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

Meet Linda. She just finished her 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 her studies, Linda learned about different accounting practices and in her new position, she will be mainly working in receivables management or accounts receivable. So, what would be the main tasks of a receivables management accountant? Let’s first look at the operations of the Bike Company. They sell their bicycles and e-scooters daily, which results in numerous outbound deliveries, customer billings and invoices and incoming payments that need to be processed. Although these tasks are distributed among different roles within the company, Linda’s main job is receivables management accounting.

Receivables Management Accountant Tasks:

• Payments Collection and Monitoring. When material or stock is sold, a customer is automatically issued an invoice to be recorded in the company’s accounting and posted to the relevant accounts. The accountant is responsible for checking and monitoring invoice accuracy as well as collecting payments.

• Posting Correction. If there is inaccurate information entered into the accounting system (such as an incorrect invoice amount), a receivables management account would need to correct the issue.

• Invoice Reporting. An accounts receivable accountant generates various reports regarding customer invoices. An example is determining the total amount and type of open receivables and the length of time for payment.

• Dunning and Correspondence. If there are open invoices that are not being paid on time, the company can send out official Dunning correspondence communications as a reminder for payment. They can also issue other forms of customer correspondence such as an account balance statement.

• Down Payments Collection. If a negotiated down payment before shipping is requested and provided, a receivables management account would process it in the system.

• Periodic Activities. During financial closing, a receivables management accountant can send out balance confirmations, perform foreign currency valuations, make receivables value adjustments, and regroup receivables items within the balance sheet based on legal requirements.

Linda will be working closely with customers and other departments of the Bike Company that are involved with sales and distribution. However, Linda has never worked with SAP before. So, she would like to understand how receivables management domain is represented within the SAP system.

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

Receivables Management is work area within SAP that handles accounts receivable transactions. The accounting department takes care of open invoices management and incoming payment processes. It is tightly integrated with sales & distribution.

Receivables Management functions within SAP can be summarized in 6 main parts:

• Account Management. Record and maintain all necessary master data for your suppliers.

• Invoice Management. Within this domain, an accounts receivable accountant would check and monitor all outgoing invoices and perform corrections if necessary.

• Incoming Payments. The functions of this domain support receivables management accountants in processing incoming payments from the customers. Receivables are cleared using the electronic bank statement import or via the payment program’s direct debit function.

• Dunning. An accounts receivable accountant can issue official dunning notices reminding the customers about paying the overdue invoices.

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

• Customer Analytics. Here you can profit from various embedded business intelligence functions that provide key performance indicators, such as days sales outstanding, overdue receivables, or aging analysis.

On Linda’s first day of work, the Bike Company formed a new customer relationship with a company called Velotics, a bike-sharing company, that runs bike renting and sharing stations in different urban areas. Since this Customer is new, it needs to be represented in the company’s SAP system. This is a perfect chance for Linda to understand the process of how a new customer is handled in the SAP system. First, a new master data record for Velotics 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 customer in the system, Linda must follow 3 mandatory steps while creating a business partner account:

• 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 fields related to this specific role. In our case, Velotics will have a Customer role, meaning that it would contain accounting and sales 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:
  • Sales organization: The connection to the sales department of your company
  • Distribution Channel: How your goods or services are being sold
  • Division: What kind of goods or services are being sold
• Optional:
  • 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

Linda created a new master data record for Velotics. A few days later the customer placed its first order and billing documents together with an invoice were issued. Now the invoice needs to be checked in the system and the customer will need to eventually pay it.

Linda recognizes that these tasks are part of a bigger process called Lead-to-Cash.

Lead-to-cash is a business process that starts with finding customers, creating sales opportunities, providing customer offers, leading customer to place the order, ship ordered goods or services to the customer and finally process customer payments for these goods or services. Many different areas of Contact to Lead, Lead to Opportunity, Opportunity to Quote, Quote to Order, Order to Cash and Deliver to Invoice are part of the Lead-to-Cash process. The accounting department and the tasks Linda is involved with are part of the Order to Cash sub-process called Invoice to Cash.

The Invoice to Cash sub-process starts within the Customer Invoice Management, where billing documents together with the customer invoice are created in the system.

The customer invoice may be created in one of the following ways:

• Invoice entry with sales order and billing documents from sales & distribution domain
• Invoice entry without sales order
• Via billing plan
• 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 receivables management accountant can take over further process steps:

• Invoice customer
  • Customer invoice creation
  • Customer invoice review
• Process accounts receivable
  • Open items clearing
  • Open items monitoring
• Manage and process collections / incoming payment processing
  • Electronic bank statement import
  • Single incoming payment
  • Down payment
  • Direct debit with the payment program
• Correspondence
  • Manage payment advices
  • Issue payment confirmations
  • Issue balance confirmations
• Customer analytics
  • Reporting on outstanding payables
• Account management
  • Customer master data creation and maintenance

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

• When you invoice your customer, you can create invoice from the billing documents or from scratch
• This step records this customer invoice in your accounting system and all amounts are posted on your Customer (Accounts Receivable) and G/L accounts​
• Then, based on the payment terms, the payments for the invoice is collected​
• If the customer didn’t pay in full, a payment difference needs to be documented and posted
• After the incoming payment is processed, open customer invoices become cleared
• Finally, correspondences like payment confirmations may be produced​

Linda creates the Customer invoice for Velotics in the system. To make sure that all necessary information was recorded, she 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 Linda 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

A finance document has 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 customer transactions, the company code is the invoicing party, 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.

A 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 customer invoice is created in the system, the amounts are posted to the relevant accounts (including taxes) and the payment for this invoice is expected to be paid within the negotiated payment terms and with customer’s preferred payment method.

Sometimes it is necessary to issue official communication letters to our customers. In other words – customer correspondence. After receiving some Bike Company’s invoices, Velotics would like to have an account statement for its account in the Bike Company’s SAP system, in order to make sure that the posting information was consistent. Linda, as a receivables accountant, is the right person to take care of this matter.

Sending customer correspondence is an official way to communicate with your business partners. An account statement is just one example of it. Every business partner, for example customer, has its own account in your SAP system, where all open and closed transactions are listed.

In order to compare these transactions with the information in their own system, a customer might request account statements from you. This will ensure data consistency across your and your customer’s accounting data.

Balance Confirmation are another form of correspondence. Your company can request from a customer to validate that their records, on a specific date, match with what your company's records are showing.

A Dunning Letter can also be produced. This happens when a payment deadline has been missed and can serve as a reminder to the customer that a payment is due.