Identifying Financial Contract Accounting Processes

The invoice of customer CutAbove is posted on their contract account in subledger FI-CA on the contract account of CutAbove. CutAbove must pay their invoice. Karen now passes the contract to O2C’s accounts executive.

Amir is an accounts executive for the O2C Company. His tasks involve creating background processes for:

• Running payment lots.
• Run clearing on contract accounts.
• Run dunning process for open items.

He also checks the customer account for complaints from the customer. Lastly, Amir explains open items and calls the customer requesting open items.

Contract Accounting capability comprises the functions of Contract Accounts Receivable and Payable (application component FI-CA) used for subledger accounting, implementing typical functions of accounts receivable accounting such as posting, payments, and dunning, and is set up to process large numbers of documents.

You can integrate Contract Accounts Receivable and Payable as an integral part of Finance with capabilities in Finance and other solutions to accomplish more business tasks.

We now return to our SAP Billing Innovation Revenue Management Consultant, Finn. In the following video, Finn introduces the process steps involved in SAP Financial Contract Accounting.

SAP FI-CA (Contract Accounts Receivable and Payable) is a subledger for managing high-volume business transactions. It helps businesses manage simplified, customer-specific processes such as posting and document management.

Accounting pain points in high-volume companies are as follows:

• Inaccurate and nontransparent accounting.
• Controlling and reporting are associated with difficult reconciliation and audit assurance.

These pain points can be eased by SAP's optimized key business capability for integrating all internal and external accounting aspects into one aligned solution that follows accounting principles and reconciliation needs.

Industry Specific Operations

Missing industry-specific expertise in other subledger systems is not the subject of accounting in SAP Billing and Revenue Innovation Management (SAP BRIM). Industry-specific operations and features have been adopted to the solution in the past and are still in focus for further developments to lower Total Cost of Ownership (TCO) in implementations and adjustments.

Deal with a Large Volume of Data

Dealing with a mass volume of data and different payment channels, it is difficult to handle the import of masses of payments in various formats and the assignment of them to the appropriate receivables items in subledger.

Huge manual effort is required to clarify the payment assignment, which makes this process slow and expensive. SAP Receivables Management and Payment Handling consider all possible payment channels, and provides a sophisticated and flexible clearing control to assign individual clearing strategies.

In the end, the transparency of the actual outstanding receivables results in better collections and higher customer satisfaction.

Credit and Collection Management Function

The credit and collection management functions of the SAP Customer Financial Management package helps you to make credit decisions and perform collections that are individually tailored to your customers. With the software, you can initiate and monitor internal and external collection activities, and generate strategic credit and collection reports.

The contract account is a unit that groups business partner postings. Before a document can be posted, a contract account must be assigned to a business partner in the role MKK. The contract account data controls the FI-CA processes:

• The clearing category controls payment allocation and the clearing of receivables.
• The dunning procedure determines the dunning levels and the dunning activities.
• The account determination ID is used to determine the general ledger accounts.
• The payment term determines the due date and the cash discount deadline.
• The creditworthiness reflects a business partner's payment patterns.
• The interest key determines the conditions for interest calculation.
• The tolerance group defines limits for payment differences.

A FI-CA document represents a business transaction that results in the update of the subledger and subsequent applications like general ledger, controlling, and cash management.

The business view of a document shows:

• Document header
• Business partner items
• General ledger items

Document types classify different business transactions.

Examples:

• Posting document: for example, open items can be posted in invoicing.
• Payment document: for example, can be posted during incoming payment.
• Write-Offs documents.
• Charges and Discounts documents.

The lifecycle of receivable item in Contract Accounts Receivable and Payable clearly indicates the Contract Accounts Receivable and Payable processes that are handled in FI-CA. These processes include:

• Open items (OI) can be posted in invoicing, dunning, or returns processing. Alternatively, open items can be posted manually in subledger accounting.
• Items relevant for the general ledger are regularly compressed and transferred to the general ledger.
• Cleared documents that have expired can be archived.
• Open and cleared items can be displayed in the account display function.

The document lifecycle clearly indicates the FI-CA processes:

• Documents can be posted as receivables (usual form) and sometimes as payables.
• Documents can be posted in invoicing (usual form), dunning, or returns processing.
• Documents can be posted manually as well.
• Cleared and open items are regularly compressed and transferred to the general ledger.
• Cleared and open items can be displayed using the account balance display.
• Cleared documents that have expired can be archived.

Credit and Collections Management enables your company to operate centralized credit management and process delayed payments.

Dunning is a process carried out to give reminders to customers for their overdue payments. In SAP FI-CA, you can conduct the dunning process and generate dunning letters to be sent out to customers. The system uses parameters like dunning levels, dunning areas, dunning charges, and so on, to govern this mechanism. With each successive parameter change (like an increased dunning level), the tone of the dunning letter becomes more serious.

Dunning by collection strategy is based on business rules that are evaluated at run-time. This allows for a flexible evaluation of a broad range of parameters:

• A collection strategy is assigned on master data level.
• Contract accounts can be treated individually or can be grouped together.
• The evaluation of the business rules within the strategy return the next collection step (and related activities) to be carried out.
• The specific circumstance of an account determines the next collection step.
• The data that can be evaluated in the rules engine include, for example the dunning data, dunning history, credit risk data.

In the following, the process of dunning by collection strategy is described.

1. The Dunning Proposal run takes place.

   The previous screenshot shows the Dunning Proposal Run (FPVA) where all due items are identified and grouped together. The following business rules determine the next collection step before beginning the Dunning Activity Run.

2. As next, the Business Rules Framework comes into place.

   Business Rules Framework

   Apply rules for contract accounts or group of contract accounts.

   Collection Step

   Determine Dunning Activity, dunning interval, charges, and interest as well as alternative Collection Steps​.

   Organization management

   Clerk Determination (Role and Task assignment).​

   Capacity planning and workload balancing

   Determination of a maximum number of reminder letters in a dunning activity​.

   These business rules frameworks, collection steps, and dunning activities ultimately increase the efficiency of the collections process but also can help maintain positive customer relationships even in the face of payment difficulties. Let’s see what a dunning activity run looks like in the system.

3. Based on the rules, the Dunning Activity is created.

Collection is a more advanced stage of dunning.

The process of collection in SAP FI-CA (Financial Accounting - Contract Accounting) is designed to help businesses manage their incoming payments more efficiently. This module aids in identifying overdue payment or outstanding items, classifies them into different collection segments based on defined criteria such as risk category or days in arrears, and automatically initiates the appropriate collection activities.

Collection activities can include automatically generated reminders, dunning letters, or even escalation to a collections agency. SAP FI-CA also allows for individualized management of each debtor. This means that collection strategies can be customized based on the debtor's payment history, credit rating, or other defined parameters. This not only increases the efficiency of the collections process but also helps to maintain positive customer relationships even in the face of payment difficulties.

Furthermore, SAP FI-CA provides comprehensive reporting and analytical tools to monitor the effectiveness of collections activities and to identify trends or issues that can require changes to the collection strategy. These can then be addressed promptly to ensure optimal debtor management and cash flow for the business.