Describing Payables Management and Its Role in Company's Financial Operations

Meet José. He just finished his business administration studies and started working in the accounting department of the Bike Company. Bike Company produces bicycles and e-scooters made of sustainable materials.

During his studies, José learned about different accounting practices and in his new position, he will be mainly working in payables management or accounts payable.. So, what are the main tasks a payables management accountant would do? So, what would be the main tasks for a payables management accountant? Let’s first look at the operations of the Bike Company. They purchase raw materials and other supplies daily, which result in numerous deliveries, supplier invoices and payment runs that need to be processed. Although these tasks are distributed among different roles within the company, Jose’s main job is payables management accounting.

Payables Management Accountant Tasks:

• Supplier Invoice Entry. When a certain material or other stock is ordered, a supplier issues an invoice that needs to be recorded in the company’s accounting. The invoice consists of the order items and the total amount that needs to be paid to the supplier. Entering an invoice into the system would mean that the invoice amount gets posted to the relevant accounts. Sometimes this task may be shared with a colleague from the procurement department, for example a purchaser.

• Posting Correction. When an invoice enters the accounting system, it could always happen that some information was entered incorrectly. For example, if the total invoice amount entered in the system differs from the original invoice. A payables management accountant would be the one to correct this issue.

• Preparation of Payments. Obviously, when invoices arrive, they need to be paid. A payables management accountant prepares the payment run according to the payment terms and payment methods that were settled with the supplier.

• Down Payments. Sometimes, a supplier may request a down payment before the order gets delivered. The amount of this down payment depends on the terms negotiated with the supplier. A payables management accountant issues the down payment, so the negotiated terms could be met.

• Payment Run. Payment run is an activity that creates an outgoing payment for one or multiple invoices at the same time. It generates a payment object depending on the payment method. For example, it could be a physical payment object like check, or an electronic payment object like bank transfer.

• Periodic Activities. In terms of financial closing there are certain periodic activities that a payables management accountant would do. These activities include sending out account balance confirmations to the suppliers, performing foreign currency valuations to the invoices posted in foreign currency and regrouping payable items within the balance sheet based on legal requirements.

José will be working closely with suppliers and other departments of the Bike Company that are involved with procurement. However, José has never worked with SAP before. So, he would like to understand how payables management domain is represented within the SAP system.

Payables Management (also called Invoice Management) is a separate domain within SAP that provides information about company’s supplier-related financial operations. It can be seen as a separate work area that creates a financial overview of company’s supplier transactions. You can view each and every company’s supplier, process invoices and payments, perform supplier analysis and communicate in an official way.

Payables Management is a work area within SAP that handles accounts payable transactions. The accounting department takes care of invoice entry and payment processes. It is tightly integrated with Sourcing & Procurement.

Payables Management functions within SAP can be summarized in 4 main parts:

• The first part is Account Management. Here you will record and maintain all necessary master data for your suppliers.

• The second part is Payment Processing. The functions of this domain support payables management accountants in executing payments to the suppliers and ensure that they are made at the best possible time. Payables are paid using the payment program. The payment program supports all standard payment methods as well as country-specific payment methods.

• The third part is Correspondence. It enables formal communication with a supplier. You can send out balance confirmations, account statements, and other forms of correspondence according to your requirements.

• Finally, we have Supplier Analytics. Here you can profit from various embedded business intelligence functions that provide key performance indicators, such as days payable outstanding, overdue payables, or aging analysis.

On José’s first day of work, the Bike Company created a partnership with a new supplier, Tireless Tires, to supply them with tires for their bike production. Since this supplier is new, it needs to be represented in the company’s SAP system. This is a perfect chance for José to understand the process of how a new vendor is handled in the SAP system. First, a new master data record for Tireless Tires needs to be created in the SAP system. General data such as the company’s name, address, bank connection, etc. is entered. Now is when the concept of a Business Partner comes into use. By creating this Business Partner entity in the system, we can maintain relationships between other identified roles (such as suppliers and customers) and their relationship to our original Master Business Partner entity.

Initially, a business partner is generic. It is an entity that does any kind of business with your company. For example, it could be your supplier, your customer or maybe even both.

In order to accurately represent the new supplier in the system, Jose must follow 3 mandatory steps while creating this new Business partner:

• Choose business partner category
• Assign one or multiple business partner roles
• Decide on a business partner grouping

Choosing a partner category will determine which generic master data fields are provided by the system.

You can choose from the 3 following categories:

• Person: A private individual, for example a landlord
• Organization: A legal entity, for example a company
• Group: A group of people, for example a community

Let’s first look at the Business Partner role. You can specify your relationship to this business partner with a single role, multiple roles, or even an unlimited number of roles depending on your business context. Each role can be identified in your Master Record.

To structure your business partners, you need to assign them to the respective groupings. Once the business partner master record is created, it will get a unique number to get identified within the SAP system. What kind of number will it be, depends on the business partner grouping.

Each grouping is connected to a number range, which can be classified based on two categories:

• Internal number assignment

  A number is automatically assigned from the grouping’s number range by the system

  • May only contain numbers (numeric)
• External number assignment

  A number is either manually entered by the user or gets transferred from a different system domain

  • May contain numbers (numeric)
  • May contain letters (alphanumeric)

These 3 steps are essential for business partner master data creation. The selection performed during these steps is seen as business partner general data.

