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Understanding Lockbox

Objective of this document is to explain the meaning, purpose, advantages and disadvantages of the lockbox. This document also explains various types of formats that can be used to process the lockbox data. What is a lockbox? A company can create accounts called lockbox accounts at its bank (or banks) that act as payment collection accounts for customer payments. The company then informs their customers that all open item payments for their accounts must be submitted to one of the established bank lockbox accounts. The bank collects these payments along with the customers remittance information that indicates what open items the customer payments intend to clear. Data entry clerks at the bank manually enter the information into an electronic file for transmission to the company to which the lockbox account belongs. These files are typically transferred nightly to the various lockbox owners (companies). The files adhere to one of two standard banking industry transmission formats: BAI, BAI2, EDI820 and EDI 823.

Advantages of Lockbox: Lockbox process has several advantages. Some of them can be illustrated as under.

Avoid Manual handling of checks Timely processing of Checks Easy reconciliation Reduction of manpower cost Avoid clearing Errors

What is BAI? The standards for lockbox transmission files are defined by the Bank Administration Institute (BAI). Founded in 1924, the BAI organization is a partnership composed of its own BAI membership, a Board of Directors, various banking industry advisory groups and a professional staff. The organizational mission is to help bank administrators achieve high levels of professional effectiveness and to help solve significant banking problems. Activities include the definition of industry file formats, such as lockbox transmissions. BAI and BAI2 are the two defined lockbox transmission formats, however, BAI is considered outdated by the BAI organization and is no longer supported (ie. standards are no longer updated or improved). Nonetheless, many banks still offer transmissions in the old BAI format.

BAI vs. BAI2? BAI and BAI2 formats differ in their level of information detail. BAI does not separate out the incoming check line items by invoice subtotal reference. Instead, one check total amount simply has all invoices listed underneath it. Thus, in BAI format files, the entire check amount must match perfectly (or within configured payment difference tolerances) the total amount for all invoices listed. Otherwise, the entire check will enter into SAP as:

an On account posting (if the payment and invoice totals dont match), or An Unprocessed posting (if no customer account and documents could be identified from the transmission).

In these scenarios, your Accounts Receivable cash application clerks will have to perform manual application to clear payments against open items on the proper accounts. Conversely, BAI2 splits the check total into separate invoice references and associated payment amounts. Thus, within a large batch, BAI2 format files will allow a Partially applied status in which some identifiable payments within the check total will be matched and cleared, others will land on account. As a result, your hit rate percentage of payment-invoice matching from each transmission is likely to be higher when using BAI2 rather than BAI formats. Electronic Data Interchange: Network transfer of structured electronic data from one computer application to another using standard message formats. EDI is described as the interchange of structured data according to agreed message standards between computer systems by electronic means. This standard format is nothing but a Set of rules, agreed upon, accepted, and voluntarily adhered to, by which data is structured into message formats for exchange of business and operational information. Lockbox related formats are Edi 820 and 823. EDI 820: The 820 Payment Order/Remittance Advice transactions can be used to make a payment, send a remittance advice, or make a payment and send a remittance advice. The 820 transaction can be an order to a financial institution to make a payment to a payee. It can also be a remittance advice identifying the detail needed to perform cash application to the payees accounts receivable system. The remittance advice can go directly from payer to payee, through a financial institution, or through a third party agent. EDI 823 The 823 Lockbox formats are sent by bank as confirmation of payments received from customers of lockbox owner. EDI 823 format contains information like Bank details of lockbox service provider, total quantity of checks in each format transmission, total amount involved in total checks, number of batch involved ( batch represents maximum quantity of checks in each lot). Further break up like, customer name, customer bank routing number, customer bank account number, check number and amount, number of invoices paid, amount per invoice, discounts for each invoice, deductions if any involved and credit memos etc. Information available in these formats are generally used for clearing customer open items in SAP depends upon the business requirement. Following EDI configuration is required to read the data from corresponding format and process customer open items.

