the material
was received in damaged condition). In this case the invoice would have been
for 10 cartons (or USD 800). Since two cartons were returned, a partial
amount (USD 160) needs to be adjusted by issuing a credit note ..
2. Full credit note: A full credit note adjusts the entire amount stated on the
invoice and a new invoice is issued in its place. Taking the same example as
discussed above, when the customer returns the two cartons,the full credit
note will adjust the entire amount of USD 800 and a new invoice worth USD
640 will be issued to the customer.
(Note: USD stands for US Dollar, the currency of the United States of America.
The study material will carry a lot of references of foreign currencies like USD,
GBP i.e. British Pound, AUD i.e. Australian Dollar or EUR i.e. Euro, because a
lot of outsourcing activity is done by the clients based in these countries and
regions.)
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From 02e cycle perspective issuing a full credit note and a new invoice results in Order Management
and Invoicing
the customer paying later than what would have been the case if a partial credit
note would have been issued. This is because when the older invoice is adjusted
and the new one issued, the credit period will be extended as per the date on the
new invoice which will carry a later invoice date.
Performance measurement of the Invoicing team

Process metrics are measured and tracked to monitor the quality of the processes.
In an outsourced environment, especially, these metrics become the basis of
performance measurement of the outsourcing services provider and further
improvement of quality. The metrics that are tracked and reported from invoicing
process are:
1. Accuracy: refers to the correctness of the data that are entered into the system
while collecting the rating related data from various sources. The accuracy
metrics that are measured for invoicing process are:
a) No. of invoices with errors reported per month.

b) No. of invoices needing amendments/rework per month
c) No. of variation requests that were reported with errors per month
2. Turnaround Time (TAT): This is the average time taken to process a credit
review request. The TAT metric that is measured for invoicing process is:
a) Average time to generate an invoice (from receiving the order to

dispatch of the invoice)
given amount of time. The productivity metrics that are measured in invoicing
process are:
a) No. of invoices generated per day by transactions

b) No. of invoices generated per day by value
c) No. of invoices processed for recurring charges
d) No. of invoices processed for service charges
e) No. of invoices processed for variations/amendments
Check Your Progress
1. Which of these is not the responsibility of the order management team?

a) Selling to the customer
b) Verifying the order against the stock of finished goods
c) Creation of the sales order
d) Maintaining the documentation for the order
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Order to Cash (02C) - 2. State whether the following statements are True or False.
Accounts Receivable
a) On receiving the purchase order from the customer, the order management
team compares the order, with the previous orders placed, for duplicates.
b) One of the responsibilities of the order management team is to facilitate
revenue recognition.
c) Order management team is responsible for the fulfillment and shipment of the
order.
\ ~V d) After the order is fulfilled the invoice can be generated.
4.6 LET US SUM UP
Order management is the process that enables the seller to create, validate and
manage customer orders, track their fulfillment and shipment status and recognize
the resulting revenues.
The sales person usually receives the purchase order from the customer (and gives
it to the order management team) or the customer sends it to the order
management team directly. It is first verified that it is not a duplicate. It is
compared with the contractual terms set with the customer, the current inventory
position of the finished goods and the customer's credit limit (the limit should not
be exceeded otherwise the customer is asked to clear the previous dues first).
After the verification of the customer's order, the order management team creates
a sales order against it which communicates to various stakeholders to fulfill the
order.
The order is fulfilled by packing the goods in the quantities as indicated in the
sales order and shipping them to the customer's location.
After the order has been fulfilled, the invoicing team (which is a part of the order
management team) prepares the invoice and sends it to the customer. The invoice
indicates the details of the goods supplied and requests the payment for them.
4.7 KEY WORDS

------------------------ -- - .. ---
Contractual Tterms: The terms stated in a contract agreement signed between
two parties (in 02C case it is between the supplier and the customer).
Credit Limit: The limit on the amount of value of goods that can be supplied to
the customer on credit at any time.
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Inventory: The stock of raw material, semi finished and finished goods kept and Order Management
and Invoicing
stored by a company to support its production and sales operations.
Invoice: A document sent by the seller to the buyer1fequesting payment for the
goods and services provided. The invoice contains the details of the quantity of
goods/services provided, the price that has been charged and any additional costs
(like transportation, insurance etc.). It also contains a date by which the payment
is expected.
Purchase Order: A document sent by a buyer to a supplier ordering

goods/services to be bought from the supplier.
Revenue Recognition: The accounting activity of recognizing the legitimate

income earned by the business through its business operations.
Sales Order: A document created internally within the seller organisation to

communicate to various parties about the customer's order that needs to be
fulfilled. It is used stores/warehouse, production and order fulfillment teams to get
the shipment readyior the customer.
Shipment: The consignment sent from one party to another (in 02C context, it is
the goods being sent by the supplier to the customer)
1. a.) Selling to the customer
2. a) True b) True c) True d) False
1. Explain the responsibilities of the order management team?

2. When the order management team receives a customer's order, what does it
do? List all the activities up to invoicing the customer.
·3. Why is order management critical to 02C cycle?
4. Explain the invoicing process.
5. What are the metrics that are tracked in the invoicing process? Explain in
detail.
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UNITS COLLECTIONS
Structure
5.0 Objectives
5.1 Introduction
5.2 Collection
5.3 Query Resolution
5.4 Case History Record
5.5 Collection Agents And Legal Action
5.6 Let Us Sum Up
5.7 Key Words
5.0 OBJECTIVES

• describe the collection process; and
• discuss about the query handling and dispute resolution.
5.1 INTRODUCTION
After the customer's order has been fulfilled and the invoice has been sent to the
customer, it is the job of the collections team to make sure that the money that is
due from the customer is paid in time.
Collection is one of the most crucial parts of the .o2C cycle and it is also the.
activity which is outsourced more than other processes.
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The collection team is also supported by the query resolution team. Query j
resolution is the activity to resolve any disputes that the customer may have on
the invoice. Let us look at these activities in more detail.
5.2 COLLECTION
As discussed earlier, "a sale is a gift until the invoice is paid." Collection teams
convert these gifts into sales. If customers pay what they owe, on time, there
would be no collection jobs. However, increasingly not only are the customers not
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paying the bills/invoices on time there is an increasing tendency to pay them later Collections
and later. Thus the job of the collectors is very crucial to the entire sales cycle.
Practicing professionals (collectors) believe that the collection process begins
with the acceptance of a credit application. By clearly siating the terms of sale and
payment and any penalties that may be payable due to late payment, the
foundation for an effective collection process is laid.
Traditionally various tools that have been used for collection are:
l. Mail (postage): This involves sending a mail to the customer reminding

him/her to pay at the earliest. It also helps keep a proper record of the
reminder correspondence.
Most of the customers recognize the mailing and do not even open the letter.
If the letter is opened then it is discarded after reading first few lines. Some
customers also figure out the pattern of letters over time and how long a time
period they can take to avoid paying the credit. They try to stretch the
payment till they can. One of the other disadvantages of using mail is that in
case there are any queries or clarifications from the customer's side then this
information does not come back to the collection team quickly which results
in the dues not being paid in time.
The collection letter should be short and should clearly state the objective of
the communication. It should be addressed to the appropriate person who
takes the payment related decisions and provide all the relevant details like
purchase order, invoice etc. and any other documentary evidence that
supports the claim. Usually the letters are sent out one after the other if the
previous letter did not evoke a satisfactory response and the tone of demand
gets. more and more firm with each letter.
A lot of collection professionals do not prefer this as a collection tool because

they do not find it to be as effective as some other tools. However, in case a
business has a large no. of small customers then this is usually the most
practical way of contacting them.
Fax: The fax allows the collector to place the letter and other relevant
documents in the hand of the customers instantaneously. For it to be
effective, it should be addressed to the correct party.
Faxing of invoices can also be automated and in case a copy of the invoice
needs to be sent to the customer it can be done using the computer as well.
However, some companies have a policy of not paying from the fax copies 57
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Accounts Receivable and insist on original invoice as well. The reason is that if the invoice is paid
out of a fax copy then there is a risk of duplicate payments. While this is an
acceptable reason, if ,the invoice is not received then the collectors ask the
customer to pay on the basis of the fax copy and maintain the record.
3. Email: Electronic mail is a popular means of sending out reminders. If used

judiciously, it can be very effective and productive. It can also be automated
by programming the email system and interfacing the invoicing and payment
.• data with it. However, the weaknesses that we discussed in the context of
mail also apply to this medium. One good feature that an email has, is the
subject line, which used properly can indicate the purpose of the mailand
also be used to catch customer's attention.
However, a lot of recipient mailboxes these days are programmed to filter out
junk mails and automatically delete them. For example, care should be taken
not to put characters like dollar sign '$' etc. in the subject line to avoid the
entire message being moved to junk folder.
. 4. Telephone: This is the most preferred way of collection for the following
reasons:
a) The telephone puts us in a personal contact with the customer
b) Allows issues to be resolved quickly because of the two way
conversation that takes a few minutes.
c) Helps to identify delaying tactics if a customer is using them.
d) It helps to obtain a promise for payment.
For the telephone call to be effective, the following steps are recommended:
i) The caller must prepare for the call by collecting the facts like payment
history of the customer, current dues and invoice details (like invoice
numbers, dates of dispatch, items supplied etc.), outcomes of previous
calls.
ii) The caller must make sure as to who is the correct person at the other
(customer's) end who will make the decision about the payment.
iii) The caller must identify himselflherself and the purpose of the call at the
beginning itself.
iv) The caller must listen carefully rather than speaking.
v) The caller must take good notes for the objections raised by the customer
and seek to have them resolved quickly with careful research.
vi) Insist on a promise to pay date if everything in the invoice has been found
correct.
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'he workflow for a typical collection process is provided below (Fig 5.1): Collections
Fig. 5.1: Collection process
The collections team regularly generates the "Aging report of receivables". This
report contains the information on how much receivables are pending from which
customer and for how long. This forms the basis of prioritizing the collection calls
as the older receivables and higher value receivables are sought to be collected on
a priority.
This prioritization allows for using the collection team's effort optimally and
raises the effectiveness of the collection effort for the client and well as the
outsourcing service provider.
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Performance Measurement of the Collection Team
Accounts Receivable
The effectiveness of the collection process is measured through a tool called

