To understand how lockbox helps organization to manage collection from customer (account receivable). We need to understand the challenges faced by accounts receivable department in collecting payments from customer.
Challenges in collection from customer:
Customer makes payment to company by issuing check. Everyday company receives large number of chec from various customers. Checks are sent to bank for encashment. Someone has to carry checks to bank. Company has to keep track of all the checks. Once checks are encased, finance department has to reduce account receivable and increase the bank balance in account books.
This process leads to
- Delayed cash flow:
Cash is available for use only after check is encashed in bank. Collecting check from customer and then sending to bank for encashment consumes few days. During these days money is not available to be used by bank.
- Cumbersome tracking of checks:
Increase in number of cheques increases the difficulty in tracking.
- Multiple visits to bank
Need for lockbox
The problem of delayed availability of money for use by company can be solved if customers send check directly to bank. Bank encashses the check and informs the company about received payment. Company reduces account receivable and increases bank balance in account books. This process of collection management ensures better cash availability, better & faster tracking, less visit to bank.
This process of collection management is enabled by lockbox.
What is lockbox?
- Company opens lockbox facility with bank.
- Company informs its customers to send cheques directly to bank. Customer provide below remittance information along with cheque
Invoice number against which customer is paying
- Bank prepares a file called as lockbox file which is sent to company.
Lockbox file contains below information
Customer number, invoice number, invoice amount, cheque amount etc
File is prepared in a specific format agreed between bank and company. Normally file format is BAI or BAI2.
- Company receives the lockbox file and loads the file into sap server. Program RFEBLB30 reads the file and creates payment advice which has information like customer number, invoice number and payment amount.
- Information in payment advice is matched against customer number, open invoice number and invoice amount.
There can be four below scenarios:
If information in payment advice is matching with customer number, open invoice number and invoice amount, then payment advice is applied successfully.
Below accounting entry is generated and customer open item is cleared.
DR. Bank clearing account
Once payment advice is successfully applied, payment advice gets deleted.
Customer number and invoice number is matching but amount is not matching. Then payment advice remains in status on account.
Later on during post processing stage, correction is made in payment advice and applied. Payment advice gets processed successfully leading to open item clearing and generation of accounting entry.
In case when customer makes a single payment against multiple invoices, it may happen that same invoice number are matching but few invoice numbers are not matching. Then status of payment advice is in partially applied.
During post processing, correct in payment advice is made and payment advice is applied successfully.
Customer number itself is not matching. Then status of payment advice is unapplied.
Correction is made during post processing and then payment advice is applied.
When bank encashes the check, bank sends another file (Electronic bank statement or EBS) to company. Company loads the file on the server and below posting happens.
CR. Bank clearing account
DR. Main Bank account
Upon processing of EBS file, clearing account is cleared and main GL account corresponding to bank account is posted. So that balance in company accounts books can be reconciled with actual balance in bank account.
To read more on lockbox