The SAP order to cash process is used for processing the business’s sales orders for goods and services. It manages the company’s receivables and accumulates the relevant payments from its customers. This is the opposite of the Purchase-to-Pay Process.
We have various components of Order to Cash in SAP. Here I explain them.
A Sales Order is a document we generate in the system, based on a purchase order document received from the customer or buyer. It includes details about the goods or services, quantity, price, customer information (e.g. shipping address and billing address), terms & conditions, etc.
Since it is a kind of agreement between the buyer and seller that means, the company promises to deliver the ordered product on an agreed-upon date, quantity, and price.
Likewise, the Sales Order process is also connected with the finance section of the company as it normally affects the business accounting part. Communication is always flowing between the finance and Sales departments in terms of revenue recognition, order management, and billing information.
The outbound delivery document is created after the execution of the sales order document. It represents the goods or services delivered to the recipient of the goods.
It also includes all shipping-related information such as packing, transporting, picking, and goods issued etc.
Create Outbound Delivery – VL01N
The billing process takes place after generating the outbound delivery document. A billing document contains billing-relevant information for a specific transaction with the customer. Further, we can create it for credit memos, debit memos, invoices, cancelled transactions, supplier invoices, etc.
Transaction Code – VF01 (Billing Document)
It involves a series of steps that are as follows.
In SAP S4 HANA, a customer account is a master record that contains both accounting-relevant information for accounts receivable and logistics information. It is maintained through sales & distribution.
It contains all necessary information about the customer to receive orders, such as name, address, and currency conditions, along with accounting information such as reconciliation accounts in the general ledger.
Subsequently, Accounts Receivable is a sub-ledger to the general ledger. We can get the details of each individual transaction in the sub-ledger customer accounts. The balance of all customer master records is reflected in a single general ledger account which is the accounts receivable reconciliation account.
The company needs to bill its customers for the goods and services shipped to them and must update its sales revenue accounting. The invoice contains information such as customer details, the amount to be paid, payment terms, shipping address, etc.
After the billing document is released, an accounts receivable is automatically generated. The billing document generated during this process creates two different documents:
Direct Sales Invoice Posting is the posting that we do without the reference of sales & distribution billing documents.
The standard document type for direct accounts receivable invoices is DR- Customer Invoice.
Whereas, for the sales & distribution automatic invoice, it’s RV-Accounting Document for Billing. It’s The Transaction Code is FB70.
The Incoming Payments Process is an important part of Financial Accounting in SAP S/4 HANA
Once a sale happens, the system records the customer invoice. The next crucial step in financial accounting is to secure the revenues through the efficient customer payment process.
Before accepting the payment, it is important to understand the payment method options and weigh the advantages and disadvantages of each.
Subsequently, we can generate an incoming payment document using a variety of payment forms, ranging from traditional cash and check payments to modern methods such as credit cards, mobile payments, bank transfers, and even bills of exchange.
Understanding these options enables businesses to effectively manage their financial transactions and ensure seamless revenue collection.
Transaction Code – F-28
For each good or service provided to the customer, the company expects an incoming payment from the customer. In some exceptions, the seller processes some adjustments regarding the amount paid by the customer in its account. Most of the time, customer claims end up in the seller’s release of a credit memo.
A credit memo, also known as a credit memorandum or credit note, is a document representing a credit back to the customer account to correct the customer balance and offset incoming payment balances. It could be issued due to damaged goods, wrong quantity, wrong amount, wrong product, and so on.
Transaction Code – FB75
The down Payment received is nothing similar to received advance payments. This is because they are made in advance by the customer before or while receiving goods or services. This may happen when the customer has a low creditworthiness rating. For that reason, the company asks for a pre-payment from the customer by issuing a down payment request.
It is also very common in long-term contracts, such as in the construction sector, where order fulfilment can take more than a year. A customer down payment request is entered into the system and then cleared against an incoming down payment.
Down payments are first initiated by a payment request. It is a note in financial accounting that does not impact the balance sheet at all. Therefore, the general ledger account balances remain unchanged. Only the incoming payment will impact the balance sheet but not income accounts. On goods/services delivery or receipt, the down payment starts the clearing process against the final invoice.
Dunning is the process of sending letters to customers to remind them that they are late in paying. It is an important communication activity that helps collect money from the customer faster.
The method of communication with the customer depends on the overdue receivables and starts with friendly reminders that escalate to official claiming letters and phone calls.
In SAP S/4 HANA, to set up dunning, you need to apply the necessary configurations and settings in the customer master data.
Credit Management is another important subject in accounts receivable. As I said, in business-to-business transactions, payments are due according to payment terms after goods delivery and fulfilling services.
All those orders that are fulfilled or delivered to a customer without receiving payments are maintained in the credit limit field as a part of customer master data.
A credit limit is a credit facility – a temporary loan – that a company grants to its customers as a credit exposure allowance.
For example, we create a credit limit for one customer for the amount of 2,00,000 INR. With this credit limit, the customer can purchase products and services up to the amount of 2,00,000 INR without triggering any payments. However, as soon as the order exceeds the credit limit amount, the system automatically blocks it due to insufficient credit limit.
Credit limits can be different for each customer depending on the payment method, customer payment history, and the creditworthiness rating provided by a credit inquiry agency.
Credit management allows the company to monitor and check the credit risk by setting up the credit limit for its customers. The responsible unit in the company receives warning alerts for a specific customer or group of customers. For example, we can assign some specific days grace period to customers with good credit indicators according to the organization’s standard rule.
The period-end closing consists of two stages.
In SAP S/4 HANA, we store documents in the main financial table ACDOCA. Likewise in SAP ERP, we store all financial-related information documents in one table instead of multiple tables.
The reconciliation process is much simpler with table ACDOCA. It consolidates all separated tables into a single one, including accounts receivable, accounts payable, general ledger, asset accounting, controlling, etc. Thus, we no longer require the reconciliation between multiple tables.
Before closing the books, it must be verified that the total balances in the sub-ledger accounts receivables match the accounts receivable reconciliation account in the general ledger. In this way, the financial accounting department ensures completeness and accuracy of the reported accounts receivable amount in the balance sheet.
For each customer, the system creates a separate account in the sub-ledger, linking it to a certain SAP S/4 HANA reconciliation account. The moment you are creating a customer master record, the system will require you to enter the Reconciliation account field.
Conclusively, we can consider the reconciliation account a control account to perform the reconciliation between the sub-ledgers and the general ledger.
As we post an item to a customer sub-ledger account, the system creates an entry in table ACDOCA, which populates the reconciliation account automatically in the same line. In this way, the accounts receivable and general ledger are posted simultaneously.
During closing periods, no matter if it’s month-end, quarter-end, or year-end, it’s necessary to compare the transaction figures with the total balances of the posted items.
Thus, the system will perform a comparative analysis as below:
Hence, with reconciliation accounts for all sub-ledgers, the SAP S/4HANA guarantees the sub-ledger to general ledger reconciliation and its integration model.
In this blog, I explained the main functions of accounts receivable and discussed how accounts receivable accounting works in SAP S/4 HANA in terms of integration with the SAP order-to-cash-process, customer master data, and accounts receivable transactions such as customer invoices and payment postings.
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