collection pyramid. It ca~ also be used to ~easure the performance of individuals
as well as teams. The collection pyramid is indicated in the figure 5.2 below:
Dollar
collected/hr
Average
payment size
Kept rate
Promise rate
Contact rate
Penetration rate
Fig. 5.2: Collection Pyramid
The overall objective of the collection process is to collect as much as possible.
Penetration rate: This stands for the number of calls made per hour. The
orientation of a collection person is to be ~ble to make as many calls as possible
in the given time to raise the chances of collecting more dues. The requirements
for this stage is for the collection person to be present (half the time, success is all
about showing up) and make effective use of time. The person should be able to
handle multiple tasks, focus on the job and plan well.
Contact rate: This stands for the number of right parties contacted out of the
total calls made. All the parties that may be contacted need not turn out be the
ones making the decision on approval and payments or may have visibility into
when the payment is going to be made. Getting to the right party is very importanl
for the collection effort to be effective. The skill required here is how the
collection person opens the call (e.g. greeting the other person enthusiastically)
and tries to confirm whether he has reached the right party or not and if not then
getting the contact details of the right party. Also important are the listening
skills.
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Promise rate: After the right party has been contacted, next objective is to secure Collections
a payment or promise to pay. The effort should be to get a firm

promise/commitment from the customer on a payment date. Promise rate is
arrived at by dividing the total payments secured by total number of right party
contacts. The key skills here are listening and persuasion/influencing skills. The
collection agent explores with the customers the payment options, acknowledges
their concerns, tries to overcome objections and gets a commitment to pay by a
certain date.
Kept rate: Not all commitments/promises to pay may be kept. Kept rate
determines how good the promise secured by a collections person was. Kept rate
is arrived at by dividing total number of promises kept divided by total promises
secured.
, .
A verage payment size: This indicates if the payments are being negotiated well
or not. This is arrived at by dividing the total dollars collected by the numbers of
payments.
A collection call usually keeps to the sequence suggested below. There are certain
things that should be kept in mind while the call is on. These are also provided
alongside the respective stage of the call sequence:
Preparation • Check the payment history or the payment record of

the customer
• Check for results of previous contacts/attempts
• Look for any disputes or issues raised by customer
previously
• Be ready with the call plan
Opening • First few seconds determine the success or failure of
any calL A good call opening with enthusiastic voice,
good tone & effective listening skills will ensure
fruitful conversation & avoid early hang ups.
• From the customer contact information seek the right
party to talk to.
• Once Right party is established, introduce self
• Communicate the objective /purpose of call
• Keep in mind other supporting information that can
help in collection, like the outcomes of the previous
collection calls.
• Communication should be clear & simple.
Seeking • Listen carefully: a lot of information & answers is
informationlbridging received without asking, if you listen to customer
carefully. 61
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Accounts Receivable • Do not hesitate while sharing the amount due on the
account
• Acknowledge the concerns
•: Keep the conversation on & avoid a situation when
there is silence at both the ends.
Negotiation • Acknowledge
• Suggest solutions
• Gain commitment for as early date as possible.
• If appropriate, share also the consequences of non
payment
• Create urgency
Closing • Recap the promise or commitment
• Include payment details & timeline while
reconfirming commitment with customer
• Thank the customer
Metrics
The metrics collected and reported out of the collection process are aligned to the
collection pyramid itself, like:
1) Receivable Invoices greater than 90 days past due date.
2) Receivable Invoices greater than 30 days past due date.
3) Receivables greater than 180 days old.
4) Days sales outstanding
5.3 QUERY RESOLUTION
Query resolution in 02C cycle, refers to the process where the customer has some
disagreement, objection or informationlclarification to seek on the order or
invoice and calls up the client. The query resolution team researches these issues
and resolves the queries.
Customer queries can be of four types:

• Document related: The customer may want a copy of the invoice that was
sent earlier or some other documents like the associated PO or GRN or
packing slip, proof of delivery, to be able to process the payment further.
• Delivery related: About status of an order, has it been shipped, when the
delivery happened or is expected to happen.
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• Pricing related: confirmation on the pricing terms in the invoice, dispute on Collections
some benefits/discounts (that were promised but) not passed on to the
customer
• Payment related: confirmations on payments received, balances
clarifications on goods/services delivered.
A prompt response to these queries allows quick processing of payment.

Query resolution also calls for proper research to be done into customer
claims or disputes otherwise there is a risk that we may end up passing on a
benefit to the customers that they may not be eligible for. Fog. 5.3 below
shows the query resolution process.
Some of the typical queries received from the customers are:
.. 1) The price on the invoice does not match the price that was agreed to between
the customer and the sales person.
2) Some trade/volume discounts that were supposed to be passed on to the

cuatomer may not have been mentioned in the invoice.
3) Some of the goods, which were shipped as part of the order, have been
returned but the invoice does not reflect that.
4) The account balance kept by the customer does not match the account balance
shown in the client's books.
Fia. 5.3: Ouerv Resolution Process

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Performance measurement of the query resolution team
Accounts Receivable
The metrics collected and reported for query resolution are:
1. Accuracy: refers to the correctness of the resolu .on provided on the issue
raised by the customer. The accuracy metric that is measured for query
resolution is: •
a) Number of Customer Claims performed correctly per month
2. Turnaround Time (TAT): This is the average time taken to resolve a

t
customer query/claim. The TAT metrics that are measured for query
resolution are:
a) Average time to process a Customer Claim
b) Average time for query resolution

c) No. of queries resolved within 8 business hours
d) Ageing report of unresolved claims
given amount of time. The productivity metrics that are measured in query
resolution are:
a) Number of Claims received per week

b) Number of Claims resolved per week
c) Number of claims resolved within 8 business hours

d) Value of claims resolved
5.4 CASE HISTORY RECORD
Case history record stands for keeping a track of all the collection related
exchange of communication that happens with the customer. This includes written
and verbal communication. The verbal communications are recorded through the
call recording tools and the written communication through mails. However, the
incidence of each communication successful or unsuccessful should be reported
in a centralized tracker.
It is not a standalone process but is coupled with other processes and systems like
collection call recording system, invoicing system, email system, customer query
help desk (any inbound calls received from the customers) etc.
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All the events on a particular account need to be recorded e.g. Collections
• Any request for document by the customer and our response to that
• Any query by customer ;and our response to that
• Any collection attempts, including email, phone call, voice mail etc.
• Any responses received from customer
• Any dispute opened by the customer, and progress thereof
• Any escalations done; etc.
Managing correspondence properly is important for the following reasons:
• A properly kept record of correspondence helps collection analyst/reviewer to

determine what has so far happened during the collection process and what
will be the next appropriate action.
• It helps identifying the invoices that have disputes so that efforts could be
made to resolve the dispute rather than contacting the customer again without
resolution of the dispute.
• The correspondence strengthens your case while escalating within customer's
organization.
• It is a meaningful record that can be produced in a court of law to substantiate
collection attempts (in case the client has to resort to legal means to recover
the dues).
• Customer's payment record and collection case history data are useful in
reviewing credit limits of a customer.
5.5 COLLECTION AGENTS AND LEGAL ACTION
Collection agents: When repeated collection attempts do not result in receiving

the payment from the customer, the case is referred to a collection agency.
A collection agency is a business that pursues payments on debts owed by
individuals or businesses. Most collection agencies operate as agents of creditors
and collect debts for a fee or percentage of the total amount owed. Creditors
typically send debts to a collection agency in order to remove them from their
accounts receivable records. The difference between the amount collected and the
full value of the debt is then written off as a loss.
In many countries, collection agencies are governed by laws that prohibit certain
abusive practices like harassment and coercion ?f the customer. Failure to adhere
to such laws may result in lawsuits or government regulatory actions.
Most collection calls rely on repetition to motivate the debtor to pay. The laws
also govern how many times a customer can be called for collection follow up in
a day. In addition to the federal laws each state also has its own laws applicable to
collection calls. Most states require collection agencies be licensed. 65
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Accounts Receivable
The Fair Debt Collection Practices Act (FDCPA) is the primary United State
Federal law governing debt collection practices. The FDCPA allows aggrieved
consumers to file private lawsuits against a collection-agency that violates the
Act.
It may take action against a non-compliant collection agency, including issuing

fines, ordering damages, restricting its operations or even closing it down.
Legal Action : When repeated collection attempts fail, the default indicates a
failure to meet a financial obligation. In 02C context it means the customer who
has either not responded to collection attempts or has not paid due to financial or
other reasons (absconding or filing for bankruptcy).
Defaults are usually dealt with in the following ways:
• Refer to collection agency: (discussed earlier).

• Refer to legal experts: The matter is referred to collection attorneys who have
considerable experience in debt collection lawsuits. The lawsuit is filed with
the court. Then, the debtor must be notified of the lawsuit by having the court
documents served upon him or her, usually in person. Once the debtor is
served, he or she must take some action to respond to the lawsuit. If there is
no response, the court usually grants a default. In case the defaulter is a
company then it can be ordered into liquidation/file for bankruptcy. If it is an
individual, the default judgment empowers the collection attorney to take
action to obtain the money from the debtor. Depending on the state the debtor
is in and the status of the debtor's employment and assets, the options are:
o Typically, the most effective method to collect on a legal judgment is to

garnish a debtor's salary. The court will send or serve an order of
garnishment to the debtor's employer.
o A creditor who has obtained a judgment can also execute against a debtor's
assets, such as automobiles, bank accounts, and real estate.
Garnishment means that the debtor's employer withholds some part of the
debtor's salary and pays it to the court directly. The court in turn pays the
creditor. The salary keeps getting garnished till the creditor is fully paid.
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Check Your Progress Collections
1. Fill in the blanks: .;

