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SAP Cash Application using Machine Learning

SAP Cash Application using Machine Learning

Machine learning helps finance and risk teams increase automation and handle exceptions,

streamlining business processes and reducing manual errors. As opposed to rules configured in

tables — which are often never revisited, even when the business environment changes —

machine learning means just that: the system learns how to handle exceptions based on historical transactions as well as on any human, manual actions taken to deal with exceptions in the past.

Machine learning applications in SAP Cash Application

SAP Cash Application  streamlines the clearing process of open items for accounts receivable (A/R) transactions. When new transactions come into the system that result in exceptions, the machine learning application takes that prior information and decides on the course of action, such as a proposal for review or an automatic clearing posting.

To begin, let’s look at A/R and the importance of SAP Cash Application.

SAP Cash Application as Part of the A/R Process

The traditional process of A/R spans several steps, as shown in Figure 1. As a contract or sales

order is created, there is a credit check against the customer, but there is no impact to general

ledger accounts in the Universal Journal. Once approved, normal logistics processes take place to fulfill the sales order, whether the manufacturing or assembly of a customized product or the sale of a product already in stock. Once the product is shipped, resulting in a financial posting against the cost of goods sold (COGS) account, the A/R process then creates an invoice, which is considered in working capital and cash flow analyses. Payment is made by the customer, which may or may not include collections and dispute activities. Once payment has been received, it is posted in A/R and cleared against the invoiced amount.

Figure 1: Traditional A/R process

The clearing of the open A/R line items is based on rules that have been configured within SAP

S/4HANA Finance, including payment terms and tolerance levels to ignore minor differences.

However, there may be many situations in which there is no one-to-one match, within the specific tolerance level, between the invoiced amount and the payment received from the customer. This could be for several reasons: the information provided with the payment may be incomplete, a reference number to the order may be missing, payment advice documentation is not legible, or duplicate master data records for the customer may exist. Alternately, there may be discrepancies in the amount paid. For example, the customer may have paid for more than one invoice in one payment, the payment received is a partial payment, there may be discrepancies based on currency conversions, or the customer may have taken an unallowed discount or paid without taking advantage of an available discount. In these and other situations, the clearing process is not straightforward, and the finance or shared services teams responsible for A/R will need to reconcile these exceptions manually. In some cases, this means reaching out to the customer.

The standard clearing process is based on the rules in configuration tables in SAP S/4HANA

Finance. To reduce the number of exceptions, SAP Cash Application was developed as a next step that includes machine learning to clear as many of these remaining open items as possible.

As shown in Figure 2, SAP Cash Application is able to act on a variety of inputs to the machine learning algorithm to clear open A/R items.

SAP Cash Application

Diagram Description automatically generated

Figure 2: SAP Cash Application uses machine learning to clear A/R items that were not able to be cleared through the standard configured rules

Line items for clearing can come into SAP S/4HANA Finance in multiple ways, including open

receivable line items resulting from the sales order process, which may be entered manually, or

records imported from a bank statements file or a lockbox file. In addition, the processing of

unstructured data for payment advice information is also incorporated by SAP Cash Application, as shown in Figure 3. The format could be a PDF, a scanned document, an image, or an email. In

these situations, optical character recognition (OCR) is used to read the input documents and

extract the key information to populate transactions in the system. If the unstructured data is an audio file, such as a voicemail, it can also be transcribed using natural language processing and then used as input.

Payment Advice Extraction

Timeline Description automatically generated

Figure 3: Payment Advice Extraction for SAP Cash Application allows unstructured data to be

incorporated into the A/R process.

Once the machine learning algorithm is applied, many exceptions to the open items can be cleared.

A company may choose to allow the application to post these cleared items automatically, as long as they meet the designated confidence level, such as 90% certainty that the logic applied has resulted in the correct proposal. This tolerance level can be configured in SAP Cash Application. Other companies may choose disallow automatic postings, choosing to examine the line items that would have been posted and then manually release them. Typically, after some time, most companies do allow the system to post these items automatically. This leaves only a fraction of the line items that must still be handled manually as true exceptions.