There are 2 areas of business partner data:

• General Data: Contains basic information
• Role-specific data: Contains business context specific information

The following fields are located within the general data:

• Mandatory:
  • Business Partner Number: Unique Business Partner identifier in the system
  • Business Partner Name: The real name of your Business Partner
  • Business Partner Role: The assigned roles. Unlimited number of roles can be assigned
  • Business Partner Grouping: Business Partner number logic and determination
  • Address: Business Partner's physical address
• Optional:
  • Language: Official communication language between Business Partner and yourself
  • Bank Data: Business Partner's bank and bank account number that will be used in the payment run

Depending on the role assignment, there might be additional field related to this specific role. In our case, Tireless Tires will have a Supplier role, meaning that it would contain accounting and logistics related data.

• Mandatory:
  • Company Code: The connection to the financial accounting department of your company
  • Reconciliation Account: A G/L account that represents this Business Partner's balances in the balance sheet
• Optional:
  • Payment Terms: Until when and on what conditions will the invoices connected with this Business Partner need to be paid
  • Payment Method: The form of payment, e.g., a bank transfer or a check

• Mandatory:
  • Purchasing organization: The connection to the logistics department of your company
• Optional:
  • Purchasing group: A buyer or a group of buyers responsible for particular procurements
  • Payment terms: Until when and on what conditions will the invoices connected with this Business Partner need to be paid
  • Incoterms: International commercial term for international trade rules

José created a new master data record for Tireless Tires just in time. A few days later an invoice arrives for the first batch of new tires that the Bike Company has ordered. Now it needs to be recorded in the system and eventually paid.

José recognizes that these tasks are part of a bigger process called Source-to-Pay.

Source-to-pay is a business process that starts with finding, negotiating, and ordering the goods and culminates in the final payment for these goods. Many different areas of Sourcing, Procure to Receipt, Request to Resolution, Manage Supplier and Collaboration, and Invoice to Pay are part of the source-to-pay process. The accounting department and the tasks José is involved with are part of the subprocess Invoice-to-Pay.

The Invoice-to-Pay subprocess starts within the Supplier Invoice Management, where the incoming supplier invoice enters the system.

When we are entering the supplier invoice, we have complete invoice information in real time, which may be entered in one of the following ways:

• Invoice Entry with Purchase Order from Materials Management
• Invoice Entry without Purchase Order
• Entry of recurring Supplier Invoices
• Mass Upload of Invoices

There are automated workflows in place. Which means that there is:

• Automated document exchange between different departments, for example accounting, logistics and warehouse management
• Automated and standardized resolution and approval process, which routes invoices to the right people at the right time

Once the invoice is in the system, a payables management accountant can take over further process steps:

• Payment Processing
  • Payment Run
  • Single Outgoing Payment
  • Down Payment
• Correspondence
  • Manage Payment Advices
  • Issue Payment Confirmations
  • Issue Balance Confirmations
• Supplier Analytics
  • Reporting on outstanding payables
• Account Management
  • Supplier master data creation and maintenance

Let’s discover some important stages of a supplier invoice lifecycle​

• When your supplier creates an invoice, eventually it arrives at your company either in physical or electronic form​
• When it gets entered in your accounting system and all amounts are posted on your supplier and G/L accounts​
• If necessary, the entered invoice can be corrected​
• Then, based on the payment terms, the invoices are selected for the payment run​
• After the payment run is executed, open items are cleared and payment objects are generated
• ​Finally, correspondences like payment advices or payment confirmations may be produced

José enters the supplier invoice from Tireless Tires in the system. To make sure that all necessary information was recorded, he decides to take a closer look at its content. When an invoice gets posted it becomes an accounting journal entry or in other words a finance document. After browsing through the document’s content José recognizes 3 main areas:

• Document header, where general or basic information is displayed
• Document line items, where you can see the accounts and the amounts
• Tax area, where all tax-related information is displayed

Finance document have one header area which contains basic information that is relevant for the whole document:

• Mandatory:
  • Journal Entry Date: The date that is written on an invoice.
  • Posting Date: The date when the invoice is recorded in the system.
  • Journal Entry Type: Classification of the transaction, for example it is an invoice, a credit memo, or maybe something else.
  • Company Code: In supplier transactions, the company code is the invoice recipient, which in our case is the Bike Company.
  • Transaction Currency: The currency of the invoice amount. You cannot have multiple currencies on one invoice.
• Optional:
  • Reference: Some reference number to have additional invoice identification in the system.
  • Header Text: Optional description of the posted document.

Finance document can contain up to 999 line items. Each line item brings the information about the amounts that are posted to the relevant accounts:

• Mandatory:
  • Account (G/L Account): Which account receives the posting
  • Debit: Amount to be debited tied to a debit posting key
  • Credit: Amount to be credited tied to a credit posting key
• Optional:
  • Item Text: Additional description of the document line item

• Optional:
  • Payment Method: How will this invoice be paid, for example via bank transfer

• Optional:
  • Payment Terms: Until when this invoice needs to be paid

• Mandatory:
  • Tax Code: The basis of the tax calculation
  • Tax Account: The G/L account that collects tax postings
  • Tax Base Amount: The net amount for which taxes apply
  • Debit: Tax amount to be debited tied to a debit posting key
  • Credit: Tax amount to be credited tied to a credit posting key
  • Tax Rate: Tax percent value

So, in a nutshell, when a supplier invoice enters the system, the amounts are posted to the relevant accounts (including taxes) and this invoice needs to be paid within the negotiated payment terms and with the preferred payment method.