(\ ,\ a) The US federal law governing the collection activity 'is calledthe
'"V0")
b) The ratio of the number of payment commitments received to total no. of

calls made to the right parties is called _
c) The ratio of number of payments actually received to the number of
payments committed is called _
\ ~j d) is the most preferred collection tool.
2. Explain the following ratios in the collection pyramid:
a) Penetration rate
b) Contact rate
c) Promise rate
d) Kept rate
5.6 LET US SUM UP
After the invoice has been sent to the customer, the next activities are collection,
cash application and query resolution.
Collection activity consists of following up with the customer to ensure timely

payment of the invoice. Of all the communication tools available for collection,
calling the customer is the most popular and effective as it makes the customer
respond to the payment request and helps resolve the disputes on the invoices
more quickly.
The performance of the collection team and its individual members is measured
by a tool called collection pyramid.
The customer query resolution involves resolving any queries that the customer
might have relating to documents, delivery, pricing or payments.' The query
resolution team needs to respond fast to the customer queries otherwise the
customer may hold back the payment.
Case history record for any communication with the customer should be
maintained to allow the collection team determine the collection strategy as well
as use the information later to review the credit terms for the customer or in case
the matter goes into legal dispute, to substantiate collection attempts.
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Order to Cash (02C)-
In the US, the collection activity is governed by a federal law called the Fair Debt
Accounts Receivable
Collection Practices Act (FDCPA). It prot~cts the customer from undue
.
. harassment and intimidating behaviour from the collectors. The collection calls
must comply with this act (apart from the additional laws passed by the individual .
states). ••
5.7 KEY WORDS
'. Cash application: The process for recognizing a payment made by the customer
against the correct customer account and invoice.
Collection agency: A business which offers services to collect the accounts

receivables from the customers for a fee.
Collection calls: The calls made to the customer to ensure timely payment of
dues.
Collection pyramid: A tool to measure eth effectiveness of the collection calls

across various stages of collection.
Dunning letters: The letters sent to the customers reminding them to pay an
overdue amount.
FDCPA: (Fair Debt Collection Practices Act) US Federal Law that governs the
functioning of collection agencies. In addition to FDCPA, individual states may
have their own laws about collection agency. operations as well.
Invoice: A document sent by the vendor/supplier/seller to the customer,

requesting payments for the goods/services provided.
Metrics: (Process or Business): The measurements taken for monitoring the

quality of execution of a process.
Purchase Order: The document sent by a customer to a supplier, indicating an

intention to buy a certain quantity of goods at a certain price. Confirmation of a
purchase order by a supplier indicates that he is in a position to supply goods as
per the agreed terms. The confirmation also make the purchase order a one-off
legally binding agreement between the buyer and seller i.e. the supplier has to
supply the goods as per the agreed terms and the buyer has to buy the goods.
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Sales order: An internal document within the seller's organization generated by Collections
sales department on receiving a customer's purchase order. A sales order indicates

to various departments like production, warehouse, shipping, invoicing etc. to
prepare to fulfill and deliver the order.
a) FDCPA (Fair Debt Collection Practices Act) b) Promise rate

b) c. Kept rate d) Telephone call
·. ...,.. 1. Compare the advantages and disadvantages of the email and telephone call as
collection tools.
2. What are the kinds of queries that are received from the customers?
3. Why should we record the case history of all the collection related
communication made with the customer?
4. Explain the role of a collection agent in collecting the dues for the seller.
5. If everything else has failed and the seller has not been able to receive the
payment for his dues then he usually resorts to legal action. Explain in a step
by step manner how does the legal recourse proceed.
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UNIT 6 ACCOUNTS RECEIVABLE
Structure
6.0 Objectives
6.1 Introduction
6.2 Accounts Receivable
6.3 Cash Application
6.4 Commercial And Accounting Transactions in the 02C Cycle
6.4.1 A Purchase Order is Received from a Customer.
6.4.2 The Purchase Order is Confirmed to the Customer.
6.4.3 A Cash Advance is Received from the Customer Against a Purchase Order.
6.4.4 Goods are Shipped to the Customer (At Our Risk).
6.4.5 Goods are Shipped to the Customer (At Customer's Risk)
6.4.6 Goods are Supplied against the Advance Received
6.4.7 Invoice Sent to the Customer
6.4.8 Payment Received from the Customer in Full
6.4.9 Customer Avails an Early Payment Discount
6.4.10 Tax is Deducted at Source by the Customer While Making the Payment
6.4.11 Goods are Returned by the Customer
6.4.12 Payment Received from a Customer (Cash Not Applied Because the Customer
Not Identified Yet)
6.4.13 Customer Identified for the Unapplied Cash
6.4.14 Provisioning for Bad Debt
6.4.15 Write Off of Receivables against Provisions Already Created
6.5 Month End Reporting

6.6 Customer Refunds
6.7 Let Us Sum Up
6.8 Answers To Check Your Progress
6.9 Key Words
6.0 OBJECTIVES
• describe accounts receivable activities;

• handle the cash application process;
• explain the commercial and accounting transaction related to 02C cycle; and
• do reconciliation and month-end activities.
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Accounts Receivable
6.1 INTRODUCTION
Accounts receivable team is responsible for recognition of payments-received

from the customers against the respective invoices, at count keeping,
reconciliation and reporting.
, Cash application is the activity that involves recognition of the payments received
by the customers against the respective invoices and customer accounts.
6.2 ACCOUNTS RECEIVABLE
Accounts Receivable (AR) process covers the receipt of payments from the
customers and accounting for the same against the customer accounts and
invoices. This process is called cash application.
Apart from this, it also covers the accounting activities after the payments are
received like reconciliation activities, answering customer queries on account
balances and confirming payment status, closing the books of accounts for the
02e cycle at the end of an accounting period and reporting the same.
In this unit we will discuss these activities in detail.
6.3 CASH APPLICATION
Cash application process involves recognizing and applying the payments

received from the customers, to the respective customer invoices and customer
accounts.
The payments are made against one or more invoices. There are various channels
through which the customers send remittances:
1. Lock box in the bank: Cheques are sent by the customers to a lock box in the
bank. The bank sends in the checks for clearing and forwards a copy of the
check and the other remittance ~ocuments (scanned) <l:ccompanying the check
to the cash application team of the client.
2. Electronic transfer: The money is electronically transferred (EFf/wire
transfer) to the client's bank account directly. The remittance details are sent
to the collection agent over a collection by mail/fax. These remittance details
are passed on to the cash application team after scanning or as email
attachments for applying cash. 71
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The payment receipt is usually accompanied with other remittance details like the
Accounts Receivable
invoice number, payee's bank account details, date of payment etc. This
accompanying information is used to identify the customer account and the
'. .
invoice against which to apply cash.
In case complete details are not available but the customer who sent in the
payment has been identified, the cash can be applied on account (against the
customer's account) while further details are sought from the customer on the
payment.
If the customer, who has paid, cannot be identified, the money is parked in a
suspense account. However, in both the cases it is very important to get the
missing details quickly and apply cash. In case the issue is left unresolved for
some time then it becomes increasingly difficult to obtain clarification on it.
Typically a cash application process looks like as shown below:
Fig. 6.1: Cash Application Process
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In cash application, speed and accuracy both are critical. Accuracy is critical for Accounts Receivable
the obvious reasons that if the cash is misapplied then the collection effort is
wasted (collection teams will call up customers who have already paid instead of
the ones who have not) and the customer relationships will also suffer:
:
Speed is important for cash application as only after quickly applying cash, the
collection teams will know the correct position of receivables and prioritise their,
collection calls.
In case the cash received is not applied properly, the customer accounts will show
receivables and after a certain period the overdue receivables (or a part of it) have
..
to be provided for as bad debts. High amount of unapplied cash indicates poor
managerial control of the AR activity and will reflect poorly on the client
managers.
For proper control of the process, the cash application team should prepare a
I
reconciliation report every day which reconciles the total cash received for the
day with amount applied against invoices, amount applied on account, amount
identified but not applied yet and the amount not identified.
Performance measurement of Cash Application Team
One of the most important criteria for measuring the performance of cash
application process is the amount lying in the suspense account. Suspense account
is a liability account where the money received from the customer is temporarily
parked till the time it is identified which customer paid and which invoices were
paid in that payment.
If the suspense account has a large balance then it indicates poorly managed cash
application process as the cash application team is not able to apply cash quickly
and accurately.
If this situation is allowed to exist then on one hand the suspense account will be,
indicated in the reports generated at the end of the accounting period and. also the
invoices against which the payments were made will show up as overdue. The
provisions for bad debts may need to be made for this.
The other metrics collected and reported from cash application process are:
1. Accuracy: refers to the correctness of the cash application i.e. whether
payment received has been applied to the correct invoice and customer
account. The accuracy metrics that are measured for cash application are:
a) Number of transactions performed correctly per month

b) Value of transactions performed correctly per month
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Accounts Receivable 2. Turnaround Time (TAT): This is the average time taken to apply a single
payment. The TAT metric that is measured for cash application is:
a) Average time to process a remittance

b) Average time to apply cash
3. Productivity: This refers to how many payments have been applied within a
given amount of time. The productivity metrics that are measured in cash
application are:
a) No. of remittances received per day
b) Value of Cash Applied per day
c) Value of unapplied cash balance
d) No. of lock box transactions processed within same day of transmission

e) No. of Payments Processed (EFf/ChecklWire Transfer)
6.4 COMMERCIAL AND ACCOUNTING TRANSACTIONS

IN THE 02C CYCLE
As per the duality principle of accounting (discussed earlier), for a business,

source of funds is always equal to the use of funds.
This principle results in the following:
• Double entry book keeping.

• All transactions entered into by a business have two aspects namely debit and
credit
• Total amount debited should be equal to total amount credited.
• Both the sides of the balance sheet will always be equal i.e. Assets =
Liabilities + Capital
As also discussed earlier, a business gets its funds by:
• Increasing liability or
• Decreasing assets or
• Earning IncomelProfit
It also implies that a business uses its funds by:
• Decreasing liability
• Increasing/acquiring assets
• Incurring expenses/losses
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The above two situations refer to Credit and Debit respectively. Accounts Receivable
Based on the above let us look at the accounting treatment of various 02C
transactions.
6.4.1 A Purchase Order is Received from A Customer
e.g. a purchase order (for 55 tons of mild steel, costing $ 780 per ton) is received
from a customer (ABC Ltd.)
In this case there will be no accounting transaction recorded. This is a commercial
'. transaction and does not translate into an accounting transaction yet.
($: Indicates US dollar. The transaction under consideration is from a US based

customer who will pay in US dollar for the material ordered).
6.4.2 The purchase Order is Confirmed to the Customer
e.g. The PO is confirmed to the customer (for supply of 55 tons of mild steel,
costing $ 780 per ton)
In this case also there will be no accounting transaction recorded. Confirming a
purchase order does not result in an accounting transaction.
6.4.3 A Cash advance is Received from the Customer against a Purchase

