Factoring is a process whereby the factoring agent pays the Company (the originator) for the factored invoices less any fees, interest, dilutions or retention amount, based on contract agreement. Receipt of the cash for factored invoices will result in a balance sheet affect reducing the AR balance by the amount of the factored invoices.

Factoring receivables provide the Company (the originator) with a tool which will increase the cash flow based on accounts receivable documents for certain customers. Once invoices are selected by the factoring agent they need to be identified and marked in SAP for tracking purposes as well as reconciliation.

There is a need to develop a process which will allow the Company (the originator) to account for the factored transactions and reconcile with the factoring agent. The bank account will be established at the current House Bank and be a “shared” account with the company and the factoring agent.

Customers will remit to the “shared” bank account for all their invoices, both factored and non factored and the Company (the originator) will have to reconcile with the factoring agent and settle cash for non factored  invoices. The single account for all remittance is to not affect the customer’s process and not indicate to them that invoices have been factored.

SAP provides the ability to mark factored invoices on the AR transactions but that does not provide accounting functionality for cash and balance sheet impacts. The cash accounting process needs to be built in conjunction with the cash application and clearing customer receivables.

The recommended solution for the Company (the originator) is to implement the use of the “AR Pledging Indicator” and design a solid reconciliation process for factoring accounts receivable.The following solution details lay out what is required to evaluate and ultimately the steps to implement a factoring process.

Process Proposal

1) Bank account established at the current House Bank, shared with the Company (the originator) and the factoring agent.

2) Customer remittance will be directed to the new account for all cash receipts.

3) The Company (the originator) will receive bank statement, including the new account, to allow automatic cash application process to remain the same.

4) Mark Customer invoices as factored through configured fields “AR Pledge Indicator” and Text Field with identification (i.e. DD/MM/YYYY + user ID)

5) Accounts receivable invoice will remain open on customer account to allow normal servicing (i.e. collections, credit, statements, aging, etc)

6) Cash received from factoring agent will debit cash and credit AR Contra account to relieve balance sheet of factored AR.

7) Cash application will debit cash “clearing” account and credit AR customer, clearing the invoices through normal post processing.

8) Reconciliation performed daily to determine factored invoices cleared and non factored invoices cleared.

a. Factored Invoices: Credit cash “clearing” and debit AR Contra account for amount of factored invoices which were cleared. This is done daily to “true up” the AR contra account for factored invoices

b. Non-Factored Invoices: Credit cash “clearing” and debit Bank Due To/Due from account. Performed daily to reconcile cash clearing account and

indicate cash receivable from the bank for money they have on non-factored invoices.

9) Settlement: Bank will submit cash to the Company (the originator) (via EBS) for the amount of cash they hold for non-factored invoices. Debit Cash and Credit Bank Due To/Due from.

Implementation Activities

1) Activate AR Pledging for the Company Code. (This allows the AR Pledging Field/Flag to be configured and used on the customer account or AR Invoice.

2) Configure the AR Pledging Indicator (Factor flag)

a. ‘01’ = Offer

b. ‘02’ = Factored

c. Field Status for customer master

d. Fields status for customer invoice

3) Electronic Bank Statement

a. Configure new account at house bank

b. Change GL account for cash entries in EBS

c. Create new BAI code and GL account determination for EBS

4) Add AR Pledging Field to any BW reports in AR

5) Reporting Requirement:

a. Define and evaluate what reporting requirements exist

b. Map to current / standard reports

c. Create new reports for reconciliation process or historical reporting

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2 Comments

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  1. Manoj Jamkhedkar

    Its Very Important Process and same problem we have faced in Our Euopian Implemetaion Project. Nice workournds .

    Thanks

    Manoj J

    (0) 

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