SAP Cash Application is built on SAP S/4HANA Finance, leveraging both the core A/R processes and the machine learning engine. It has been available in the public cloud since release 1802 and on premise since release 1709. A special adapter has now been built to allow the application to run against SAP ECC 6.0, with EHP7+.

Now that we understand the capabilities of SAP Cash Application as part of the overall A/R process, let’s take a look at how the machine learning engine is trained to create the appropriate algorithms.

Training the Machine Learning Engine

Before implementing SAP Cash Application, the machine learning engine must be trained to learn and incorporate knowledge of prior transactions and how exceptions were handled, even when handled manually. Figure 4 highlights the process of training the machine learning engine.

Diagram Description automatically generated

Figure 4: Training of the machine learning engine involves incorporating historical information,

iteratively processing this logic on new data sets and incorporating feedback to refine the algorithm to make the correct inferences on the receivables open items.

Training begins with the incorporation of historical information, which includes business partner information such as the customer ID and customer name, bank master data, and product master data. Additional transactional information includes prior electronic bank statements, notes and payment advice records, payer bank account information, and core financial accounting documents in the Universal Journal.

The machine learning engine builds an algorithm by learning the correct decision criteria, tolerance of values, and the priority of applying them against incoming payment transactions. Then, with the preliminary algorithm created by the machine learning engine, this logic is used iteratively on new data sets. The system again learns with feedback from the finance team on which recommendations are appropriate and which are not.

Once this iterative training cycle has been completed, the logic is used to infer the correct actions. For example, with no match of a business partner in an incoming record, the correct customer number can be inferred from bank statements by matching the reference number of a particular transaction. Once trained, it is not necessary to “re-train” the machine learning engine in the future. While new exceptions may result after a change in business processes or the business environment, the system learns how to handle these exceptions on an on-going basis and incorporates them to refine the algorithm used to match receivables where there are future similar exceptions.

SAP Cash Application has embedded the machine learning engine that is part of the SAP AI Core, which is delivered in the SAP Cloud Platform. The application, while residing in the cloud, can run against both on-premise and cloud implementations of SAP S/4HANA Finance.

Next, let’s take a look at how to verify that SAP Cash Application made the correct decision for

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SAP S4/HANA Finance Accounts Payable

SAP S4/HANA Finance Accounts Payable
Accounts Payable in S4/HANA
Define Account Groups with Screen layout (Vendors)

Path: Financial Accounting-Accounts Receivable /Accounts Payable- Vendor accounts – Master data – Preparation for creating vendor master data – Define Account Groups with Screen Layout

Acct Group: MKV

Company Code data- Account Management – Reconciliation account is mandatory.

Create Number Range for Vendor Accounts

Path: Financial Accounting-Accounts Receivable /Accounts Payable - Vendor accounts – master data – Preparation for creating vendor master data- Create Number Range for vendor Accounts

External Number Range: MV

Assign Number Range to Vendor Account Group

Path: Financial Accounting-Accounts Receivable /Accounts Payable - Vendor accounts – master data – Preparation for creating vendor master data

MKV assign Number range MV.

Define Number Ranges (Business Partner)-HANA

Path: Cross Application Components – SAP Business Partner – Business Partner – Basic Settings – Number Range and Groupings – Define Number Ranges

Define Number Range MV

Define Groupings & Assign Number Ranges-HANA

Path: Cross Application Components – SAP Business Partner – Business Partner – Basic Settings – Number Range and Groupings

Grouping: MKV

No. Range: MV

Master Data Synchronization - HANA

Path: Cross Application Components- Master Data Synchronization – Customer / Vendor Integration – Business Partner Settings – Settings for Vendor Integration – Field assignment for vendor integration – Assign Keys – Define Number assignment for direction BP to vendor

This is because we want BP to act as FI customer.

