Sales Order Processing Imperative for Small Businesses

Sales Order Processing - Order Entry

What is Sales (or Jobs) Order Processing?

Sales (or Job) Order Processing is a systematic process for handling customers’ purchase requests for goods or services. The process is designed to ensure effective service delivery and good customer relations. Orders for goods are usually referred to as Sales Order, while Orders for Services (such as dry-cleaning, sewing, printing, welding & fabrication, etc.) can be referred to as Jobs Order.

The key components of Sales Order Processing are as follows:

  1. Order Entry
  2. Order Confirmation
  3. Order Execution
  4. Quality Check
  5. Delivery

Sales Order Processing is a multi-stage process and may require involvement of different personnel at each stage of the process. Many companies have formal procedures or guidelines for handling customers’ Orders as part of their operational policy.

Sales Order Processing Workflow

Sales Order Processing Workflow

Order Entry

This involves collection of purchase requests from customers in a variety of formats (via phone calls, emails, direct visits, etc.) and entering them into the Order Processing System—be it manual or electronic. Part of the Order Entry procedures may require creating a unique account for each new customer, and each Order must be assigned a unique Order Number on initial entry.

Order Confirmation

Order Entry is a non-binding documentation, just like quotation or sales enquiry. Everything could just end there without any ado. However, when a customer has entered into an agreement to purchase the goods or service—either by making payment in part or in full, or by subscribing to a binding contract—the Order will have to be officially confirmed. Confirming the Order means billing or invoicing the customer for the goods or services. It also means debiting the customer’s account to indicate indebtedness of the customer to the supplier for the requested goods or services.

Order Execution

On confirmation of an Order, the supplier or service provider is officially bound to go ahead and provide or manufacture the goods or services based on the specification of the customer. Order to execute must be accompanied with valid Confirmation document.

Receipt of Customer’s Payment

Somewhere along the chain, the customer will have to pay for the product in full, either before or after delivery (depending on the sales agreement). All payments will have to be recorded and acknowledged separately by the relevant unit.

Quality Check

It is always a good practice for independent check to be carried out to ensure that the goods or services comply with the customer’s specifications, and have no defect, before final delivery to the customer. This will not only impact positively on the company’s service delivery reputation, but will also eliminate preventable errors, reduce the rate of customers’ complaints and, possibly, prevent litigations.

Completion and Delivery

This is the final release of goods or services to the customer, after a successful completion. The Order is signed off as completed and closed. You must ensure that all contractual terms are strictly adhered to before delivering the goods or services. If, for example, the contract stipulates “full payment before delivery,” then that provision must be complied with before delivery. However, any outstanding payment within the terms of the contract is finance—and not operational—issue.

Revenue Recognition in Sales Order Processing

Based on the provision of the International Financial Reporting Standards (IFRS), Revenue cannot be recognized until goods or services have been delivered and all the risks of ownership transferred to the customer. What this means is that the seller or service provider cannot recognize revenue until the goods and services ordered for have been safely and successfully handed over to the customer.

Now, let us examine one of the implications of this IFRS provision: Assuming you are a Dry Cleaner, and you accept a job to dry-clean a jacket for $5. Suppose, along the way, you did a bad job or damage the customer’s fabric, leading to a situation where you cannot morally or professionally justify charging the customer for the service! What then happens to the revenue from this job? You have not earned it and you cannot earn it. This is one of the numerous reasons the International Accounting Standards Board (IASB)—through the International Financial Reporting Standards (IFRS)—discourages recognition of revenue before a successful delivery.

Below are accounting entries associated with Sales Order Processing:

On Confirmation of Order:

  • Dr. Customer
  • Cr. Unearned Revenue (Liability)

On Receipt of Customer’s Payment:

  • Dr. Cash
  • Cr. Customer

On Completion and Delivery:

  • Dr. Unearned Revenue
  • Cr. Sales Revenue (Profit or Loss)

You can see that Revenue is first recognized as unearned and credited to a liability account, on confirmation of Order. Revenue is only deemed to have been earned after goods or services have been delivered to the customer successfully. At that point, Unearned Revenue liability is reversed and credited to Sales Revenue (Profit or Loss).

Sales Order Processing Solution for Small Businesses

While there is no doubt that big and established companies have put robust sales order processing procedures in place, the same cannot be said of small businesses. We have heard of or witnessed cases of many delivery blunders, such as not remembering delivery due date, missing or undocumented items, wrong specifications or labeling, wrong measurements or styles, etc. Some of these issues have resulted in arguments or litigations between service providers and their customers, with negative impact on the image of the company. Problems like these can easily be eliminated or minimized with a well-implemented Sales/Job Order Processing policy.

The Sales and Job Order module of ABC Financial and Business Toolkit has fully automated all the standard procedures involved in Sales Order Processing. The software also provides a tool for comprehensive profiling and tracking of customers and their transactions. Small and Medium Enterprises (SMEs) engaged in the provision of goods and services, where customers’ Orders may take more than a day to deliver can take advantage of this offering. Such businesses include Laundry/Dry-cleaning service, Fashion Design/Sewing, Printing, Carpentry, Welding & Fabrications, among others.

About Uso Etim

Etim Uso is a systems analyst and a programmer with over 20 years of experience in the design and implementation of financial and business solutions. He is an IFRS/IPSAS systems specialist, and holds a Bachelor of Technology degree in mathemetics and computer Science from the Federal Univeristy of Technology, Owerri, Nigeria. He also holds a Certificate in Entrepreneurial Management from Enterprise Development Centre (EDC) of Pan-Atlantic University, Lagos. He has contributed to a number of discourses on important national and international issues, including the Nigeria Leadership Initiative's (NLI) White Paper (Volume 2) on Nigeria tax system. He was a guest columnist for the Nigeria's Businessday Newspaper throughout 2012, writing weekly on International Financial Reporting Standards (IFRS) and International Public Sector Accounting Standards (IPSAS). Mr. Uso has written a number of books and eBooks on accounting, including the following, all of which are available in the Amazon Kindle store: 1. IFRS Accounting Manual for Small Businesses 2. IFRS Accounting Manual for the Real Estate 3. How to Master IFRS Accounting for Hotels with 3 Easy Steps. www.accountingbychoice.com is his blogging and marketing platform on financial and business solutions.

Leave a Reply

Your email address will not be published. Required fields are marked *