Defining How to Apply Cash in the System

Cash reconciliation is the process of matching and verifying incoming payments against outstanding invoices or financial records. These payments typically come from customers, but may also originate from vendors, partners, or other sources.

Aspects of the cash reconciliation process are as follows:

• A significant volume of payments needs to be processed manually, for example, if payment contains no or incomplete invoice references, master data is not up-to-date, customers pay multiple invoices at once, and so on.
• Accounts Receivable accountants have to investigate such issues.
• Tailored rules were required to achieve higher automation, reflecting customer and country specifics. This carries high implementation costs.
• Automation with simple rules is not sufficient, as many payments do not contain sufficient remittance information.
• Accounts Receivable accountant needs to consider many possible exceptions when manually looking for invoices.
• This process is very time-consuming and labor-intensive.

For many companies, applying cash to invoices while processing bank statements is a manual task – and leads to large team sizes for order-to-cash organizations. Thus, there is potential for automation.

There is a lot of complexity to the cash reconciliation process when considering the details.

The primary step of the cash reconciliation process involves identifying the correct application of each payment, typically by matching it to corresponding invoices. If a payment cannot be accurately linked to specific invoices, it is then associated with the customer at the account level. This hierarchical approach ensures that all payments are properly accounted for, even when precise invoice matching is not immediately possible.

In addition to sending a payment, the customer may send remittance information by mail, e-mail, web portals, or other sources. The remittance information contains details on what is being paid, for example, what invoices and corresponding dollar amounts. For many companies, the remittance information is key to applying cash.

Another complexity occurs when customers make a single electronic payment for multiple invoices. This makes matching a much more difficult process since you cannot just look at the amounts of payments to match proper payments to the invoices. The remittance information now becomes key as it is the only means of relating the payment to the correct invoices.

What also makes this process complex and error-prone is that customers often enter incorrect payment information, such as wrong invoice numbers, when paying invoices. This makes it difficult for automated rules to clear the correct invoice. Additionally, the involvement of our customers' customers (who are the end-payers) adds another layer of complexity to the process.

Discover the essential steps for automating Cash Reconciliation in the SAP S/4HANA Cloud system, from invoice receipt to payment matching and customer identification. Select the play button to learn more: