CHAPTER - 6

PURCHASING AND SELLING PROCEDURES

Selling Procedures

A contract is an agreement between two parties. A contract of sale is therefore an agreement of sale
between the buyer and the seller, where the seller agrees to transfer goods to the buyer for a price.

In a contract there should be an offer and acceptance

OFFER -To offer means to put forward something for sale to someone at a certain price. It is actually
a statement made by the seller, of the terms on which he is willing to part with particular goods.

ACCEPTANCE - Acceptance means to agree to buy something at a certain (offered) price.

TERMS OF A CONTRACT OF SALE

Each time an agreement or contract of sale is entered into, the two parties agree to certain terms.
The terms of a contract are the promises and undertakings contained in that contract. The terms of a
contract of sale are

i) The seller must be the lawful owner of the good offered for sale.

ii) The quality of the goods must be suitable for the purpose for which it is bought.

iii) Payment for goods has to be made before delivery can be enforced.

Conditions in a contract of sale

A condition is a very important term of a contract. The words conditions and warranties are
sometimes used to describe certain terms of a contract. If it is broken by one party then the whole
agreement is dead. Then the other party has the right to cancel the contract and claim damages for
the losses caused.

Warranties in a contract of sale

It is not an essential element of the contract. That is, even if it is broken the contract is still valid but
the aggrieved party can claim a financial compensation for the inconvenience caused.

Agreement to sell and actual sale

AGREEMENT TO SELL - refers to a situation where the buyer and seller agrees on how the transaction
is going to be concluded but no transfer of ownership takes place. A good example is a lay-bye
agreement and a hire purchase agreement.

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 ACTUAL SALE - Actual sale takes place when the ownership of the goods changes hands here the
buyer pays full price required by the seller and the seller delivers the good to him. The buyer
assumes full and legal ownership of the good.

POINTS OF AGREEMENT IN A SALES CONTRACT

When entering a contract of sale the buyer and seller must agree on certain points regarding the
sale in order to reduce the chances of dispute at a later stage. The main points of agreement
include the following.

1) Price of the product - For many goods the asking price is not usually the price the buyer will
pay. There can be negotiation until a suitable price acceptable to both is agreed. The agreed
price is the minimum price at which the seller is willing to part with the good and the
maximum the buyer is prepared to pay to acquire the good. The agreed price should also
specify what the quoted price includes. For e.g. whether it includes the packaging materials,
transportation etc. The price of a good can be quoted in different ways as follows -

i) Carriage paid - When the price is expressed as carriage paid it means all the costs of
packaging and delivery are paid by the seller and the goods will be delivered at the buyers
premises at no further costs.

ii) Free on rail - (F.O.r) Here the seller will package the goods, load them in his van, deliver them
to the railway station and even arrange for them to be loaded onto the railway wagons. The
actual cost of transport by rail (Freight) will be met by the buyer.

iii) Carriage forward - (c.f) in this case the seller packages the goods and arranges for their
dispatch, but all other costs are met by the buyer.

iv) Ex-works or Ex-warehouse - When the price is quoted this way it means the retailer is going
to use his own transport to collect the goods from the warehouse or factory. Ex-works is
usually factory price.

v) Loco: When the price is quoted this way it means that the goods are sold wherever they are
at the time of sale. If they need packaging, it has to be paid for by the buyer who also has to
pay the transport costs.

2) Quantity - The buyer must specify in his order the quantity of goods required, and the units
in which the goods are measured. The seller must also state whether he will be able to
supply the quantity ordered and in good time. The buyer has the right to reject the goods
delivered if they are less or more than the quantity ordered. Also the buyer may reject goods
that are delivered far too late.

3) Quality: - If the buyer buys as a result of inspecting a sample sent by the seller then he has
the right to expect that the rest of the consignment must be equal quality to the sample.
Where the goods are sold by description they must correspond with the description. If the
buyer has indicated to the seller the purpose for which he want the goods, then the goods
delivered must be suitable for that purpose.

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4) Delivery - When ordering heavy, bulky or delicate goods, the buyer should specify the
address, and the time or dates when the goods are required. The seller should also confirm
that he is able to do that. Delivery dates are sometimes specified by sellers in their
catalogues. However this should not be taken for granted. Hence an agreement should
therefore be reached on the place, time and costs of delivery.

5) Conditions of payment : - In case of credit transactions, where payment is to be made at

later date, it is important for the two parties to agree on the date and made of payment. The
buyer needs to be sure when and how (by cheque, cash, bank draft or postal order) he is
expected to pay for the goods. A good buyer usually negotiates discounts and long credit
terms on goods purchased from suppliers whenever possible.

