5A.2. Sales and Revenue Risk and Controls

The sales and revenue process is central to any organization’s financial health and operational success. It encompasses all activities related to selling goods or services and recognizing the income generated. The primary activities in this process include:

• Market Research and Strategy Development: Before any sales can occur, an organization must understand its market, including customer needs, competition, and pricing strategies. This research informs the development of sales strategies tailored to target markets and customer segments.
• Product or Service Development: Based on market research, the organization develops or modifies its products or services to meet customer needs. This involves decisions on product design, features, pricing, and how the product or service will be delivered to the customer.
• Marketing and Promotion: With products or services ready, the organization undertakes marketing and promotional activities to create awareness and interest among potential customers. This may include advertising, content marketing, social media campaigns, trade shows, and direct sales efforts.
• Sales Process: The sales process involves interactions between sales personnel and customers. This can occur in various settings, such as in-person meetings, online transactions, or over the phone. The process includes presenting the product or service, addressing customer queries, negotiating terms, and closing the sale.
• Order Fulfillment: The organization must fulfill the order once a sale is made. This includes processing the order, managing inventory to ensure products are available, packaging, and arranging for delivery or providing the service as agreed upon with the customer.
• Invoice Generation and Payment Collection: After delivery or service completion, the organization issues an invoice to the customer. Payment terms are established beforehand, and the organization must collect payment using these terms, which may involve follow-ups with customers for overdue payments.
• Revenue Recognition: Recognizing revenue involves recording the income in the financial statements. Organizations must follow accounting principles to determine when revenue can be recognized. This is usually when the product or service is delivered, and the collection of payment is reasonably assured.
• Customer Service and Support: After-sales service is crucial for maintaining customer satisfaction and fostering repeat business. This may involve handling returns, addressing complaints, and providing ongoing support for products or services.

Let’s review the top three sales and revenue management risks and their impact on the organization. We will also take an inventory of the top three preventive, detective, corrective, and accounting controls related to each risk.

Revenue Recognition Errors

Risk Impact

Misstated financial statements, potential regulatory penalties, and investor distrust. This risk involves inaccurately recording revenue, leading to incorrect financial reporting.

Preventive Controls

• Segregation of Duties: Separating sales, billing, and accounting responsibilities to prevent errors or fraud.
• Revenue Recognition Policies: Establishing clear guidelines and policies for recognizing revenue in compliance with accounting standards.
• Review of Sales Contracts: Implementing a review process for sales contracts to ensure accuracy and compliance with revenue recognition criteria.

Detective Controls

• Revenue Reconciliation: Reconciling recorded revenue with supporting documentation and external sources to identify discrepancies.
• Sales Data Analysis: Analyzing sales data for anomalies or irregularities that may indicate revenue recognition errors.
• Investigation of Customer Complaints: Investigating customer complaints or billing or revenue recognition disputes.

Corrective Controls

• Revenue Adjustments: Adjust missed revenue figures and ensure accuracy in financial statements.
• Sales Training and Education: Training sales teams on revenue recognition policies and procedures to prevent future errors.
• Process Improvements: Implementing process enhancements to streamline revenue recognition and reduce the risk of errors.

Accounting Controls

• Revenue Recognition Controls: Implementing controls to ensure accurate recording and reporting of revenue by accounting standards.
• Revenue Reconciliation Controls: Establishing controls to verify the accuracy and completeness of revenue reconciliation processes.
• Sales Commission Controls: Implementing controls to accurately calculate and record sales commissions to align with revenue recognition.

Credit and Collection Risks

Risk Impact

Cash flow disruptions, increased bad debts, and strained customer relationships. This risk involves extending credit to customers who may be unable to pay, leading to payment delays or defaults.

Preventive Controls

• Credit Approval Policies: Establishing criteria and procedures for assessing customer creditworthiness and approving credit limits.
• Credit Monitoring and Review: Regularly monitor customer credit accounts and review payment history to identify potential credit risks.
• Collection Procedures: Implementing effective collection procedures to follow up on overdue accounts and minimize bad debts.

Detective Controls

• Credit Limit Enforcement: Enforcing credit limits and implementing controls to prevent sales orders from exceeding approved credit limits.
• Analysis of Accounts Receivable Aging Reports: Analyzing accounts receivable aging reports to identify overdue accounts and prioritize collection efforts.
• Review of Payment Terms: Reviewing and adjusting customer payment terms based on credit risk assessments and payment history.

Corrective Controls

• Debt Collection: Initiating debt collection efforts for overdue accounts and negotiating payment arrangements with customers.
• Credit Limit Reviews: Reviewing and adjusting customer credit limits based on creditworthiness or changes in payment behaviour.
• Dispute Resolution: Resolving customer disputes or discrepancies regarding invoices or payment terms to facilitate timely payments.

Accounting Controls

• Credit Policy Compliance: Monitoring adherence to credit policies and procedures to ensure consistent customer application.
• Collection Effectiveness Metrics: Establishing metrics to measure the effectiveness of collection efforts and track progress in reducing overdue accounts.
• Inadequate Debt Reserves: Maintaining adequate reserves for bad debts to mitigate the impact of credit losses on financial statements.

Pricing and Discount Risks

Risk Impact

Erosion of profitability, market share loss, and damage to the brand’s reputation. This risk involves setting prices or offering discounts not aligned with cost structures or market conditions.

Preventive Controls

• Pricing Strategy Review: Regularly reviewing and updating pricing strategies to reflect costs, competition, and market demand changes.
• Discount Approval Procedures: Implementing controls and approval processes for granting discounts to customers to prevent unauthorized discounts.
• Contract Pricing Analysis: Analyzing pricing terms in customer contracts to ensure consistency with pricing policies and profitability targets.

Detective Controls

• Monitoring Price Discrepancy: Monitoring pricing discrepancies or deviations from standard pricing to identify potential pricing errors or unauthorized discounts.
• Discount Usage Analysis: Analyzing discount usage patterns and trends to detect anomalies or misuse of discount policies.
• Customer Price Complaints Investigation: Investigating customer complaints or disputes about pricing discrepancies or incorrect discounts.

Corrective Controls

• Price Adjustments: Making adjustments to correct pricing errors or unauthorized discounts and ensure consistency with pricing policies.
• Discount Policy Enforcement: Enforcing discount policies and procedures to prevent unauthorized discounts and maintain pricing integrity.
• Contract Negotiation Review: Reviewing contract negotiation processes to ensure compliance with pricing policies and profitability targets.

Accounting Controls

• Pricing Controls: Implementing controls to review and approve pricing decisions and ensure alignment with pricing policies and profitability targets.
• Discount Authorization Controls: Establishing controls to authorize and track discounts granted to customers and prevent unauthorized discounts.
• Contract Pricing Controls: Implementing controls to review and approve pricing terms in customer contracts to ensure profitability and compliance with pricing policies.