Managing Payment Differences with Tolerances for Lockbox Cash Application

[Kim_Ciesla]

This blog post discusses customer tolerances:  when a customer short pays an invoice, what happens to the difference and how can it be controlled.

Key concepts:

• Line item tolerances


• Tolerances for payment advices

 

Overview

When a customer short pays their invoices, the differences need to be reconciled.  Typically, the differences are either written off immediately or set up as a residual item on the customer account for subsequent research and resolution.  This blog discusses different options for controlling how short and overpayments are accounted for during lockbox processing.

Customer Tolerance Configuration

The key sections in this screen are Permitted Payment Differences and Tolerances for Payment Advices.  These two boxes determine how payment differences are treated during both manual cash application and lockbox processing.  Depending on how you define the values in the Permitted Payment Differences field, the system will return the dreaded message:  Difference too large for a clearing if the differences are outside tolerance.

 

Figure 1:  Customer Tolerance Configuration Screen, OBA3

 

Permitted Payment Difference:

During manual cash application, the system looks at the values in the Permitted Payment Difference to determine up to how much can be written off.

If the payment difference is less than the amount or percentage specified in these fields, the difference is written off automatically.  Otherwise, the difference has to be processed manually – create a residual item, write off to a general ledger account, etc.

This is considered to be the cheque/payment level tolerance.

Tolerance for Payment Advices:

The Tolerance for Payment Advices comes into play during manual cash application with payment advices and automatic cash application and works together with the permitted payment difference.  The amount specified here is the threshold to determine if the difference is eligible to be written off.  Each line item of the remittance is compared to this tolerance – this is the line item tolerance.

 

Putting it Together

Consider the Permitted Payment Difference a “bucket” if you will.  The max you can put into the bucket is $250.

An incoming payment paying an invoice is short by $25

• $25 is less than the Tolerance for Payment Advices of $50 – so it is eligible to be written off


• $25 is less than the Permitted Payment Difference, so it will be automatically written off

An incoming payment paying an invoice is short by $100

• $100 is more than the Tolerance for Payment Advices of $50 – so it is eligible to be created as a residual item


• $100 is less than the Permitted Payment Difference, so it will be created as a residual item

As long as all of the small differences do not exceed the Permitted Payment difference, the payment will apply and residual items will be created.

 

Example: One Payment, One Invoice

Figure 2:  One Payment, One Invoice

 

	Invoice	Pmt	Difference	Tol for Pmt Advice	Permitted Pmt Diff	Result
A	$2,000	$1,975	$25	Under	Under	Applied:  Write Off
B	$2,000	$1,900	$100	Over	Under	Applied:  $100 residual
C	$2,000	$1,700	$300	Over	Over	Applied:  $300 residual

 

Example:  One Payment, Multiple Invoices – Over Permitted Payment Difference

To add on, in the case where one payment is for multiple invoices, the lockbox program will interrogate each line item.

1. Does the difference exceed the Tolerance for Payment Advices?
   
   
   
   1. No: it is eligible to be written off
   
   
   2. Yes: it is eligible to be created as a residual item
   
   
   
   


2. Does the total of the small differences exceed the Permitted Payment Difference?
   
   
   
   1. No: the items eligible to be written off will be, and the residual items will be set up.  The payment will be in Applied Status
   
   
   2. Yes: the payment will be Posted on Account with the message Difference too Large for a Clearing  and will require manual intervention to post the payment
   
   
   
   

The example in Figure 3 demonstrates that even though all of the individual differences per line item are under the $50 Tolerance for Payment Advices, the total, $280, is greater than the Permitted Payment Difference of $250.  This will trigger the error Difference too Large for a Clearing.  The payment will be posted on account and must be processed manually to reconcile the difference.

 

Figure 3:  One Payment, Multiple Invoices – Over Permitted Payment Difference

 

Invoice	Payment	Difference	Tol for Pmt Advice	Permitted Pmt Diff	Result
$2,000	$1,955	$45	Under	Difference too Large for a Clearing!
$1,600	$1,565	$35	Under
$500	$452	$48	Under
$200	$155	$45	Under
$300	$265	$35	Under
$4,500	$4,452	$48	Under
	$8,844	$256		Over	Posted On Account

 

Example:  One Payment, Multiple Invoices – Under Permitted Payment Difference

Figure 4 demonstrates a combination of differences that are both above and below the Tolerances for Payments Advices.  In this example, the sum of the differences under the Tolerances for Payment Advices, is less than the Permitted Payment difference.  In this case:

• The small differences will be written off automatically


• The differences that are greater than the Tolerances for Payment advices will be set up as residual items


• The payment will be "Applied"

The residual items will need to be reviewed as a part of the cash application process for resolution, however, the payment itself will be posted and will need no further manual processing

Figure 4:  One Payment, Multiple Invoices – Under Permitted Payment Difference

 

Invoice	Payment	Difference	Tol for Pmt Advice	Permitted Pmt Diff	Result
$2,000	$1,955	$45	Under	$173 write off
$1,600	$1,565	$35	Under
$500	$452	$48	Under
$200	$155	$45	Under
$300	$165	$135	Over		$135 Residual Item
$4,500	$4,300	$200	Over		$200 Residual Item
	$8,592	$508		Under	Applied

 

Assign Tolerance Group to Business Partner

Figure 5 shows where in the Business partner the customer tolerance is assigned:  Customer Financial Accounting Role, FLCU00, in the Company Code section, Customer:  Payment Transactions tab.  If multiple tolerances are not used, at minimum, you need to define a “blank” tolerance group.

Figure 5:  Assign Tolerance Group to the Business Partner

This information should help to reduce manual processing of payments and increases your cash application rate.  Please refer to my other blog Additional Customer Tolerance Components  for additional information.

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