Please refer SAP AP Tutorial: SAP AP

Create Business Partner / Create Vendor Master Data

Transaction code: XK01 – This takes to Tcode BP

In S4/HANA FI vendor is replaced with Business Partner to remove data redundancy. When Business Partner is created FI vendor is automatically created by system. Thus, SAP ECC transaction code XK01, XK02, XK03 are all replaced by transaction code BP

Business partner 6000000 created.

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SAP S4/HANA Finance Accounts Receivable

SAP S4/HANA Finance Accounts Receivable

Changes in AR in S4/HANA
Customer Master replaced with BP. In ECC FI customer master is created in XD01 than extended to FSCM, Joint venture accounting etc. as Business Partner. This is data duplicity. In HANA FI Customer master created as BP. Now this BP can be saved in various roles like FSCM Credit Management, Treasury Business Partner, FI Customer master etc. This removes data redundancy and thus speed up SAP system performance.
AR Credit Management is replaced with FSCM Credit Management

Below steps to be followed to configure Accounts Receivable in SAP S4/HANA Finance

Activation switch for function

Path: Cross application component – SAP Business Partner – Activation switch for Functions

Define Account Groups with Screen layout (Customers)

Account Group determine number range of customer account and screen layout of fields in customer records.

Path: Financial Accounting -Accounts Receivable/AP- Customer accounts – Master data – Preparation for creating customer master data – Define Account Groups with Screen Layout

Acct Group: MK21

Company Code data- Account Management – Reconciliation account is mandatory.

Create Number Range for Customer Accounts

Path: FA-AR/AP- Customer accounts – master data – Preparation for creating customer master data- Create Number Range for Customer Accounts

External Number Range: HC, MC

Assign Number Range to Customer Account Group

Path: Financial Accounting-Accounts Receivable/AP- Customer accounts – master data – Preparation for creating customer master data

MK21 assign Number range MC

Create Customer Reconciliation Account

Transaction Code: FS00

Select Account Type as Balance sheet Account. Account group as Balance sheet. Sort key as 001 and Field status variant as G067. Shown below.

Define Number Ranges (Business Partner)

Path: Cross Application Components – SAP Business Partner – Business Partner – Basic Settings – Number Range and Groupings – Define Number Ranges

Define Number Range MC

Define Groupings & Assign Number Ranges

Path: Cross Application Components – SAP Business Partner – Business Partner – Basic Settings – Number Range and Groupings

Grouping: MK21

No. Range: MC

Master Data Synchronization

Here we map Business partner group to Customer Account group. Thus, BP automatically works as SAP FI customer

Path: Cross Application Components- Master Data Synchronization – Customer / Vendor Integration – Business Partner Settings – Settings for Customer Integration – Field assignment for customer integration – Assign Keys – Define Number assignment for direction BP to Customer

Create Business Partner / Create Customer Master Data

Transaction code: XD01 – This takes to Tcode BP.

In S4/HANA FI customer is replaced with Business Partner to remove data redundancy. When Business Partner is created FI customer is automatically created by system. Thus, SAP ECC transaction code XD01, XD02, XD03, VD01, VD02, VD03 are all replaced by transaction code BP

Save – BP#800002 has been created.

Now click the company code tab and enter Company code and Reconciliation account.

There are two different numbers.

1st is Business Partner number: 800002.
2nd is AR Customer number: 400001.

These are linked as per configuration done in earlier steps.

Now in the Business Partner you can create multiple roles like Clerk, contact, subsidiary etc. These are than linked to each other through relationship button. Please see example below

Define Tolerances (Vendors/ Customers)

Transaction code: OBA3

Tolerances up to which difference in payment to vendor invoices are automatically posted to expense or revenue accounts when clearing Open Invoices.
Payment terms for residual items, if posted during clearing

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SAP S4/HANA Finance Part-1

SAP S4/HANA Finance Part 1
SAP S4/HANA Finance

S4/HANA finance is the most matured finance solution from SAP. Key advancement of S4/HANA finance over SAP ECC 6.0 as below:

Universal Journal
Material Ledger
Account based Profitability Analysis
New Asset Accounting
Group Reporting
Universal Journal

Universal Journal combine all financial information in one Table # ACDOCA. It is also called single source of truth. Each posting creates line item in Universal journal that combine data entered in different financial components into one single structure.

