Using SAP Cash Application and the Benefits

Objectives

After completing this lesson, you will be able to:
  • Outline reasons for using the SAP Cash Application
  • Identify challenges of the Cash Application process

Why is the SAP Cash Application Needed?

Automation with Machine Learning (ML)

Typical high level process of Order to Cash.

Now, let’s move on with some further details on the cash application process and our new product SAP Cash Application Add-on for Contract Accounting.

As explained earlier in this course, SAP BRIM is typically handling high data volumes and automated processes are crucial. Especially the cash application process can be related to high manual effort and costs if the system is not able to provide the right clearing proposals for incoming payments. Therefore, the new SAP Cash Application Add-On is now using a Machine Learning approach to assign payments to open items and to further streamline this process.

Challenges of the Cash Application Process

Challenges of growing demands converted into detailed questions.

Before we look at the SAP Cash Application itself, we will first clarify why such an Add-On is even needed. Therefore, we are going to look at one central point now: "Why does a head of Shared Service or Receivables care about the automation rates of cash application?"

To understand this topic better here are some questions that emphasize the importance of this.

Question or ChallengeWhat's Behind this?
How can we support this growth in payments without a huge expansion to team size?The Business wants to grow the number of customers but you want your AR team to be able to process the increased volume of payments without adding more accountants to the team.
Why are our existing rules less effective over time?This is the weakness of rules-based solutions available in the market. Machine Learning doesn’t have this weakness. Conditions in the system might change over time and rules need to be adapted which can happen automatically with Machine Learning instead of manually.
Uncleared invoices are leading unjustified bad payment behavior assessment of customers.This might affect the way premium customers are treated, for example with payment conditions. You want to treat your good customers in a way that improves the relationship with them, making sure they will remain good customers.
Is there a solution that fits seamlessly into my SAP landscape?Competitive solutions may not be aligned with your roadmap. Additional interfaces add complexity and increase cost.
Cash sitting on the customer’s account is driving up our DSO metrics.This is the metric AR and Shared Services teams care about the most – it’s key to their performance reviews. Therefore, it is key to assign incoming payments to open items as quickly as possible.
How can our process be improved for customers that don’t send remittance?This is important if you’re in a country where customers and banks don’t send information consistently.
What could Machine Learning do to improve our matching rates?Tech-savvy companies want to see how this use case is addressed by Machine Learning.

Challenges with Incoming Payments

Understanding Challenges of the Cash Application Process

Unmatched incoming payments will lead to a Clarification case that needs to be identified for matching in a manual activity by the Receivables Accountant.

The term "cash application" describes the accounting process of receiving cash and assigning the incoming cash to the appropriate party. Cash application is a part of the Accounts Receivable process that applies incoming payments to the correct customer accounts and invoices. To do this, the first step is to determine where to apply the cash. This is done by matching the payment to the associated invoices.

  • If, for some reason, an incoming payment cannot be correctly matched to its associated invoice(s), the payment may be applied to the customer at the contract account level. Once this is done, the payment can be applied to reduce the open accounts receivables for that customer.
  • There are two ways to apply cash: manually or automatically. Although the process may sound simple, it can be very complicated when considering companies often have thousands of customer accounts and that payments are not typically made per invoice but instead for multiple invoices. The complexity increases when considering exceptions such as short payments, discounts, mismatching amounts, and so on.

Lowering Days Sales Outstanding (DSO)

An efficient cash application process is key to a lower Days Sales Outstanding (DSO). Days of Sales Outstanding is the primary KPI used to measure the effectiveness of an Accounts Receivable team. An efficient cash application process also gives more control over a company's cash flow and liquidity. Control over liquidity is key to all companies.

Due to the high document volume, processes in customer financial management have been automated as much as possible already. Still, applying cash to invoices while processing bank statements is often related to manual activities – and leads to large team sizes and high DSO for order-to-cash organizations.

Customer Financial Management enables companies to set up complex and flexible rules based on clearing control functionality.

  • Even without Machine Learning, on average, 96% of the items can already be cleared automatically based on these rules.
  • Due to the high document volume, the remaining 4% still make a significant volume of payments that must be processed manually.
  • For example, if payments contain no or incomplete invoice references, master data is not up-to-date, customers pay multiple invoices at once, and so on. AR accountants must investigate manually in such cases, and this can be a very cumbersome, manual task which takes lots of time.

Automation with simple rules is not sufficient anymore, as many payments do not contain sufficient remittance information. Tailored rules were required in the past for achieving higher automation, reflecting customer and country specifics. This carries high implementation costs.

AR accountants need to consider many possible exceptions when manually looking for invoices which is a too time-consuming process.

Cash Application Process - Steps that Happen to Manually Apply Cash

To understand the process of cash application even better, let's discuss the steps that happen to manually apply cash.

StepExplanation
Invoice sent to customerFirst an invoice is sent to the customer. This invoice may include information regarding multiple entities or multiple products.
Payment receivedThe customer pays one or multiple invoices with one payment. The payment may be by check or by a form of an electronic payment, such as ACH, SEPA, wire, or EDI. The customer payment is received in the daily bank statement. The person applying cash has the information in the note to payee / memo line to help identify the customer who has made payment.
Manual cash application processIf a match is not found using the pre-configured clearing rules, the cash application specialist must view the note to payee or memo field in the bank statement for any hints to determine the customer.
Determine a customerThe cash application specialist may search customer master records to try to identify the associated customer & contract account number on SAP.
Determine invoice(s)Once a customer & contract account is determined, the customer's open items are reviewed, and the open items relevant to the incoming payment are determined. The customer open items are cleared against the incoming payment.
Post on Contract AccountIf the customer can be identified, but the specific invoices being paid cannot be identified, the payment may be posted on the contract account and a follow-up call made to the customer to get the information required.

The SAP Cash Application can help with these manual steps.

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