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PURCHASING PROCEDURES

Purchasing is the buying of goods and services. The supplies in a company should ensure that they
buy goods and services of the best quality from best suppliers.

Sources of supplies for a product

 Producers
 Wholesalers
 Agent

Choosing the right suppliers is one of the trader’s most important responsibilities which directly
affect his profitability and prosperity. Some suppliers are

 Very expensive
 Unable to offer goods on credit
 Unable to deliver goods
 Providing poor quality goods or
 Unreliable and cannot meet deadlines

Factors affecting the choice of suppliers

The following are some of the factors that a trader must consider before choosing the supplier for a
particular product.

i) The product must be of good quality

ii) The price should be reasonable and competitive

iii) The supplier must be reliable

iv) The supplier should have a good reputation for prompt delivery, good service etc;

v) The supplier should be able to offer technical support in the form of installation, repairs
maintenance etc.

vi) The supplier should be able to provide quality guarantees (ie) to accept the unacceptable
goods returned by the trader.

The process of choosing the supplier

Choosing a supplier of a product depends upon what kind of product one wants to buy. A trader
needs to follow the following steps in order to choose the best possible supplier.

1. Define the need: The retailer should determine what goods he needs to buy and list them down.

2. Research the market: the retailer should refer to all possible organisations that can supply such
a good. Information about suppliers can be found in the yellow pages of a telephone directory
newspapers, trade journals, internet etc.

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3. Thirdly the retailer should send inquiries to all the possible suppliers asking for the availability of
goods, their prices, their size, delivery date and terms of payment.

4. Evaluate responses: the retailer needs to examine the quotations, price lists or response sent by
all the suppliers. Carefully he should compare the quality, prices, and terms of payments offered
by each supplier. Finally he should be able to select the most suitable supplier.

5. Place an order: the retailer can place the order with the selected supplier.

Dealing with orders

One important thing the supplier must always do is to deal with orders very fast. A manufacturing
firm might have to produce the ordered goods if there is nothing in stock. The order should be
entered into the register and passed on to the production department whose duty is to produce the
goods. The production department will source the required funds from the finance department and
buy the necessary inputs. As soon as the goods are ready they should be passed on to the despatch
department for immediate supply.

Importance of proper storage of stock

Once goods are delivered to the store they must be promptly documented and securely stored, and
also an accurate stock record maintained. This is important for three reasons.

1) The company is able to maintain sufficient stock to meet the customers demand at all times.

2) The company will avoid locking up capital in too much stock.

3) The stock record provides vital information for management.

Rules for storing different stock

There are some basic rules for storing different products. They are -

1. Stocks that are issued frequently should be stored conveniently to keep down the handling costs.

2. Items that are issued together should be stored together or at least next to each other.

3. Dangerous items should be stored separately in a lockable bin with warnings placed.

4. Inflammable items should be kept away from open flames and warning signs posted to remind
staff

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Stock Record Cards

A stock record card keeps basic information about the stock. It keeps the description of the goods,
the supplier, the catalogue number, and price and bin number. Every time new stock is delivered by
the supplier, it is entered on the stock card (the total number of stock goes up). Every time stock is
sold or issued it is entered on the stock card (the total number of stock goes down). The accuracy of
stock records can be checked by stock taking. At anytime, one can refer to the stock record card to
check the level of stock available on hand.

STOCK RECORD CARD FOR BAFANA WHOLESALERS

STOCK:CAKE SUPPLIER: SEFALANA STOCK LEVELS

BIN No: 10A CATALOQUE No: 0256 Maximum 60cases

DELIVERY TIME: 1 WEEK Minimum 10cases

DATE RECEIVED ISSUED BALANCE

QUANTITY FROM QUANTITY TO

01-04-99 60 cases Sefalana 20 Sales Dept 40cases

09-04-99 - 10 Sales Dept 30cases

15-04-99 - 20 Sales dept 10cases

Computerized Stock System

Computers can be used to control stock levels computers enables a trader to enter all the
information about that stock into the computer which then monitors it automatically. There are
several advantages in using computerized stock control system.

1. All departments have immediate access to stock information.

2. The computer signals when minimum stock level has been reached. So orders can be placed
immediately.

3. Records can be updated quickly and immediately.

4. He computer saves on storage space as the right amount of stock is always kept

5. Fewer staffs are required to operate the system.

6. It is cheaper and convenient.

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Documents used in Buying and Selling

In business there is need to provide a written record of all transactions that take place between the
buyer and seller. This is important not only for the sake of evidence but also to enable the parties
involved to keep track of their activities.