Order
e.g. a purchases order (for 55 tons of mild steel, costing $ 780 per ton) is received
from a customer (ABC Ltd.) along with a cash advance of $5000.
Since an asset of monetary value changes hands, an accounting transaction will be
recorded.
In this case an asset (cash/bank balance) goes up (debit) and a liability (advance
received from the customer) also goes up (credit).
Date Particulars LF Dr. Amount Cr. Amount
BankAlc 5,000
To Advance Alc 5,000
6.4.4 Goods are Shipped to the Customer (at our Risk)
e.g. 55 tons of mild steel (costing $ 780 per ton) is transported to the customer
location the risk of transportation is ours.
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In this case, till the risk of possession of the material is transferred to the
Accounts Receivable
customer, the revenue cannot be recognized. Hence there will be no accounting
transaction to recognize revenue yet.
6.4.5 Goods are Shipped to the Customer (at Customer's Risk)
location the risk of transportation is customer's (ABC Ltd.).
In this case, the risk of possession of the material is transferred to the customer;
hen~e the revenue can be recognized.
In this case an asset (Accounts receivable from the customer) goes up (debit) and
"
sales/revenue goes up (credit).
Date Particulars Lp· Dr. Amount Cr. Amount

ABCLtd 42,900
To Sales 42,900
6.4.6 Goods are Supplied against the Advance Received
location against advance received earlier of $ 5000.
In this case, a liability (advance received from the customer) goes down (debit),
an asset (Accounts receivable from the customer) goes up (debit) and
sales/revenue goes up (credit).
Date Particulars LP Dr. Amount Cr. Amount

ABCLtd 37,900
Advance Alc 5,000
To Sales 42,900
6.4.7 Invoice Sent to the Customer
e.g. 55 tons of mild steel (costing $ 780 per ton) has been transported to the
customer (ABC Ltd.) location (no prior advance was received). Invoice is sent
after the goods have been delivered.
Since the customer has taken delivery of the goods, the revenue can be recognized
(if it has not been recognized already).
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In this case an asset (Accounts receivable from the customer) goes up (debit) and Accounts Receivable
sa1es/~evenue goes up (credit).
Date Particulars LP Dr. Amount Cr. Amount

ABCLtd 42,900
To Sales 42,900
6.4.8 Payment Received from the Customer in Full
e.g. ABC Ltd. Pays the complete amount in full ($ 42900)

f
In this case, an asset (Cash/bank balance) goes up (debit) and another asset
(accounts receivable from ABC Ltd.) comes down (credit).
Date Particulars LF Dr. Amount Cr. Amount

BankA/c 42,900
ToABCLtd 42,900
6.4.9 Customer Avails an early Payment Discount
e.g. The payment terms were 1110 net 30 (i.e. the customer can avail 1% discount
if the money is paid within 10 days otherwise the full amount will have to be paid
in 30 days of receipt of invoice).The customer pays on the 10th day and avails of
the discount by paying $ 42471.
In this case, an asset (Cashlbank balance) goes up and a cost (discount provided to
the customer) goes up (debit) and another asset (accounts receivable from ABC
Ltd.) comes down (credit).
Date Particulars LF Dr. Cr.

BankA/c 42,471
Discount \
429
ToABCLtd. 42,900
6.4.10 Tax is Deducted at Source by the Customer while making the

Payment
e.g. As per the regulations the customer has to deduct 10% tax from the payment
and pay to the tax authorities directly. The customer withholds 10% of the
payment amount towards Withholding tax.
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Order to Cash (02C) - In this case, an asset (Cash/bank balance) goes up and another asset (withholding
Accounts Receivable
tax paid on our behalf) goes up (debit) and another asset (accounts receivable :
from ABC Ltd.) comes down (credit).
Date Particulars LF Or. Cr.

BankNc 38,610
Withholding Tax 4,290
To ABC Ltd. 42,900
6.4.11 Goods are Returned by the Customer
e.g. Customers returns 10 tons of steel due to poor quality (@ $ 780 per ton)
In this case sales return account goes up (debit) and a liability (payable to the
customer for the goods returned) goes up (credit).
Sales return 7,800
To ABC Ltd. 7,800
6.4.12 Payment received from a customer (cash not applied because the
customer not identified yet)
e.g. received a direct deposit of $ 14200 into the bank account. The customer is
not known yet.
In this case an asset (cash/bank balance) goes up (debit) and a liability (suspense
account) goes up as well (credit). Until the source of money is identified, it will
be treated as a liability by the business.
BankNc 14,200
To Suspense Nc 14,200
6.4.13 Customer Identified for the Unapplied Cash
e.g. The customer (as stated in the previous transaction) identified as XYZ Ltd.
In this case, since the customeris identified, the money in the liability (suspense
account) is no longer a liability and can be adjusted against the receivable from
the customer. So the liability (suspense account) goes down (debit) and the asset
78 (accounts receivable from the customer) goes down as well.
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Date Particulars LF Dr. /
Cr. Accounts Receivable
Suspense Alc . 14,200

ToXYZLtd. 14,200
6.4.14 Provisioning for Bad Debt
e.g. Historically 3% of your credit sales every quarter is not collected (turns into
bad debt). You closed the month with $ 100,000 of credit sales.
In this case a "provision for bad debts" will be created as a liability account and
'f
the losses will be charged to P&L in the same period. So, a liability (provisions)
goes up (credit) and a cost/loss account (bad debts) goes up (debit).

Bad debts 3,000
To Provisions for bad debt 3,000
6.4.15 Write off of Receivables against Provisions already Created
e.g. XYZ Ltd. (customer) went into liquidation. None of the $ 1500 that was
owed to you can be recovered. A provision for bad debt was already created.
In this case a liability (provision for bad debts) goes down (debit) and an asset
(accounts receivable from the customer) goes down.

Provisions for bad debt 1,500
ToXYZLtd. 1,500
6.5 MONTH END REPORTING
The objective of the month end process is to close the accounting activity for a
period (month) and report the results in the form of financial statements. In an
02C process, the month end activities consist of the following:
1. A provision is created against all the receipts received into the bank accounts.
(These provision details need to be retained separately for follow up/reversal
in the next period).
2. The exception report on sales invoices is generated for invoices that have not,
been validated and the ones that have been validated but not accounted yet.
These are validates and accounted separately in the AR module.
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3. If there are any cheques that have been deposited but not cleared yet, then
Accounts Receivable
these need to be cleared in the ERP to enable bank reconciliation.
!. The month isfinancially closed in ERP. This disables any accounting entries
to be passed for' the p;eviou~ month.
5. The following reports/schedules are generat
a) The ageing report on receivables. The collections team provides inputs to
this report on the quality of the receivables. This report is also used for
provisioning for bad debts.
b) The tax payable (TDSlWithholding taxN AT) schedule is prepared,
reconciled and forwarded to the tax team.
6.6 CUSTOMER REFUNDS
The AR team also manages the refund payments made to the customers. The
refunds are usually made when:
1. The customer returns the goods as he is not satisfied with the quality.
2. The customer is returning the goods within the specified period. Some
vendors have a policy of accepting the returned goods from the customers
within a specified period of the sale (with no questions asked).
3. The customer has made duplicate payments and is asking for the money back.
The customer request for refund usually comes in the form of a mail, email, fax or
a written com~nication along with the returned goods. All the refund requests
are logged in a request tracker and tracked to closure.
The AR team is assigned the request to process the refund. It first verifies whether
the conditions for refund are valid or not:
1. Whether the return of goods is in compliance with the return policy of the
client.
2. In case the refund request is for a duplicate payment, then the AR team also
verifies if there is unapplied cash in the customer's account for the same
amount.
If the refud request is found to be valid or legitimate, the AR manager on the

client side is requested to approve the refund payment.
The AR team contacts the customer to find out whether he will accept a credit
note instead of a cash refund. The customers who do not purchase regularly from
the client usually ask for a cash refund while the regular customer may agree to a
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credit note being issued which can be adjusted against future purchases. In most Accounts Receivable
client organisations usually cash refunds take longer to process than issuing a
'"
credit note so the frequent customer find it more convenient to settle the
transaction with a credit note. The customer is also aSkfd to provide his bank
account details.
If the customer accepts a credit note then the credit note is prepared and sent to
the client's AR manager for approval. Upon the AR Manager approval, the credit
note is sent to the customer.
If the customer requests fora cash refund, then a refund payment is processed and
a cheque is prepared and sent for the AR manager to sign or a payment instruction
is prepared for the client's bank and approval is requested from the AR manager.
Once the AR Manager approves the request and authorises the payment, it is sent
to the customer in the form of a cheque payment or through electronic transfer.
Check Your Progress

(
0Y) a) For cash application process speed is more important than accuracy.
b) Credit entry in accounting indicates use of funds.
c) Confirmation of a purchase order does not lead to any accounting
transaction.
d) Suspense account balance is an indicator of the cash application
performance.
,lv)e) Whenever cash goes out of the business, cash account is debited.
6.7 LET US SUM UP
Accounts receivable team is responsible for recognition of payments received

from the customers against the respective invoices (cash application), account
keeping, reconciliation and reporting.
A business gets into a variety of commercial transactions (financial and non-

fmancial) with outside entities (vendors and customers) and within. Accounting is
the activity which records, classifies and summarises these transactions properly
to provide information on financial performance of the business.
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,..
Modern accounting systems work on the double entry method where each
Accounts Receivable
transaction has dual aspect of source of funds (credit) and use of funds (debit).
In this unit we saw how various commercial transactions done by the business
"
with its customers translate into accounting transactions.
Apart from recording individual accounting transactions in the sub-ledgers of the

account books, the AR team also needs to summarise and report these accounting
transactions at the end of an accounting period.
.. 1. a) False b) False c) True d) True e) False
6.9 KEY WORDS
Accounting: The activity of recording, classifying, summarizing and reporting

the financial transactions done by eth business. .
Accounting Equivalence Concept: (see Duality principle)
Accounts Receivable: The money receivable from the customers for the goods
and services supplied to them on credit.
Advance Payment: A payment made by the customer to a vendor/supplier in

advance of receiving the goods and services.
Asset: An asset is a source of current or future economic benefit for the business
e.g. cash, money receivable from the customers, land, buildings, machinery,
vehicles etc.
Cash Application: The process for recognizing a payment made by the customer
against the correct customer account and invoice.
Credit Entry: The entry which indicates source of funds i.e. a decrease in an
asset, increase in a liability or increase an income or profit.
Debit Entry: The entry which indicates use of funds i.e. an increase in an asset,
decrease in a liability or increase in an expense or loss.
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Double Entry: The duality principle requires us to maintain accounts by making Accounts Receivable
double entries together one for credit and one or more for debit or vice versa,
where amount under credit is equal to the amount of debit.
Duality Principle: The principle of accounting which states that each transaction
has two aspects i.e. source of funds (credit) and use of funds (debit) and that in
any transaction, amount of debit is equal to amount of credit. This principle is the
foundation of the double entry system of accounting.
Invoice: A document sent by the vendor/supplier/seller to the customer,