As you can see table ACDOC has fields from both Financial and Controlling module. Thus below tables have become obsolete in S4/HANA Finance

Table Index Tables Removed
BSIS Index for GL Accounts
BSAS Index for GL Accounts – Clearing Postings
BSID Index for Customers
BSAD Index for Customers – Clearing Postings
BSIK Index for Vendors
BSAK Index for Vendors- Clearing Postings
BSIM Index document for Material
FAGLBSIS Index for GL Accounts (New GL)
FAGLBSAS Index for GL Accounts – Clearing Postings (New GL)
FAGLFLEXA New GL Line-item table
ANEP Asset Line Items
ANLP Asset Line Items
ANEA Asset Line Items
Table Aggregate Tables Removed
GLT0 Classic GL Totals table
FAGLFLEXT New GL totals table
KNC1 Customer Master transaction figures
LFC1 Vendor Master transaction figures
KNC3 Customer Master Special GL transaction figures
LFC13 Vendor Master Special GL transaction figures
COSS Cost Total Internal Postings
COSP Cost Total External Postings

SAP has replaced above deleted tables with CDS views. This ensures existing custom program works. Customers existing investment in SAP is fully safeguarded.

Custom programs read access to these deleted tables is automatically directed to Universal Journal by CDS views

Material Ledger

Material Ledger provide valuations in multiple currencies and valuation principles. In S4/HANA it is mandatory to activate parallel currencies valuation functionality of material ledger.

Account Based Profitability

Profit center accounting is a tool used for management reporting. It provides financial statement in dimension other than company code. It provides below functionalities:

Provide profitability information based on the physical or management structure of the business.
Provide information and allow planning based on responsibility areas such as region, business function, or product.
Use a structure defined in terms of profit centers and arranged in a standard hierarchy Easily achieve a full profit and loss (P&L) statement by profit center.

In S4/HANA account-based profitability analysis is mandatory, whereas costing based profitability analysis is optional. Account based profitability analysis is fully integrated with Universal Ledger.

For details on SAP Configuration, Business Process, testing etc. in Profit Center Accounting please refer to tutorial: SAP Profit Center Accounting

New Asset Accounting

In SAP ECC new asset accounting is available as an add on. In S4/HANA new asset accounting is mandatory. It offers real time integration with Universal Journal. New asset accounting facilitates asset reporting under different accounting principles like IFRS, US GAAP, in real time

Now we will start configuration of S4/HANA Finance in SAP

Financial Accounting Global Settings
Create Company Code

Explanation: A company code is an organizational unit in SAP. It is a separate legal entity. Complete set of financial statements like Balance sheet, Profit & Loss account can be prepared of a company code.

Transaction code: OX02

Path: SPRO-ES-Definition – FA- Edit, Copy, Del Company Code

We can also copy from SAP standard Company code US01: EC01.

Company code: MK20, HPC

Define Field Status Variants

Field status variants hold the Field Status Groups in SAP. A Field Status Group defines the screen layout for a general ledger account entry. Based on your specification, the Field Status Groups determine which fields accept input during document entry (FB60, FB50, FB65…), as well as whether a field should be suppressed, required, and optional.

Tcode: OBC4

Path: SPRO- FA(N)-FAGS- Ledgers-Fields – Define Field Status Variant

FSV: HPC

Assign Company Code to Field Status Variant

Tcode: OBC5

HPC-HPC

Maintain Fiscal Year Variant
Fiscal Year means accounting year. An accounting year is a period of 12 months
The fiscal Year may be a calendar year (Jan to December).
Fiscal Year variant can be non-Calendar year. A non-calendar year fiscal year variant contains 12 months starting from any month and ending in next year, one month before the start month. For e.g., period 1 is April and end on 31st March. Also, it can begin from 15th April and end 14th April.
Year-end closing may require adjustment accounting entries which could be required to be posted in month after last period. To allow for these posting SAP allows for 4 special periods. Thus, a Fiscal Year variant can have maximum of 16 periods with 4 special periods. The special postings are a part of the last posting period.

