Solutions for SAP

Receivables
Management

Cash Application Automation in SAP

How to leverage emerging trends to increase cash application hit rate

by
Sashi Narahari
CEO, HighRadius

© 2013 HighRadius Corporation

Agenda

• Cash Application Background

• SAP Lockbox Overview
• Architectural Choices
– SAP Enhancements
– Lockbox Preprocessing
• Emerging Trends

2 © 2013 HighRadius Corporation

Cash Application Background
Payments & Remittances

Payments Remittances

Check Check Remittance

ACH EDI 820 / 812

Wires or other EFTs Email

Fax
Credit Card

Customer Websites

Customer self-service on a portal

 How are you currently processing?

Payment Files

BAI, BAI2, EDI 823/820

• Scenario 1: Fully Manual (Bank is not keying in)

• Scenario 2: Checks are good. ACH is 100% manual
• Scenario 3: Checks are good. ACH w/ EDI/CTX is good
• Scenario 4: Checks are good. ACH w/all forms of remittances are good
Why is you lockbox hit-rate low?

• Cash Application for checks is manual (Bank is not keying

in check remittance data)
• Cash Application for EFT payments is mostly manual:
– EDI customers not mapped
– Email Remittances
– Web Remittances
• No remittance
• Complexity of your business
– Invoice matching is not just reference number based match
– Deductions (Short-payments etc)
– Cash Discounts
– Multiple business units, cross-company code etc

7 © 2013 HighRadius Corporation

What is a high lockbox hit rate?

• Hit Rate
– #of payments auto-applied / total # of payments

• On-Invoice Hit Rate

– #of remittances lines auto-applied / total # of remittance
lines

8 © 2013 HighRadius Corporation

True efficiency of cash application operations

• Total cost of cash application operations

– Bank Fees
– Cash App FTE Costs
– Deduction Coding FTE costs
• Very hard to establish an efficiency unless you do
benchmarking study within your specific industry
sub-vertical
• ‘On-Invoice Hit Rate’ is a reasonable indicator

9 © 2013 HighRadius Corporation

SAP Lockbox Overview
SAP Lockbox

Payment Files

BAI, BAI2, EDI 823/820

What is SAP Lockbox?

• It is a ‘logical set of configurations’ in SAP that

can correspond to a physical lockbox with a
bank
• It is not restricted to only check payments
• Ultimately it will ‘Process’ a BAI/BAI2/823 file

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 Sample BAI2 file
• 10070080000 70080000 0804292251 ------- this has date and time stamp
• 5800000222 08042970080000 70080000 – lockbox number, date, bank account information
• 6001001000059000076070012 5858585 010152512 – 6 record has check amt
• 400100156011800000037 00001200000000000000GH – Inv No & Inv amount
• 400100156011800000038 00001400000000000000GH
• 400100156011800000039 00001600000000000000GH
• 400100156091800000040 00001800000000000000GH
• 40010015601 00000000000000010000GH - standalone deduction
• 6001001000067000076070012 5858585 010153512 – customer’s Routing /Account number
• 400100156011800000041 00001400000000010000GH –customer reason code
• 400100156011800000042 00001600000000000000GH
• 400100156011800000043 00001800000000000000GH
• 400100156091800000044 00002000000000000000GH
• 40010015601 00000000000000010000GH
• 6001001000075000076070012 5858585 010154512
• 400100156011800000045 00001600000000010000GH- invoice specific deduction
• 400100156011800000046 00001800000000000000GH
• 400100156011800000047 00002000000000000000GH
• 400100156091800000048 00002200000000000000GH
• 40010015601 00000000000000010000GH
• 8000000222 08042900030002010000 – trailer record with batch amount for that day
• 9999900
SAP Lockbox Processing - Details

USE THE ‘6' RECORD

SEGREGATE THE ‘6’ READ THE NEXT ‘4’
PARSE BAI2 FILE FOR PAYMENT
AND ‘4’ RECORDS RECORD
ADVICE HEADER

CREATE PAYMENT IS THIS A NEW

YES
ADVICE ITEM INVOICE ?

NO

IS THERE A IS THERE A
YES CREATE A SUB-ITEM YES
DEDUCTION ? DEDUCTION ?

