This article is relevant if you seeking to understand and see a demonstration of the mechanism to enhance NetSuite’s sales order and drop ship purchase order flows so that you have the proper accounting.
Background
In two previous articles, Solved: NetSuite Drop Ship Purchase Accruals and Learn how to Reliably Measure NetSuite Gross Profit and Margin, I discuss some of the challenges of the way that NetSuite has implemented the dropship feature. For distribution companies that want to minimize actually taking stock of inventory, the dropship flow allows them to create a linked purchase order from a sales order.
The record flows NetSuite offers indeed work to mechanically facilitate the coordination between the drop ship supplier and the end customer. However, in my mind, it misses the mark with the accounting. In many operations, the notification of the supplier shipment to the end customer happens independently of the receipt of the related vendor bill. Most accounting departments have independent functions between the sales order fulfillment objectives and the vendor bill accounts payable processes.
NetSuite will not recognize the cost of the dropship until the vendor bill arrives. Because of this, there is a high likelihood that the vendor bill will arrive late relative to the shipment — so late in fact that the accounting period for which the shipment actually occurred will be closed.
Under the fundamental matching principle we accountants learn in our first-year of accounting schooling, we want to line up our costs with our revenues so that we can make the proper economics assessment for profit or loss. To solve this drop ship accounting challenge, we need to effectively accrue for costs at the time of shipment. The Purchase Order document is perfect for this accrual because it represents our best interpretation of the expected costs of goods.
Automating the Drop Ship Accrual Challenge
I highly suggest reading the article, Solved: NetSuite Drop Ship Purchase Accruals, as I go into depth about the accrual challenge. Since I get a fair number of questions about how this flow actually works so I thought I would present a short (3:26) video demonstration. Note, in the short demonstration, we focus on the following elements:
- Line Drop Ship Location: how the software can distinguish which items should participate in drop ship flows. In some cases, you may have criteria, such as insufficient in-warehouse stock, to trigger a dropship.
- An Item Receipt Emulating NetSuite’s Dropship Item Fulfillment: the key to getting the accrual to work is to have an item receipt operation. We achieve this by having an item receipt that also collects package shipment information. This then can allow us to automatically created a related and linked item fulfillment.
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Get In Front of Your NetSuite Accounting and Operations Flows
In general, when I am invited into client situations with already existing NetSuite implementations, I often find that the operational flows in place had not carefully contemplated the accounting impacts. For many clients, they live with the accounting weaknesses in the dropship flows because few people understand the issue and have any offer to resolve. Thus my firm often helps organizations untangle these kinds of challenges. If you are ready to get in front of your NetSuite related challenges, let’s have a conversation.
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Marty Zigman
Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.
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In the video the receipt and fulfillment is done from one page, is that a script?
Yes, that is correct. Our logic emulates Native dropship behavior combining those steps together.
Marty
I have a customer that has goods drop shipped from the factory of our vendor but we ship DDP. Also complicating matters is vendor invoices us at load date and we invoice customer at sail date, a difference of 5-14 days. How best use NS to properly account for this?
Hello Kendall,
That is a complicated flow. Property rights do not transfer to the owner until the goods are received — assuming DPP means that you are responsible for the duties and risks remain with you until they are received.
It also appears you are doing something called Drop Ship Direct Import business. This is a complicated flow. One that I have done some design work with our Prolecto Freight Container — but not with NetSuite Inbound Shipment.
I should write an article about it. There is no easy way to do it — model the transactions carefully in your sandbox to mimic a) logistics and b) account for property rights and related accounting. Consider carefully the matching principle for both revenue and costs. Then, use some script to help bind the disjointed process together. We can be engaged to help. Contact us at this link: https://www.prolecto.com/contact-us/
Marty