Advanced SAP Lockbox and Cash Application Automation

June 15th, 2011 Presented By: Sashi Narahari President & CEO HighRadius Corporation

Copyright 2011, HighRadius Corporation. All rights reserved.

Is this your Cash Application Analyst?

http://www.youtube.com/watch?v=SLyu43Jml WA&feature=related

Agenda

Review of Cash Application KPIs Standard SAP Lockbox + Minor Enhancements Advanced Cash Application Key takeaway points

Cash Application KPIs

On-Account hit rate % of checks cleared On-invoice hit rate % of dollars auto-applied

What is the true performance indicator?

% of remittance line items auto-applied (invoices & deductions) requiring NO further MANUAL processing

How do customers Remit?

Cash Transfer
Check ACH

Payment Details
Check Remittance EDI 820 / 812 Email Fax Customer Websites

Wires or other EFTs

Two Solution Architectures to Consider

1. Most of the Cash Application processing within SAP ECC 2. Pre-Process outside SAP and post via SAP lockbox

Standard SAP + Minor Enhancements

Solution Architecture

Process payment files from banks and customers directly into SAP Perform matching algorithms during cash posting in SAP

Scenarios easily handled via standard SAP

Cash Transfer
Check ACH

Payment Details
Check Remittance EDI 820 Email Fax Customer Websites

Wires or other EFTs

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Best Practice to get the Remittance Data

Cash Transfer Payment Details
Scenario 1: Get BAI2 from the bank containing both check header and item data. Note that you will have to engage the bank to key-in line item data

Check

Check Remittance

ACH Wires or other EFTs

EDI 820

Scenario 2: Get EDI 823 from the bank containing the EFT header data. Get EDI 820 directly from the customer

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What is BAI/BAI2?

Originally developed by Bank Administrative Institute (BAI) in 1971 BAI was the initial format. But can only capture check header level data. Not good enough to auto-clear invoices BAI2 developed in 1982 is the new format that can capture both header and remittance line items
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Sample BAI2 File from Bank

10070080000 70080000 0804292251 ------- this has date and time stamp 5800000222 08042970080000 70080000 lockbox number, date, bank account information 6001001000059000076070012 5858585 010152512 6 record has check amt 400100156011800000037 00001200000000000000GH Inv No & Inv amount 400100156011800000038 00001400000000000000GH 400100156011800000039 00001600000000000000GH 400100156091800000040 00001800000000000000GH 40010015601 00000000000000010000GH - standalone deduction 6001001000067000076070012 5858585 010153512 customers Routing /Account number 400100156011800000041 00001400000000010000GH customer reason code 400100156011800000042 00001600000000000000GH 400100156011800000043 00001800000000000000GH 400100156091800000044 00002000000000000000GH 40010015601 00000000000000010000GH 6001001000075000076070012 5858585 010154512 400100156011800000045 00001600000000010000GH- invoice specific deduction 400100156011800000046 00001800000000000000GH 400100156011800000047 00002000000000000000GH 400100156091800000048 00002200000000000000GH 40010015601 00000000000000010000GH 8000000222 08042900030002010000 trailer record with batch amount for that day 9999900

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EDI: Order-to-Cash Transactions

EDI Message
EDI 823 EDI 820 EDI 810 EDI 812 EDI 821

SAP IDOC/Message
LOCKBX lockbox file REMADV remittance advice INVOIC01 - Invoices DEBADV Debits FINSTA Bank statement

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Implementation Architecture for Check Payments

BAI2 File

Lockbox Program: RFEBLB00

SAP A/R

UserExits / BaDIs

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Custom

Implementation Architecture for ACH/Wires (EFT)

EDI 823

LOCKBX IDOC

Stage in Payment Advice Tables

EDI 820

REMADV IDOC

Insert 820 line items in staged 823 header data

User-Exits / BaDIs Customers

Lockbox Program

SAP A/R 16 Custom

Lockbox Algorithm Modification

Two Business Add-Ins/User Exits for standard SAP lockbox program

EXIT_RFEBLB20_001
Called exactly once per check, immediately before payment advice is created

EXIT_RFEBLB20_002
Called for each invoice being paid by check. Can change fields such as customer number, company code, invoice number, document number, reason code etc.

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Conclusions

When to consider standard SAP + Minor Enhancements?

High volume of customers :
Pay via check & bank is keying in remittance details Pay via ACH & provide EDI 820 for remittance details

Invoice matching rules are relatively simpler such as reference number based matching that can be implemented via lockbox user-exits Not too many customer-specific rules
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Advanced Cash Application Automation

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When to Consider?