1. The inquiry - This is a letter written to the supplier by the buyer, requesting for information
about the availability of goods, their prices, delivery dates and terms of sales. It is also possible
to make a verbal inquiry on the telephone and ask for a quotation, provided the buyer is well
known to the seller.

2. The quotation - This is a reply to the inquiry. It is usually sent by the supplier to the customer or
buyer. The quotation contains a detailed description of goods available, the price at which goods
are offered, terms and conditions of sales, including terms of payment and delivery date.

3. Price lists and catalogues - Some suppliers have prepared price lists and or catalogues which they
send in the place of the quotation. They all contain a list of the supplier’s products, their prices,
description and size as well as the terms of trade.

4. The Order - This is an instruction to the supplier to supply particular goods. It can be made on a
special order form or in an ordinary letter. Orders may also be placed verbally on the phone, but
verbal orders must be followed up by written document to avoid misquotation and the supply of
wrong items. The order contains.

a) The description of the goods required.

b) The quantity ordered

c) Price, as given in the quotation or catalogue.

d) Delivery date and cost of carriage.

e) The terms of sale - That is cash or credit and any discount offered.

5. The Invoice: this is the bill sent by a supplier to his customer containing details of the goods
supplied on one order. The invoice contains

 A description of the goods

 The quantity supplied
 The unit price and the total amount due from the customer
 The terms of sales e.g. Trade discount if available.
 The names and addresses of buyer and seller
 The order number

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The invoice is very important because:

 It tells the buyer the amount he owes the supplier.

 It is used by the supplier for accounting (i.e) book-keeping purposes.
 The buyer may also verify if everything ordered has been sent by checking the goods
delivered against the invoice.
 A foreign import invoice is used to calculate customs duties.

6. Advice Note - The advice note is sent to advice the buyer that the goods ordered have been
despatched. It is usually sent ahead of the goods. It specifies the method of transport used, date
of despatch, quantity and description of the goods. If the goods do not arrive within a reasonable
period of time the buyer should advise the seller. As the advice note usually shows what is on the
invoice, it provides an opportunity for the buyer to spot any mistakes, which can then be
corrected quickly or in advance before the goods arrive. In addition, it also enables the buyer to
prepare the necessary space for the goods before they arrive.

7. Delivery Note: This is used when goods are sent by the suppliers own truck. It contains a detailed
description of the goods including the quantity and number of packages. Some companies use
delivery notes, where the truck driver would obtain the signature of the consigned on delivery of
the goods and keep a copy as proof of delivery. The customer can check the items delivered
against this note. So that any errors can be quickly spotted. This is particularly important when
orders are delivered in parts.

8. Consignment Note: This is a document used when sending goods by hired transport. It is a
request and instruction to the carrier to accept and deliver a certain consignment to the
consignee. It is made out in triplicate. The carriers driver will sign one copy and give it to the
sender who will keep it as his receipt. It contains the address and name of the consignee, a
description of the goods, the quantity of goods or number of packages and statement of who is
responsible for any possible damage to the goods and freight charges the consignment note is
sent together with the goods and the consignee signs it to acknowledge receipt of them when
the goods arrive. The carrier will then return this copy to the consignor when claiming the freight
charges.

9. The credit note: This document is sent to a customer who has been overcharged. A credit note
may be issued if. Goods are supplied in smaller quantities than shown on the invoice, some goods are
delivered in an unsatisfactory condition and had to be returned. Goods wrongly supplied are sent
back. The Credit note is important because it corrects the mistake that appears on the invoice. It is
usually printed in red ink to show that money is going out from the business.

10. Debit Note: This is a document sent to the buyer if he has been undercharged. In other words
the debit note asks the buyer more. It may be issued if. Some delivered items are not shown on the
invoice; Pricing errors are made on the invoice, calculations went wrong on the invoice. The buyer
has kept samples that were sent by the seller. The importance of the debit note I that is informs the
buyer of the undercharge and claims the extra amount outstanding.

11. The statement of account: The statement of account is a summary of all transactions made
between the buyer and seller during the month it is sent by the supplier to the buyer every month.
The statement of account contains: The balance owing at the beginning of the month, the amount of
invoices issued during the month, any payments made during the month, and any credit or debit
notes issued during the month and the net amount owing at the end of the month.

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This down it is important for three main reasons.

1. Firstly it confirms the transactions made during the month.

2. Secondly, it reminds the customer that payment is due.

3. Lastly, it enables the buyer to compare the accounts records kept by the supplier with his own
records.

12.Cash Receipt : - Each time we pay cash for something, a cash receipt Is given as a proof of the
transaction. In many cases it is only a still slip which most people throw away. It is important that
receipts are an important document and should not be discarded but filed.