requesting payments for the goods/services provided.
Journal: It is the book of accounts which notes the commercial transaction at the
time of origin. It is also known as the original book of entry.
Ledger: It is an accounting book which records the classified and summarised

accounting transactions. The transactions are recorded in the journal first and then
posted to the ledger. It is also known as the secondary book of entry.
Liability: An obligation on a business to pay money, transfer an asset or perform

a service to another party.
Metrics: (Process or Business): The measurements taken for monitoring the

quality of execution of a process.
Provision: A liability of an uncertain amount or expected to be borne by a

business at an uncertain time.
Write Off: Transfer of entire or partial balance of an account to loss account in

recognition of the fact that the value of an asset has fallen below the value at
which it was recognised in the account books e.g. when a customer who owes us
money files for bankruptcy, we may have to write off the amount owed by the
customer as we may not be able to realize all the receivables.
1. Write the journal entries for the following 02e transactions: (The
transactions are denominated in $ i.e. US Dollar, the currency of the
United States).
a) Sold goods for cash ($ 150)
b) Sold goods on credit to Wallace Partners ($ 400)
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Accounts Receivable c) Wallace Partners returned goods ($ 75)
d) Received $300 as an advance for supply of material from Arthur Pallen
Company,
'. e) Supplied material fa Arthur Pallen Company for $400
f) Wallace Partners went into liquidation and the amount due from them
had to be written off as bad debt.
g) Created a provision for bad debts ($2100)
h) Arthur Pallen Company paid $ 75 to settle the dues.
i) Received commission from the manufacturer on the sales made ($
2300)
j) Received a payment from a customer directly into bank account ($
1600). Remittance details not available yet.
k) The customer identified as Kelly's Stores,
1) Received advance payment from Braithwaite and Kames for
maintenance services to be provided in the coming quarter ($1200).
m) At the end of the first month adjusted the advance received against the
services provided and the revenue realized.
n) Arthur Pallen Co. sent a PO worth $3200 for supplying fasteners.
0) Confirmed the PO to the customer.
p) Supplied goods for $3200 to Arthur Pallen Co. (Cost of Goods: $2100)
q) Sent invoice for $3200 to Arthur Pallen Co.
r) Arthur Pallen Co. paid the invoice ($3200)
2. Describe the month end activities carried out y the 02C teams.
3. Describe the cash application process. What are the source documents that
are needed to apply cash?
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UNIT 7 02C OPERATIONS
Structure .;
.7.0 Objectives
7.1 Introduction
7.2 Technology and Tools Used for 02C Outsourcing
7.3 Day To Day Issues in a 02C Processes
7.3.1 Customer Setup: The Authorization for The Customer Setup is not Proper.
·7.3.2 Customer Setup: The Information Provided for Customer Setup is not
Complete.
7.3.3 Invoicing: Advance Payments- Invoices are not Raised.
.
, 7.3.4 Invoicing/Collection
7.3.5 Collections: Payments are Pending while the Customer Insists that the
Payment has been made.
7.3.6 Collections: Unable to Reach the Right Contact, that Authorizes / Approves
Payments, even after Multiple Attempts.
7.3.7 Collections: Customer Adjusting Wrong Credits while Making Payments
7.3.8 Collections: Customers May Have A Fixed Payment Run which may not Fall
in Line with their Credit Terms.
7.3.9 Collections: Majority of the Customers Make Payments on the Basis of
Purchase Orders and not the Invoice.
7.3.10 Collections: Customers Who Deal with Multiple Business Units of the Vendor
May End Up Sending Payments to One Entity Instead of the Other.
7.3.11 Cash Application: Remittance Advices (Customer Details, Invoice Details) not
Supplied by the Customers
7.3.12 Cash Application: Duplicate Payments- Customer Making Payments for the
Same Invoice
7.4 Risk Management, Metrics and Control
7.5 Quality Checks
7.6 Let Us Sum Up
7.7 Key Words
7.0 OBJECTIVES
After studying this unit, you should be able to .

• handle accounting transactions in 02C process:
• identify frequent issues encountered in an 02(' process:
• explain the risk management and controls III 02(: process, and
• discuss the quality checks in an (ne environment.
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Accounts Receivable 7.1 INTRODUCTION
We have discussed the 02e cycle and its various stages. We have also discussed
the roles and responsibilities of various departments like sales, order
management, collection and cash application, in the 02e cycle.
Inthis unit we will discuss how various technologies and tools are used to
manage and 02e processes i~ an outsourced environment. We will also discuss
the day to day issues that are faced by an outsourcing team in an 02e process
.• (order management, customer set up, collections etc.) .
After that we will go on to discuss the risks associated with 02e process and the
quality checks that are applied to 02e processes.
7.2 TECHNOLOGY AND TOOLS USED FOR 02C

OUTSOURCING
The outsourcing of 02e processes to a location like India poses following

challenges:
I. Scale: Most of the large compar ies who outsource their 02e processes
typically service a very large customer base and have a very high volume of
sales transactions. This gives rise to challenges like properly tracking each
customer's order, invoice and payment status.
2. Time zone differences: The client and the customers usually work in one
time zone while the outsourcing service provider works in another time zone.
While it is day time on the client side in the US, it is night in India and vice
versa. Similarly clients based in Europe and Australia start their workdays at
different times. The service provider needs to co-ordinate its work hours with
those of the client very often.
3. Lack of physical proximity (to the client and paperwork): Since the
outsourcing service team works in another location there access to the client
managers' time for discussions, meetings and clarification on various issues is
severely limited. Similarly if they want to see the original paper version of a
source document they may not be able to access it.
To meet these challenges, outsourcing industry invests heavily in a lot of leading

edge technologies which help a service provider manage and track the
transactions, control the process, monitor its health and ensure that the work done
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is accurate high quality and that the team members are able to work efficiently 02e Operations
and productively.
..
Some of the tools that are used in an 02C application are as follows:
(Note: These tools have been discussed in Course 3: pip, Unit 2 as well. Here we
will discuss the tools in the context of an 02C process.)
1. ERP application: Each client that goes for outsourcing of their 02C process
uses one of the various ERP packages available today like SAP, Oracle, etc.
The ERP relates to a software system, that integrates different function within
the business. e.g. a sales order generated by the order management team can
be seen by the warehouse manager to fulfill and prepare the order for
. shipment. This SO can then be directly converted to an invoice. When the
payment is received, the cash can be applied to the invoice directly in the ERP
.. itself .
This reduces the manual paper flow within the various departments and
increases the process efficiency. It also keeps the client's data on all business
transactions in one single place to be accessed by various parties on the client
side as well as the service provider.
2. Email (or Electronic mail): Email is one of the most commonly used tools
for written communication in the business environment. It allows employees
to share information, send written communication addressed to a specific
person or persons in a reliable and quick manner and enhances the
productivity of the individual, if properly used. As a result, paper letters are
used very sparingly and only if a legal record of a correspondence is
necessary. It is the most convenient medium to communicate with the client
and a lot of outside parties like the client's customers and bankers.
Email applications can also be automated to send out automatic reminders

based on certain defined conditions.
3. Scanning: Scanning process converts the paper documents into a digital
image which can be stored in a computer and thus can be transmitted using
the computer network. Scanning an invoice allows people from the other side
of the world to view it.
Paper invoices Scanner Scanned images
Fig. 2.4: Scanning activity

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Order to Cash (02C) - Scanning is done for paper documents that are received by the client
Accounts Receivable
organization. The majority of the scanned documents are purchase orders
received from the customers (they nee~ to be scanned and stored in the ERP
and when the sales ordfr is generated the scanned copy of the purchase order
is tagged to the sales order to enable easier revenue recognition).
4. Document management system: We have already learnt that this system

consists of hardware and softwarethat manage images and other documents.
This technology is used in the 02C cycle to store, retrieve and manage the
images of the master contracts signed with the customers.
"
5. Workflow: We have already learnt about workflows and their application. A

workflow process is an automated process where different resources
(employees or computer programs) perform a series of actions to complete a
business transaction. After a resource in the workflow completes the job
assigned to it, the work automatically moves to the next resource and waits for
it to finish the job. The way responsibility moves from one resource to another
can be configured and customized in the workflow process depending on the
business requirement.
Order management team uses the workflow tool to make sure that all the
purchase orders received from the customers are uploaded into the workflow
and assigned to various members of the team to create sales orders and then
invoices from each order received. A collection team leader uses the workflow
to assign collection calls to various members of the collection team, Similarly
the cash application transactions are also managed and controlled using a
workflow tool.
6. CRM (Customer Relationship Management) tools: These are software

applications/ packages that allow the client to manage communication,
transactions and relationships with various customers. They also help to
generate reports on the transaction history and previous communications with
a particular customer. Use of CRM also helps in consistency in
commurucation with the customer ad focus their attention to a particular
segment of the customers.
7. Telephony tools: As we have discussed that

telephone call is the most effective tool for collection.
In this context, the telephony tools become
indispensible for the functioning of the collection
Fig 2.4: IelfP::oI1i tcols used ill
88 tre mll-rt:im p:cx:B3S
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team. These tools make the collection team members more productive and the 02C Operations
collection process more compliant with the regulations. Similarly, query

resolution team receives calls from the customers or may have to call them.
Some of the telephony tools that are used by the a2e; .teams are discussed
below:
a) Call recording tools: These tools allow automatic recording of the calls
being made or received. The recording of the call helps monitor the
quality of the call in terms of language skills, voice skills and the
collection and negotiation skills of the caller. Apart from monitoring
quality, a recorded call can also be used for training other team members
on dos and don'ts to be followed while talking to the customers. In some
cases the law may require that the recording of the collection call should
not be done if the customer does not want the conversation to be recorded.
In such situations, the recording tools also enable the collection agents to
turn off the recording for the collection call.
b) Automatic Call distributor: This tool allows the incoming calls to be
distributed to the available team members evenly and based on
availability. This allows for a proper distribution of workload and also
management of the incoming call traffic with the team members that may
be available to handle the calls. For example, when the customers call
with a query, incoming the calls can be automatically distributed to each
member of the query resolution team.
c) Computer Telephony Integration: This integrates the customer contact
information stored on the computer's database with the telephone line and
helps to dial out automatically. It also listens for a human voice at the
other end before handing over the call to the collection agent. This saves a
lot of time for the collection teams in manual dialing and waiting for
electronically recorded voice messages to be over.
7.3 DAY TO DAY ISSUES IN A 02C PROCESSES
In this section we will deal with day to day issues that are encountered by a team
supporting an a2e process in an outsourcing environment. We will also look at
how these issues can be addressed and taken to resolution. However, the
circumstances that give rise to most of these issues are beyond the control or
direct influence of the a2e team members but their service levels and
performance quality are impacted due to these.
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Order to Cash (02C)- 7.3.1 Customer Setup: The authorization for the customer setup is not
Accounts Receivable
proper
Customer setup needs to:be properly authorized. If authorization controls are