Customers provide remittance details in myriad of forms: EDI 820, customer websites, email, check remittance, fax etc High volume of check remittance due to which bank keying fees is too high High volume of deductions and lack of standardization across customers Complex rules required to increase hit-rate
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Solution Architecture

Pre-Process payment files from banks and customers outside of SAP Perform matching algorithms outside of SAP Send a cleansed & transformed file to standard SAP lockbox to auto-apply

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Cash Application Automation

Bank
Paper Checks
Transformed Header & Item Details (BAI2

Customers

Lockbox Programs

SAP A/R

Cash Application Pre-Processing Engine

Transformation Rules Invoice Rules Deduction Rules Web
Email

Payment & Remittance

Walmart

Data Aggregation

OCR

EDI

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Customer Portals

First things first: Electronic Data Capture

EDI
Process EDI 820/812 data from customers Process BAI/BAI2/EDI 823 data from banks

Website / Portals
Auto-login via Web Aggregation technology to customers websites/portals and sweep data

Emails
Email parsing agents to pull attachments and parse data

Paper
Optical Character Recognition (OCR) to parse check and remittance data
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Web Aggregation Technology

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Web Aggregation
Automate information gathering from websites Similar to vertical search engines like kayak.com, shopping.com etc
Web Aggregation
Roadway Tracking Info / POD

Bank Lockbox UPS

Customer1

Customer2 Remittance / Claims Info

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Optical Character Recognition (OCR) Technology

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Sample Check Remittance Advice

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Data Extraction Template

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Load: Images to the OCR Tool

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Recognition: Text from Images

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Recognition: Remittance Details in Text

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Export Recognized Data

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OCR Output

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Demonstration

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Cash Application: Bank Deposit Details

Bank deposits downloaded on daily website via a bank BAI2 file or website

Remittance header details from the Bank

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Cash Application: Remittance Details

Remittance details from EDI, Web, Email and scanned checks are captured electronically

Cash Application: Remittance from Web

Electronic capture of data from website

Original website with remittance details

Cash Application: Remittance from Email

Electronic capture of data from email Original email with remittance details

Cash Application: Remittance from EDI

Electronic capture of data from EDI 820

Cash Application: Remittance from Check

Electronic capture of data from check via OCR

Original check with remittance details

Cash Application Transformation Rules

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Sample Rules for One Customer

Rule # Rule Name Rule Description IF Reference field starts with LDF' THEN Net amount is marked as deduction amount, Set the deduction reason code as 12' IF Reference field starts with XD' THEN Net amount is marked as deduction amount, Set the deduction reason code as 13' IF Reference field starts with 'PKL' THEN Net amount is marked as deduction amount, Set the deduction reason code as 14' IF Reference field starts with 'RV' THEN Net amount is marked as deduction amount, Set the deduction reason code as 15' IF Reference field starts with 'SH' THEN Replace 'SH' with 19

1Deduction ReasonCode Mapping 1

2Deduction ReasonCode Mapping 2

3Deduction ReasonCode Mapping 3

4Deduction ReasonCode Mapping 4

5Data Massaging Rule 1

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Sample Rules for One Customer (Contd..)

Rule # Rule Name Rule Description IF There are two line items with same reference field THEN Add up total amount paids, Discount amount and Net Amount paids Retract one item IF Reference field is a valid Invoice Number(Has a record in Open AR) AND Total amount paid is less than Open AR Invoice Amount AND (Invoice Amount - Total Amount paid) > $25 THEN Create a new deduction item with deduction amount equals (Invoice amount - Total Amount Paid) Set the deduction reason code for the new deduction item as UN' IF Reference field is a valid Invoice Number(Has a record in Open AR) AND Total amount paid is less than Open AR Invoice Amount AND (Invoice Amount - Total amount paid) <= $25 THEN Create a new deduction item with deduction amount equals (Invoice amount - Total Amount Paid) Set the deduction reason code for the new deduction item as WO'

6Combine Items 1

Open AR Matching Rule 1 - Short 7pay - Unknown discount

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Open AR Matching Rule 2 - Short 8pay less than $25

Sample Rules for One Customer (Contd..)

Rule # Rule Description IF Reference field is a valid Invoice Number(Has a record in Open AR) AND Discount taken greater than 0 AND (Discount Taken - Open AR Discount Allowed ) > $25 THEN Create a new deduction item with deduction amount equals Open AR Matching Rule 3 - Unearned (Discount Taken - Open AR Discount Allowed) 9discount Set the deduction reason code for the new deduction item as UD1' IF Reference field is a valid Invoice Number(Has a record in Open AR) AND Discount taken greater than 0 AND (Discount Taken - Open AR Discount Allowed ) < $25 THEN Create a new deduction item with deduction amount equals Open AR Matching Rule 4 - Unearned (Discount Taken - Open AR Discount Allowed) 10discount less than $25 Set the deduction reason code for the new deduction item as UD2 Rule Name

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Cash Application: Payments

Payment header from bank is matched to the remittance details

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Cash Application: Transformation Rules (Example)

Remittance details before transformation

Remittance details after transformation

Cash Application: Transformation Rules (Example)

Remittance details before transformation

Remittance details after transformation

Cash Application: Transformation Rules (Example)

Remittance details before transformation

Remittance details after transformation

A/R Extract

Cash Application: Transformation Rules (Example)

Remittance details before transformation

Remittance details after transformation

SAP FICO Lockbox Report

Detailed report of each check and the cash application status

Check application details with which invoices or accounting docs were cleared

Dispute case information (if any)

Key Takeaway Points

Carefully evaluate which is the right option for you: Process everything within SAP or PreProcess & Post in SAP Trade-off is a function of the following factors:
Do most of your customers provide remittance via Check Remittance or EDI 820? Are the bank fees reasonably affordable for data keying? Are the matching algorithm rules relatively simple or you need complex and/or several customer-specific rules? Is the deduction volume high and there is lack of standardization across customers on how they deduct?

Last but not the least: Cash Application Automation is an ongoing project!
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