Auto posting of accounts receivable.
A good place to start is with the size and/or industry of your customer (i.e., retailer, small to large corporate, etc.).
To simplify our review, let's assume that all payments are received through a lockbox--either paper, electronic or a combination of both. Very often, lockboxes that are housed internally to a company function much the same way as an outsourced lockbox--especially if the company has invested in the right technology and processes. Posting to the accounts receivable system can occur from lockbox posting files or from the internal process, with all deposit information coming from the bank.
The first step in automated posting begins with the biller. Bills usually include a coupon to be returned with the payment. (This coupon and the envelope must meet specific lockbox equipment requirements). In retail, the bill is often of consistent size and look, and should contain a scanable Optical Character Recognition (OCR) line. This allows for the equipment to read and process payments, with little or no manual intervention.
Upon receipt, the lockbox processes the payment in an automated fashion; envelopes may be discarded while the transit routing number and account number (MICR information) on the bottom of the check is captured and OCR information is read. If the check amount and the coupon amount are equal, the payment and remittance information are routed to a payment file. If they don't match, an operator manually keys the amount and sends it to the payment file. Payments without coupons can be processed if customer account numbers are provided. Payments without account information are generally returned to the biller.
This payment file should be consolidated with all other payment-type files and formatted to the accounts receivable (A/R) system needs for cash posting.
Wholesale payments tend to be fewer in number but larger in amount and can cover single or multiple invoices--though usually multiple--over a billing cycle. Another unique issue with business payments is deductions.
When checks are received in a wholesale lockbox, they are processed in the fairly standard way:
* First, the envelope is opened and the check is reviewed to ensure the following: it is a domestic check, includes a signature, has a current date, has an authorized payee, and the legal and courtesy box amounts agree. Once it passes these tests, the deposit is prepared. Depending upon the lockbox client's instructions, the MIRC line would be captured and imaging would take place.
* The next step might be data entry. This would include any additional information desired from the check, envelope or remittance documents. For our purposes, this will be limited to invoice numbers and invoice amounts. This will help to maximize auto-posting capabilities by preventing deductions from causing multiple invoice remittance not to post. Those invoices that match can post while invoices with deductions will need to be reviewed by the biller prior to posting.
A posting file is created to reflect all payment information including keyed information. Again, this file can be combined or consolidated with any retail files and/or electronic payment files.
Payments may also be received in an electronic format and processed through an electronic lockbox (ELBX).An ELBX is designed to report incoming ACH (Automated Clearing House) and/or wire payments with any remittance information available. ACH remittance information is often referred to as addenda information or addenda records.
The ACH area within financial institutions will receive incoming ACH's. They will be deposited and reported along with any addenda records through ELBX. All ACH's must settle through a financial institution and are considered "settled" at 8:30am Eastern Time on a daily basis. It makes sense, whenever possible, to have the addenda information arrive as part of the ACH payment.
Only certain ACH formats or Standard Entry Class (SEC) allow for addenda information. They are:
* Pre-Authorized Payment or Deposit (PPD)
* Customer Initiated Entry (CIE)
Each of these allow for a single 80character addenda record.
* Cash Concentration or Disbursement (CCD)--also allows for a single 80 character addenda record.
* Corporate Trade Exchange (CTX) allows for an electronic remittance file of extended addenda information to be attached, which can contain up to 9,999 addenda records.
Be sure to ask that the proper SEC be used to comply with ACH rules and to receive the information needed to post the payment to A/R.
Incoming wire transfers can be auto-posted. However, it can be a challenge since a wire format is quite specific and rigid. There are four fields in the Originator to Beneficiary Instructions (OBI) section consisting of 35 characters, each designed for remittance information. If the remittance information is in these OBI fields, it can be captured and reported through ELBX. If the remittance isn't in the OBI section, it is extremely challenging to capture even if the information is in another section of the wire transfer.
Electronic lockbox is another larger service that will consolidate the ACH information including addenda records as well as any information in the OBI section and create a payment file. Should a third-party processor be used to create debit ACH files or receive payments through a web service, such as electronic presentment and payment, the electronic lockbox will provide either the settlement info or, if the financial institution is capable, it will report the remittance data back with the settlement. These presentment services also allow for e-mail notification when a deduction is created.
Auto-Posting for A/R and What It Has to Offer
Now, how is the auto-posting done?
If using an Enterprise Resource Planning (ERP) system or legacy system, MICR data should be stored in the customer's master A/R record. By doing this, the customer's account gets tied to their MICR information. If this capability is not available, an alternative such as an Excel spreadsheet, Access database, or some other method can accomplish this task.
If using an external option, it's essential that the customer's MICR line information be associated with the customer's account number. Either of these methods will create a MICR Table.
This MICR Table provides a key to attach the data received on the lockbox file to specific customers. It allows the funds to be placed directly to the proper customer's account. Payments may not necessarily post at the invoice level--logic must be in place to do so.
An algorithm may apply the cash by totaling the invoices and then matching them to the payment. Other options would be to clear the oldest or newest invoices first. However, this can be difficult, especially if deductions are taken. Generally, it is tricky to get a high level of success with a MICR match, and on average it is around 40 percent. Be sure to include any credit or debit memos issued against an invoice to improve the success rate.
Another way to match the payment is to use the bill/invoice number as the matching key. This will allow the algorithm to identify, specific invoice(s) and sec if the payment amount matches. If it does, then post the payment. If not, then the algorithm can search for credit memos or partial payments to cover the difference in short payment situations. If credit memos aren't available, a decision must be made whether or not to post the partial payment. Some companies post partial payments leaving the original invoice open, others clear the invoice and set up a deduction for the difference. Either method works.
A caution in using invoice numbers and amounts could be transposed or incorrectly entered data. If this occurs, a valid invoice assigned to a different customer might be identified and cleared. A "work around" would be to first identify the invoice and then match the MICR information to see if it belongs to the same customer. If it does, the payment would post. If it doesn't, then it needs to be reviewed prior to posting.
Electronic payments, with the exception of the CTX, with an electronic remittance file usually only pass half the MICR information, the Transit Routing number. The electronic remittance file (an EDI 820 or 835) has the MICR information embedded in the file. Using the MICR info with invoice numbers is a quick and easy double-check prior to posting. It can save hours in research and time spent in setting back up incorrectly cleared invoices.
Allowances such as advertising or freight can also be incorporated in the posting logic and thus used to clear deductions as they are identified and before they are created. However, the customer must be entitled to an allowance. A tolerance level may also be determined and applied to avoid keeping open invoices or deductions with small balances. The tolerance level should be determined based upon the cost to process a deduction. It makes little sense to expend the time or money to clear amounts below the cost of deduction processing.
Auto-posting of payments to the A/R system is the quickest and most efficient means of keeping accounts receivable current and accurate. It allows for efficiency with minimal personnel. The key is receiving posting information in an electronic format that can be read and used by the A/R system. The lockbox provider and/or financial institution must be able to enter or capture required information and supply that information to the A/R system. Algorithms that are either part of an existing ERP system or developed independently must be put in place. Accomplishing this is no easy task, but once completed, the benefits will quickly be realized.
Pete Lambert is Vice President and Solutions Product Manager for National City's Global Trade and Treasury Services. He can be reached at firstname.lastname@example.org.
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|Date:||Oct 1, 2004|
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