weak, someone may set up a dummy customer and ship the goods to them. This
can lead to fraudulent transactions. In case proper authorization is not provide
with the request, it should be returned to the client requesting proper approval. If
the issue is not closed within the stipulated SLAs, the matter should be escalated
as per the escalation matrix provided.
7.3.2 Customer Setup : The information provided for customer setup is not
complete
Customer setup should not proceed until all the mandatory information about the
customer has been provided. The customer setup team should contact the
customer and ask for the missing information. Meanwhile the request should be
put on hold and the client manager should be informed about the matter.
7.3.3 Invoicing: Advance Payments- Invoices are not raised
Some companies have a policy of not raising the invoices till the proof of delivery
of goods is received. The order management team should monitor the delivery
schedule for the customer and send notification to invoicing team once proof of
delivery has been received.
7.3.4 Invoicing/Collections
In this case, the collection team should ascertain the goods delivered through the
source documentation like customer's GRN, shipment invoice and packing slip
etc. If the invoice is found to be valid, insist on payment. In case of customer
refusal, escalate within the client organization or sales force (as per the escalation
matrix). Quality related isues should be researched by production and/or sales.
7.3.5 Collections: Payments are pending while the customer insists that the
payment has been made
Account may need to be reconciled due to multiple reasons, like incorrect cash
application or the check may be in transit or got lost in the mail.The customer
accounts reconciliation team should reconcile the customer account. Seek details
of the payments that the customer insists have been made. Check if the amount
has been received and misapplied. If that is that case then make the correction.
90 Approach the customer if the amount is still pending.
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If it is due to some other reasons like check not received after a reasonable period O~C Operations
then ask the customer to verify that the check has not been presented for payment.
In case it has not been presented then request the customer to cancel the cheque
and send a new cheque. In case the cheque has been presented then it could have
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been sent to the wrong vendor. This may need customer's attention and
intervention. Request the customer to send another check.
7.3.6 Collections: Unable to reach the right contact, that authorizes /

approves payments, even after multiple attempts.
In this case the collector should try to ascertain the right contact from the other
channels like sales force and reach himlher with their support; If still the collector
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is unable to reach the right party then the matter should be escalated to the client.
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7.3.7 Collections: Customer adjusting wrong credits while making
payments
In this case, the collector should confirm the facts with the invoicing and sales
team. Once the wrong credit is ascertained, the customer should be called again
for payment.
7.3.8 Collections: Customers may have a fixed payment run which may
not fall in line with their credit terms.
These are the issues that the client (the selling organisation which has outsourced
the collections process) should take up with the customer. These will be taken up
by the AR Manager, sales manager or the credit manager depending on the
responsibilities defined by the client's organisation. The collection team should
communicate to the client about these issues.
In case any penalty charges are to be levied, the client's approval needs to be
sought.
7.3.9 Collections: Majority of the customers make payments on the basis

of purchase orders and not the invoice.
This indicates that the customers are only paying for the material bought and not
for the other related costs like transportation, loading, insurance, warehousing etc.
Usually the contract with the customer specifies as to who should bear these
charges. The collections team should confirm the billing terms from the order
management team and approach the customer again.
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In case the master contract indicates that these costs will be borne by' the selling
Accounts Receivable
organisation then the settings against the customer account may need to be
changed in the invoicing systems of the client organisation so that correct
invoices are generated in future.
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7.3.10 Collections: Customers who deal with multiple business units of the
vendor may end up sending payments to one entity instead of the
other.
In this case the payment may have been received but has been recognized against
a different entity (business unit, profit centre, subsidiary, group company). This is
a case of incorrect application of cash. The ~equest should be forwarded to the
cash application team and/or the reconciliation team to close.
7.3.11 Cash application : Remittance advices (customer details, invoice

details) not supplied by the customers
The cash application team should ask the collection team to get the remittance
details from the customer.
7.3.12 Cash application: Duplicate Payments- Customer making payments

for the same invoice
In this case, issue a credit note to the customer to be adjusted against future
purchases. If the customer insists on cash payment, arrange for the payment.
7.4 RISK MANAGEMENT, METRICS AND CONTROL
Risk is defined as the degree of uncertainty of an outcome. The risks associated

with an 02C cycle are:
1. Revenue risk: This is the risk that some part of the revenue, though
legitimately earned may not be recognized. This is mitigated by:
a) Keeping a proper record of source documents that establish a legitimate
sale
b) Maintaining a clear link between the source documents i.e. Customer's
contract, letter of engagement, customer's purchase order, any advance
remittances received, sales order, invoices, proof of delivery
2. Credit risk: This is the risk that credit sales made to the customer may not
result in complete payment of dues. This risk can be mitigated by:
a) Segregating the function of sales and credit
b) Doing a credit check and reference check on the customer.
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c) Refusing credit if credit rating not found to be adequate. 02C Operations
d) Doing credit appraisal on a continuous basis (at least once every year) for
existing customers or on customer's request.
e) Start with tighter ~redit terms and liberalize gradually if the payment
behavior has been satisfactory
f) Linking a sales person's compensation to payment performance of the
customer
3. Liquidity risk: This refers to the risk that if the dues may not be realized in
time then the working capital of the business may come under pressure and
other business functions like purchase, production etc. may suffer. This risk is
mitigated by:
a) Tight collection activity and active pursuance of overdue monies.
" b) Regular monitoring of receivables ageing report.

c) Prioritizing high value transactions for collections.
4. Internal control risk: This refers to the risk that the business may incur
losses due to its own employees responsible for certain function may misuse
their position to defraud the business and embezzle money. This is mitigated
by:
a) Implementing proper segregation of duties.
b) Implementing limits on managerial sanctioning power (e.g. a manager can
authorize a payment of up to $10,000. Amounts higher than that will
require the sanction of vice president)
c) Frequent audits and reconciliation of source documents and accounting
transacti ons.
7.5 QUALITY CHECKS
Quality is the basis of any good performance & holds true in case of aTC process
also.
The outsourced processes undergo quality checks and audits frequently to verify
the following:
1. Correctness of the transactions and whether the data entered is supported by

the source documents.
2. Whether the process is in good health and under proper control (the process
metrics are within the statistical control limits).
3. Whether the quality benchmarks for the process need to be revised (raising the
bar).
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Random sampling is done in BillinglInvoicing & Cash application teams to arrive
Accounts Receivable
at the accuracy levels. Apart from this client also conducts checks at their end to
ensure the quality of effort.
In collections, all calls are recorded using tools (like NICE & Witness). A
dedicated quality team evaluates the quality of the call. Quality includes all
phases of call activity, beginning with call opening, bridging, closing etc. There
are various reports which are shared with the operations team including the fatal
defects (not responding to query, threatening, improper language, third party
disclosure etc).
Check Your Progress

a) If the information for customer set up is incomplete, the request should be
put onhold, till complete information is received.
b) Revenue risk is mitigated by making sure that the dues are collected from
the customers in time.
c) Credit risk is mitigated by doing a proper credit review of the customer.
-'
d) Automatic call distributor helps save time forthe query resolution teams
e) W orkflow can be used to track and manage a large number of transactions.
2. You are a collections analyst and you are following up with a customer on an
invoice payment. Explain step by step what would you do if the customer tells
you that:
a) The invoice has not been received.

b) The invoice has been received but it does not carry the particulars that will
enable the processing (PO Number or the end user to whom the invoice
should be forwarded for approval).
c) The invoice has been received and is under process
d) The invoice has been received but the end user has some disagreements
with the charges stated on the invoice.
7.6 LET US SUM UP
We have looked at various 02C process in the previous units and how they
function and how their performance is measured. In this unit, we discussed how
f
the outsourcing industry uses technology and tools to service its clients from a
different location and time zone.
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We dealt with some of the exception circumstances that frequently happen in the 02C Operations
02C ~rocess teams which affect the smooth functioning as well as the service
level agreements of the 02C teams.
We looked at what steps can be taken by the 02C teams to deal with such
situations and prevent or minimize their recurrence.
7.7 KEY WORDS
t Accounts receivable: The money receivable from the customers for the goods
and services supplied to them on credit.
Advance payment: A payment made by the customer to a vendor/supplier in

advance of receiving the goods and services.
Credit risk: The risk that the goods/services supplied on credit may not e paid for
by the customer.
Document management: A tool which allows a document to be stored retrieved

and managed in digital form using a computer. This allows teams in one location
to access documents which have been put in a document management system.
Efficiency tools: The-tools that increase the automation of a task so that the
efficiency and productivity of the team members is enhanced.
Email: A computer based application which allows its users to exchange

messages over computer networks.
Hardware: It is a term used to describe the devices that form a computer like the
monitor, keyboard, mouse, CPU, etc. The term is also extended to mean any
piece of electronic equipment. It is often used in contrast to software (see below).
Liquidity risk: The risk that if the dues from the customers are not paid in time
then the working capital of the business may go down considerably so as to affect
the day to day functioning of the business.
Outsourcing: The assigning of the responsibility of completing a sub-activity or

.process within a business to a third party, on a commercial basis e.g. the payroll
processing of a lot of companies is outsourced to specialized service providers.
Provision: A liability of an uncertain amount or expected to be borne by a
business at an uncertain time.
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Accounts Receivable
Revenue risk: The risk that a company may not be able to recognise the revenue
1
that it has earned legitimately by selling goods and services to the customers.
~
Risk : The level of uncertainty of an outcome. Higher the uncertainty, higher the
risk.
Scanning: A tool which converts a paper document into its digital image. After
scanning, image can be stored on a computer and can be exchanged over
computer networks.
Software: The programs used to direct the operation of a computer.