NO NO

IS THIS THE LAST CREATE PAYMENT

YES
‘4’ RECORD ? ADVICE ITEM

PROCEED TO
NO
CLEARING
How to get a high On-Invoice Hit Rate?

• Only two things matter:

1) How much electronic remittance data for
payments were you able to send to SAP?
2) Did you send the data ‘tuned’ to the specific
‘nuances’ of SAP Lockbox algorithm?

15 © 2013 HighRadius Corporation

 Example: SAP Lockbox Algorithm
Original Invoice Amount: $1,000

Record Type Invoice Invoice Amount Deduction Code Processing Status

Reference Amount
4 90000001 $1,000 Applied

Record Type Invoice Invoice Amount Deduction Code Processing Status

Reference Amount
4 90000001 $800 Partially Applied

Record Type Invoice Invoice Amount Deduction Code Processing Status

Reference Amount
4 90000001 $800 Applied

4 90000001 $200 SP Applied

16 © 2013 HighRadius Corporation

Nuances of SAP Lockbox to be effectively
handled

• Payment Terms & Cash Discounts

• Tolerances
• Deductions
• Overpayments
• Customer Master (Alternate Payers)
• Reference Number of Invoice Number
Matching

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Two Solution Architecture Options
Solution Architecture (Options)
1) SAP User Exit Enhancements
– Custom logic to enhance the standard SAP logic for
creating payment advices
2) Lockbox Preprocessing
– Intercept & transform the data before sending to SAP

19 © 2013 HighRadius Corporation

Option 1: SAP User Exit Enhancements

• Two Business Add-In’s/User Exits for standard

SAP lockbox program
– EXIT_RFEBLB20_001
 Called exactly once per check, immediately before
payment advice is created
– EXIT_RFEBLB20_002
 Called for each invoice being paid by check. Can change
fields such as customer number, company code, invoice
number, document number, reason code etc.

20 © 2013 HighRadius Corporation

Option 2: Lockbox Preprocessing

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Trade-Offs
SAP User Exit Enhancements
• Only Simple Transformation
Rules
• Only EDI remittance capture
supported
• Easy & cost-effective to
implement
• Custom SAP (Z Objects)
Lockbox Preprocessing
• Complex Transformation
Rules can be implemented
• Remittance capture via
OCR, Email Parsing, Web
Aggregation, EDI
• Need a 3rd party vendor
solution
• Standard SAP with a 3rd
party solution
Emerging Trends
Optical Character Recognition (OCR)
Sample Check Remittance Advice
‘Classic’ OCR - Data Extraction Template
OCR Output
Emerging Trend - Dynamic OCR
 Sample - Dynamic OCR Capture

29
Email Parsing
Remittance details sent by the Customer in the Email

Remittance
Information sent in
the body of the Email

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Sample – Remittance Information Capture from Email Body

Payment Backup extracted

from the body of the Email
and loaded in the system

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Remittance details sent by the Customer as a PDF attachment in the Email

Remittance
Information attached
in the Email as a PDF

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Remittance details sent as a PDF attachment in the Email

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Sample – Remittance Information Capture from Email Attachment

Payment Backup extracted

from the PDF attachment

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Web Aggregation
Remittance Details Available on Website

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Key Take Away Points

• Header level ‘Hit Rate’ is not a true measure

of Cash Application operations efficiency
• Invoice Hit Rate is a better indicator
• Consider all costs to get a true picture of your
Operating Expenses (Bank Fees, Cash Team
FTE, Deduction Coding FTE)

38 © 2013 HighRadius Corporation

Key Take Away Points (Contd..)
• SAP User Exit Customization Option
– If you are getting 90%+ check payments
– Most ACH payments have EDI remittance
– Bank fees is less then 0.6 pennies
Lockbox User Exit Customization could be a cost-effective solution

• Lockbox Preprocessing
– Remittance sources are multiple (Email, Web etc)
– You want to take a proactive approach to push for EFT payments
to reduce DSO
– Need advanced transformation rules (deductions, discounts,
overpayments, remittance line splitting/merging)

39 © 2013 HighRadius Corporation