Tcode: OB29

FSV: We will use SAP Standard K4

Please refer tutorial SAP Finance Enterprise Structure for more details on Fiscal Year variant

Assign Company Code to Fiscal Year Variant

Tcode: OB37

Define Variants for Open Posting periods

The benefit of defining variants to open periods is to avoid the problem of posting accounting transactions to the wrong period. This is achieved by opening current periods and closing all other periods. At the end of the current period, the period is closed and the next period is opened.

In SAP ERP, opening and closing periods are differentiated by account types. This allows you to determine which accounts are posted to a specific posting period. For example, posting can be permitted for accounts payable but not to accounts receivable.

As part of customizing opening and closing periods, the following items are defined:

Define variants for open posting periods.
Assign variants to company codes.
Specify open and close posting periods.

Tcode: OBBO

PPV: HPC

Assign Variant to Company Code

Tcode: OBBP

Open & Close Posting periods

Copy SAP Standard Variant 0001

Period 1: For posting to regular posting period.

Period 2: For posting to Special Periods. Periods 13 to 16 represent the special periods of four months for posting year-end adjustments to a closed fiscal year.

For each interval specify

Lower limit of interval
Upper limit of interval
Fiscal Year

Tcode: OB52

Activities:

Create a minimum entry for all posting periods that you want to be open (account type +).
If you want to restrict the periods further for specific accounts, complete the entries for account types or account areas.
If you want to limit user access, enter an authorization group for each time period 1.
Period 3: This is there only in S4/HANA. It is not required for greenfield implementation. It is used for migration/ brown field implementation. Period interval 3 is used for postings from Controlling (CO) to Financial Accounting (FI). Used for CO transactions that should not be posted to FI
Define Accounting principles

Path: Financial Accounting-Financial Accounting Global Settings – Ledgers – Parallel Accounting

In S4/HANA we can assign multiple accounting principles to leading ledger. So, there is no need for Non-leading ledgers in S4/HANA.

Deactivate Document Splitting

Path: Financial Accounting – GL-BT – Doc Splitting – Activate Doc Splitting

This is done to facilitate posting in initial implementation. Can be activated later.

Define Document Type for Entry View

Every posting in the SAP system generates a document, and the document remains open until it is cleared and archived. For example, when an invoice is posted in the system, the system generates a document and assigns a document number. The invoice remains in the system as an open item. When payment is received for the invoice, the amount received is entered into the system and cleared with the outstanding invoice. A document is uniquely identified using:

Document number: This is a unique number that is assigned to a document automatically by the system during document posting or manually by the user during data input.
Company code: This is your company’s identification code.
Fiscal year: This is your company’s accounting year code. This is usually a 12-month period.

A document has two main components. Header and Line Items. Header is made up of below fields

Document Date: This is the original document / vendor invoice date
Posting date: Date on which document is accounted in the GL account
Document Type: This determine the type of accounts (S, K, D,A) to which the document can be posted. It also control the field status of the document during entry
Company code: Legal entity to which the transaction belongs
Currency/ Exchange rate: If the document currency is different from company code currency system uses the exchange rate configured in the system. If we want a different rate to be used specify the rate in this field
Translation date: If system has to use an exchange which is different from the document date enter the date in this field
Period: This is derived from posting date. Documents can be posted only in open posting periods. Typically period is the month in which a document is posted. However a document can be posted in period 14 (special period) with a posting date of Dec 10, 2018 (Fiscal year = Calendar Year)
Reference: Generally external document number is entered here. Can be made mandatory in document type configuration

Transaction code: OBA7

Will use SAP standard.

Define Doc Number Ranges for Entry View

Tcode: FBN1

Copy Number Range from Company Code or Fiscal Year

Copy Number Range from Company Code from US01 to HPC: OBH1

Copy Number Range from Fiscal Year: OBH2

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