, .
Workflow : A tool which allows for a transaction to be defined as a series of
tasks and automatically assign the transaction to the next person when the initial
task has been completed.
Write off : Transfer of entire or partial balance of an account to loss account in

recognition of the fact that the value of an asset has fallen below the value at
which it was recognised in the account books e.g. when a customer who owes us
money files for bankruptcy, we may have to write off the amount owed by the
customer as we may not be able to realize all the receivables.
7.S ANSWERS TO CHECK YOUR PROGRESS
1 a) True b) False c) True d) False e) True
2.a. Confirm the delivery of the invoice from the delivery system (E-mail,
courier etc.). Provide the reference of the person to whom the invoice was
deli vered. If the in voice can still not be traced in the customer's
organisation, send the customer a copy of the invoice and ask him to
process the copy instead of the original.
2.b. Ask for the invoice to be returned. Generate another invoice with the
required details and send to the customer.
2.c. Ask for a date by which payment can be expected.
2.d. Refer the matter to the query resolution team to research the case and
resolve it.
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02C Operations
1. Explain the risks involved in the 02C process? How are these risks mitigated?
2. Explain the use of the following tools in the context of ~)2Ccycle:
a) Workflow
b) Automatic call distributor
c) CRM
d) Email
e) Document management system
, .
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UNIT 8 QUALITY CHECKS IN 02'C .
CYCLE
"
Structure
8.0 Objectives
8.1 Introduction
8.2 Quality Checks for Various Stages in the 02C Cycle
8.2.1 Credit ChecklReview
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8.2.2 Customer Set Up
8.2.3 Order Management
8.2.4 Invoicing .
.. 8.2.5 Collection
8.2.6 Customer Query Resolution
8.2.7 Cash Application
8.3 Consequences of Poor Quality Control
8.4 Let Us Sum Up
8.5 Key Words
8.8 Further Readings and References
8.0 OBJECTIVES
After studying this unit, you should be ableto :

• explain how quality controls are implemented in various stages of 02C cycle;
and
• describe the consequenes of poor quality control.
8.1 INTRODUCTION
As discussed earlier, when a client outsources an 02C process, it must make sure
that the service levels provided to the client and its customers (timely and
accurate fulfillment of order, invoicing, collection and cash application and
reporting) are not compromised.
To ensure that these service levels are maintained or improved by outsourcing the
02C process, the client gets into some service level agreements (SLAs) with the
service provider. The terms of the agreement also specify any penalties that the
service provider may have to pay in case the service levels are violated.
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The service provider, in turn, must make sure that: Quality Checks
in 02C Cycle
• The teams which are working on various processes are enabled to provide the
service according to the Service Level Agreements (SLAs).
• There are enough checkpoints in the system to make 'Sure that the team
achieves the SLAs. These check points can be in the form of early warning
signals or direct indicators of something that has already happened that will
come in the way of the outsourcing team in meeting their SLAs.
The quality checks are the controls implemented at various points in the process
to make sure that the teams out put is of high standard and as per the agreed
requirement of the client. In case these controls indicate that the team is at risk of
not meeting client's requirement then the corrective actions are taken
immediately.
In this unit we will discuss what are the potential quality challenges for the
various process teams and various quality controls that are implemented to enable
the team to overcome these challenges.
,
8.2 QUALITY CHECKS FOR VARIOUS ST~GES IN THE

02CCYCLE
The various steps where the quality checks are implemented in the 02C cycle are:
1. Credit check/review
2. Customer setup
3. Order Management
4. Invoicing
5. Collection
6. Customer query resolution
7. Cash application
Let us discuss the quality controls that are implemented at the abovementioned
steps.
8.2.1 Credit CheckIReview
The credit check requests for the customer are authorised by the credit manager
and are forwarded to the credit review team. The credit review team gets the
information .from various sources (credit rating agencies like D&B and
Compustat, reference checks, financial information from the customer's 99
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financial statements etc.) and enters these data into the credit review application
Accounts Receivable
form. Based on the data entered in the credit review application form, the credit
ratings of the customer are calculated, These recommendations are forwarded to
the client organisation's credit manager.
For credit review team the most important performance metrics are accuracy and
turnaround time. It must make sure that:
1. The Credit check request is closed within TAT (Turn Around time) agreed
upon with the customer.
2. The financial data entered for the credit check is accurate.
3. The sources of various data (whether this was taken from credit rating agency
or the internet or the customer's own annual report) are well documented and
stated along with the credit check report.
To make sure that all credit check requests are being tracked properly, each
request that is received (whether on the phone or email) is logged in a request
tracker and allocated to a member of the credit check team. Using a request
tracker also helps track the TAT on an individual request.
To make sure that the data entered for the credit check is correct, a sample of the
credit review reports are checked for accuracy. The quality check is done by
another person who verifies the data against the sources of information stated. If
the data is found to be not matching then it is corrected. If the no. of mismatches
is higher than the acceptable percentage, then the entire set of credit review
requests undergoes a quality check before being forwarded to the client.
8.2.2 Customer Set Up
Accuracy is the most important quality measure for the customer setup process.
Since inaccuracies in the customer setup' can create a lot of problems later, usually
all the customer set up requests are audited for accuracy. The duplicate check is
also made prior to the setup. The followi ng items are checked for accurate data
entry:
1. Customer name
2. Customer's address (Bill to and Ship to address)
3. Customer's tax identification number

4. Customer's contact person and contact information (e.g. AP Manager on the
customer side)
5. Credit terms (Credit limit and period)

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6. The quotation provided to the customer on various goods/materials/services t Quality Checks
in 02C Cycle
be supplied.
7. Taxation terms (Service Tax, VAT or any other taxes applicable)
8. Payment terms (who bears the risk of in transit goods, whopays for
freight/insurance etc.)
9. Discounts/penalties and tolerances.
In case any errors in data entry are found out they are corrected.
'f 8.2.3 Order Management
For the order management team, the correct fulfillment of the order is important
but it is not outsourced because usually the fulfillment happens at client's location
or customer's location.
In an outsourcing environment, it is important to track the entire order to

fulfillment and invoicing:
1. Making sure no order is missed out
2. No order is fulfilled in duplicate

3. The documentation related to the order is in place (to enable revenue
recognition).
4. The process of conversion of customer's purchase order to sales order and

then to invoice is accurate (in terms of quantity, dispatch address, etc.)
To ensure quality, the Order Management team does the following:
• It tracks each order through request tracker.
• Checks for the duplicate orders to eliminate these.

• It makes sure that the Customer's purchase order number and scanned copy
are attached to each sales order that is generated.
• A sample of sales orders are compared with the corresponding customer's PO

copy and the quotation data to make sure that the quantities of goods, pricing
data and shipping address is correct.
8.2.4 Invoicing
Correctness of the invoice is one of the most important criteria for the invoicing
team. It maust make sure that:
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Order to Cash (02C) - 1. The PO number, invoicing address and the customer manager (as.mentioned
Accounts Receivable
on the invoice) are correct as per the Purchase order.
2. The goods mentioned on the invoice and their quantities are matching with the
PO.
3. The pricing information matches with the PO and the quotation data for the
customer.
4. Taxes are correctly calculated.
5. Invoice date, credit terms and payment terms are correctly mentioned on the
.* invoice .
To make sure that the data is accurately stated on the invoice, a sample of
invoices is identified and it undergoes a quality check by an independent person.
If the no. of errors are found to be higher than the acceptable limitthen the entire
batch of invoices are checked otherwise the batch is cleared to be dispatched to
the respective customers.
8.2.5 Collection
For collection teams, the important quality objectives are:
1. While talking to the customer, the conversation should be polite, even if the
customer is not making the payment.
2. The collection call complies with the local laws and regulations related to debt
collection (like FDCPA and the respective state's laws, if any).
3. The contact with the right party is established at the earliest during the call.
4. The promise-to-pay is committed by the customer wi~hout any pressure or

coercion.
5. Any written communication (dunning letter) sent to the customer is polite and
firm.
To maintain the quality of the collection calls and letters, the following steps are
taken:
• Each call is recorded. The recording is turned off only if the local law requires
so and customer indicates that he does not want the call to be recorded.
• A sample of recorded calls are checked by the quality control person to make
sure that the call was compliant in all respects (as mentioned above).
• The client specifies a template of letters to be sent as collectiori reminders at

various stages of collection. The basic structure and the communication is thus
defined and the person sending the letter only needs to fill in the invoice
details, dates and amounts to create a dunning letter and send it out.
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8.2.6 Customer Query Resolution Quality Checks
in02C Cycle
The queries to be resolved are passed on to the team by the collections. team when
the customer raises an issue about an invoice.
The query resolution team works with tight timelines because higher TAT for a
query results in the payment getting delayed from the customer. The important
considerations are:
1. No query to be missed out.
2. Each query to be resolved within the TAT agreed with the customer.
3. The resolution should be correct and based on the facts retrieved from source
documents, like customer contracts, POs and invoices. Sometimes other
parties like sales person for the customer may also need to be contacted.
To rnake sure that the query resolution is of high quality, the following steps are
taken:
• All queries are logged in a request tracker and assigned to various members.
• The timestamps on the queries can indicate the status of the request and who
took an action on it and when.
• The request tracker can automatically escalate the issue to a senior manager
from the client side if the query is still open after (say) a week.
A certain percentage (say 20%) of the query resolution requests are sampled for
correctness.
8.2.7 Cash Application
For Cash application team, timely and accurate application of cash is extremely
important. Their performance is determined by how much balance remains in
suspense account and how much is allocated to customer accounts but not applied
to an invoice yet.
To be able to do their job quickly and accurately, they need to have documents
like bank statements (from the client's bank) and remittance advice (from the
customer at the earliest). Sometimes these documents (especially the remittance
advice), do not reach the cash application team in time which results in a delay.
However, the quality control is applied on the cash application team by:
• Frequently monitoring the unapplied cash (in suspense account and in

customer account). On most of the floors, this amount is monitored three
times in a day.
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Order to Cash (02C) - • In case some remittance details are missing on a payment but the "customeris
Accounts Receivable
known, then the collection team is requested to get the remittance details from
the customer.
• For accuracy check, a simple of the payments is checked and verified if the
cash application was proper or not.
8.3 CONSEQUENCES OF POOR QUALITY CONTROL
The outsourcing team has direct access to the financial systems of the client.
Since the data is very sensitive and an error can prove very costly for the client as
well as the outsourcing service provider, the outsourcing team must accord
highest priority to maintaining and monitoring quality controls and taking
corrective actions. Poor quality controls in 02C processes can result in:
1. Monetary loss for the client in the form of :
a) Late or no payments from the customer.