Format EDI 820

Idoc type Pexer2002

Message type

Process code REMA

REMADV

FINSTA01 LOCKBOX EDI 823

LBX

Difference between EDI 820 and 823: In general EDI 820 formats will be used to send information to Vendor furnishing details of payment for his supplies. From business standpoint, EDI 820 information comes from customer as the business is vendor to its customer. In fact EDI 820 is not a lockbox format but can be used in place of lockbox for customer open item processing. This information however is not a real payment but only a remittance advice. Where as lockbox format is an exclusive format that comes from bank confirming the payments received from customer. This is real payment information which got credited in business account at Lockbox /Bank. Besides this basic difference between these two formats some other differences can be summarized as under. 1. EDI 820 will have one to one information. Each customer will send remittance information to the business. EDI 823 format will have several customer information in one format. 2. Customer can not use EDI 823 format where as Bank can use EDI 820 format. 3. EDI 820 is only an advice but 823 is a payment. 4. Technical settings viz., Partner profiles, Basic type, Message type, function modules used in SAP are different between these two. 5. Level of information will be different. EDI 823 will have Total number of checks involved, total payment amount involved, break up of checks and amount per batch, per customer etc will not be available in case of EDI 820. BAI vs. EDI in Lockbox: Both the formats are acceptable and can be used in SAP for processing customer open items. However the earlier one is (BAI) is file based and the later format is (EDI) is idoc based. File based is batch mode and EDI is real time information. BAI can not be made as real time process but EDI can be made as batch process. EDI technology requires mapping tool. It creates intermediate document holding the information for further process. On the other side BAI format doesnt require this. As far as processing and of clearing customer open items in SAP is concerned, whether the format is BAI or EDI system will follow same transactions. FB01 > FBE1 > FB05. In either of the case if information is not sufficient to clear open items, it is available for manual process. Some additional advantages of EDI are:

Data Accuracy Reduce Technical Complexity. Lowe Personnel needs. Accelerates information exchange. Avoid Data Entry Errors.

Lockbox Process - Data file to SAP open item clearing

What Bank will do?

What lockbox data file contain? Lockbox Data Flow

Bank Receives the payments, create a data file of the customer remittance information and payment amounts, and deposit the checks into client bank account. On regular basis, Client company receives this data file for processing to update in their accounts. Depending upon the choice of services with the Bank, the lock box file will contain information viz., Customer name, Customer Number, Customer MICR number ( Bank routing and Account Number), Check amount, Invoice number, Payment date, Payment amounts and other information. As shown in the following picture, customers send their payments to a lockbox. Then bank collects the data and sends (either through EDI 820 and 823 formats) to R/3 users EDI server (standard Process). The server translates the message using as standard EDI interface into an IDOC

(Intermediary documents) and sends it to the SAP Server. Once the message is received and stored in SAP table, a program is clicked (RFEBLB30 or FLBP transaction) to check the information stored in bank statement tables and create payment advices with Payment amount, invoice numbers and customer number.

What happens in SAP server

Payment advice Processing

Matching of customer open items

The lockbox program uses detailed information from the payment advice to automatically search and match customer open items. The document number on the payment advice is matched against

Payment Advice Status

the document number in the customer open item file. Therefore, accurate payment data is necessary for automatic clearing to take place. If the checks were applied or partially applied, the advice is deleted from the system after processing. If the check was unprocessed or placed on account of customer, the advice is kept on file for further processing. The post process function entails reviewing the status of the checks applied through the lock box function. User must manually clear any checks that were on-account of customer or not applied to customer account. The Lockbox overview screen details the number of checks in each category. Depending on the status of the check, the user determines what needs to occur to apply checks. On account: If the bank keyed in the correct invoice number, the Lockbox Import Program posts the payment on account. In the post processing step, you access the payment advice and correct the document number and upon saving the changes, the post process function clears the open item, deletes the payment advice and sets the check status to applied. Partially Applied: Checks that are partially applied may require further processing. Ex: Check may have paid 5 invoices, but one was in correctly keyed. The first 4 invoices would clear. The payment amount for the 5th invoice would be put on-account and would have to be post processed to clear. Unprocessed: Any payment that could not be identified either by customer MICR number (check) or the document number would remain Unprocessed. Once the payment is researched and the customer and invoice is identified, it would be applied during post processing.

Post Processing

What configuration needs to be done?

Control Parameters: It determines the import format BAI, BAI2 & ANSI and the types of postings generated by the lockbox program. These control parameters are needed for importing lockbox file sent by bank. Posting Data: Company code, Bank Information, G/L accounts for posting and clearing, document types and Posting keys.

RFEBLB30 or FLBP transaction

Lock Box data, Processing parameters (Procedure & Algorithm) Account assignment (Profit center), output control and Mode of call transaction.