b) Legitimately earned revenue not being recognised, due to the lack of
proper documentation.
c) Provisioning for bad debts

d) Higher cost of working capital
2. Loss of clients' reputation
a) When the customers orders are not fulfilled properly and in time or the
invoices are not generated accurately, the word gets around in the
business community about the poorly managed business process.
b) Customers take their business to the competition.
c) A high amount of suspense account and unreconciled payments showing
on the financial statements also indicate poor financial control and
damage the reputation of the client
3. Dissatisfaction among the customers due to
a) Goods not being received in time.
b) Quality of Collection communications may be poor
c) Customers not getting proper response for their queries on the invoices.
4. Loss of reputation and money, for the service provider
a) When incidents of poor quality come to the attention of the client, it results
in embarrassing situation for the service provider and a loss of face for
him.
b) It leads to loss of client's confidence and trust and may result in loss of
business
5. Loss of money for the outsourcing service provider
a) Client may impose a penalty on the outsourcing service provider, for the
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poor quality work.
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b) Sometimes the client may also have an agreement with the service Quality Checks
in 02C Cycle
provider that a part of the fee to be paid by the client to the service
provider will be subject to the service provider maintaining a certain
quality level and SLAs.
Check Your Progress

a) The client monitors the SLAs maintained by the outsourced operations
regularly.
b) Quality results in higher costs but it needs to be maintained.
c) Accuracy of the transaction is usually more important than the
"
turnaround time.
d) Collections calls are recorded because the law requires it.
e) High amount on the suspense account indicates that the business has a
"-
lot of cash which it can use for working capital.
a) are used by the client to make sure that services provided
by the outsourcing partner are not compromised on quality.
b) The third party which provides credit related information on a
prospective customer is called _
c) Poor quality results in loss of money and reputation for
______ and _
d) Collection call in the US, needs to be compliant with _
Act.
2-lv) e) If invoicing is not accurate, processes like will suffer.
•
8.4 LET US SUM UP
When a process is outsourced to another party, the service provider and the client
agree on the service level agreements on the services to be provided.
To make sure that the service provider's team s able to meet these SLAs, the team
needs to put in place various quality control measures at various points in the
process.
These quality controls act as early warning signals and also indicate if something
has happened in the process that will come in the way of the team achieving it
target SLAs.
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Orr'cr to Cash (02e) -
The quality controls and their implementation should be given the highest priority
.' . 'Obl~'~ Receivable
by all the tear-is as this can result in financial and reputation losses both for the
client " , -vell as service provider.
Apart from an independently functioning quality control team, the operations

teams in various 02e processes should be enabled to put quality controls into
their day to day functioning.
R.S KEY WORDS

\
redit Rating Agency: A third party provider of credit rating information of an

individual or a business organisation e.g. Moody's, Standard and Poor, Dun &
Bradstreet etc.
FDCPA: (Fair Debt Collection Practices Act) The US Federal law that governs
the debt collection practices in the US.
Quality control team: The team which supports the AP team and measures the
quality performance of a process by doing regular quality checks and audits.
Remittance advice: A letter sent by the customer to the vendor, providing details
of the payments made and the invoices that have been paid. It is used by the
vendor in applying cash.
Request Tracker: A workflow based application which is used to log, track and
manage requests made by customers, clients and other operational teams.
Sampling: A quality control measure where a subset (sample) of the output batch
is subject to quality tests. If the sample passes the quality tests, then the entire
batch is considered to have passed the quality test.
Service Level Agreements: (SLAs) These are the agreements between the
outsourcing service provider and the client where client's expectations out of the
process outsourced are documented. These SLAs are measured through various
performance metrics. For example all invoices will be taken up for processing
with 3 business days of being scanned, 99% of the payments will be made on time
etc.
Suspense Account: A liability account where the incoming payments are parked
till the time they are identified as which customer has paid which invoice.
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TimestaIJ.?-p:A record of date and time on which a transaction was done in a Quality Checks
in 02C Cycle
workflow tool.
'.
Turn Around Time (TAT): The average time within which a request is serviced.
1 a) True b) False c) True d) False e) False

2 a) Service level agreements
b) Credit rating agency
'0
c) client, outsourcing service provider
d) FDCPA (Fair Debt Collection Practices Act)
e) collection
1. Discuss the important quality criteria for the following processes and how the
respective teams ensure thatquality criteria are met. .
a) Cash Application
b) Collection
c) Order Management
d) Invoicing
e) Customer query resolution
8.8 FURTHER READINGS AND RE}'ERENCES
1. Schaeffer, Mary S., 2002. Essentials of Credit, Collections, and Accounts

Receivable
2. Salek, John G., 2005. Accounts Receivable Management Best Practices
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11
I~ Course Name Units
Unit 1: Overview of BPO Industry

.;
.
Unit 2: Organization Of the Industry
Unit 3: Overview of the Indian BPO Industry

BPOI-OOl: Introduction
to Finance and Unit 4: Overview of F&A outsourcing
Accounting BPO
Unit 5: Career Prospects
Unit 6: Getting Ready for a Career in F&A B.PO

Unit 7: Information Technology And Its Applications in F&A BPO
Part I - Accounting Process

.. Unit 1: Introduction to Accounting
Unit 2: Accounting Principles
Unit 3: Accounting Standards
Unit 4: Recording of Business transactions - Journal
Unit 5: Classification - Ledger I
Unit 6: Special Purpose Subsidiary Books
Unit 7: Rectification of errors
Part n- Final Accounts and Corporate Financial Statements

BPOI-002: Fundamentals Unit 8: Accounting Concepts of Income, Expenditure & Receipts
of Accounting
Unit 9: Trading and P&L Account
Unit 10: Balance Sheet
Unit 11: Adjustments in Final Accounts
Unit 12: Final Accounts with Adjustments
Unit 13: Provisions and Reserves
Unit 14: Preparation of Profit And Loss Account
Unit 15: Preparation of Balance Sheet

Unit 16: Financial Schedules
BPOI-003: Procure to
Unit 1: Introduction to procure to pay
Pay (P2P, Accounts
Payable) Unit 2: Outsourcing of procure to pay and its reasons
"
Unit 3: Source documents
Unit 4: Procurement activities
Unit 5: Invoice Processing
Unit 6: Invoices on Hold
/ I
Unit 7: Payment Runs
Unit 8: Vendor Helpdesk
Unit 9: Quality Checks

.;
Unit 10: Issue Managemen~
•.
Unit 11: Accounting Entries
Unit 12: Metrics and best practices
Unit 13: Overview ofT&E

Unit 14: Stages ofT&E
.• Unit 1: Introduction to 02C
Unit 2: Stages of 02C
BPOI-004: Order to Unit 3: Credit Approval Process.

Cash (02C, Accounts
I
Receivable) Unit 4: Order Management and Invoicing
Unit 5: Collection process
Unit 6: Accounts Receivable
Unit 7: 02C Operations

Unit 8: Quality checks in 02C
~
Unit 1: Overview of R2R
Unit 2: Reconciliation
Unit 3: Bank Reconciliation Statement
Unit 4: Fixed Assets

BPOI-005: Record to
Unit 5: Depreciation Accounting
Report
Unit 6: Cash Budgeting and forecasting
Unit 7: Cash Flow Management
Unit 8: Controls and Metrics
Unit 9: Reporting
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/
MPDD-IGNOUJP,O,1 TJApril.2009
, ,
•
ISBN-978-81-266-3858-1
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/

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.. Indira Gandhi National Open University BPOI - .

IGNOU in Associati n with Accent re

Course Expert Committee

Shyamlul C, llcgc University of Delhi l\t. r.....ar,,! \

Course Preparation Team

c lndiru Gandhi National 01),,' .lniversity. 2009

Unit 1: Introduction to Order to Cash Process explains Order to Cash cycle in an

Unit 6: Accounts Receivable relates to the process of cash application, accounting

UNIT 1 INTRODUCTION TO ORDER TO

After studying this unit, you should be able to :

• explain the concept of 'Order to Cash' (02C) process;

1.1 WHAT IS ORDER-TO-CASH?

Most of the sales transactions, especially between businesses happen on a credit

'5 Proof of Oellv~ry

1.2 RESPONSIBILITIES OF DIFFERENT PLAYERS IN THE

> Sales :} Credit review )

The responsibilities of the sales department are:

Responsibilities of the credit department are:

Usually credit function in an organization is in a conflict with the sales

[Note: US GAAP: (Stands for United States Generally Accepted Accounting

IFRS: (Stands for International Financial Reporting Standards) The accounting

in Europe. They are proposed and regulated by IASB (International Accounting

The responsibilities of the order management function are:

Collections: Collection function is critical to the financial health of the business

(Average AR (Accounts Receivable) dming an accounting period) ..

Accounts Receivable (AR): AR function is also critical as it involves accounting

Within an organization 'Accounts Receivable' refers to a business department or

For example, Hitech Computers manufactures and sells computers to businesses

1.3 IMPORTANCE OF ORDER-TO-CASH TO BUSINESS

6. Collection of dues in a timely manner also helps reduce bad debts.

The adverse consequences of a poorly managed a2C process are as follows:

1. Fill in the blanks:

1.4 LET US SUM UP

1.5 KEY WORDS

Accounts Receivable: The money due from the customers to whom

Collection Team: The team/department within an organisations that is

Order Management: The process of receiving an order from the customer to

Sales Order: An internal document within the seller's organisation to

1.6 ANSWERS TO CHECK YOUR PROGRESS

1 a) Order Management b) Sales c) Order Management

2 a) True b) False c) False d) True

1.7 TERMINAL QUESTIONS

After studying this unit, you should be able to :

2.1 SOURCE DOCUMENTS IN ORDER TO CASH

Source Documents are the documents which contain source information on

2.1.1 Purchase Order

A Purchase Order is also referred to as a PO. A PO is a commercial document

Sending a PO to a supplier constitutes a legal offer to buy products or services.

A purchase order usually contains:

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 is

A sales order is an internal document of the company, meaning it is generated by

A sample sales order is provided in Appendix V

An invoice or bill is a commercial document issued by a seller to a buyer,

A sam~le of the invoice is provided in P2P (Course 3), Unit 3.

2.1.4 Goods Received Note

: Also referred to as GRN, it is a written acknowledgement that the specified

A sample of the GRN is provided in P2P (Course 3), Unit 3.