Today, you might be processing numerous payments to your suppliers and receipts from your customers. In this post we outline how you can settle payables and receivables without issuing a physical payment. We also highlight the benefits this brings.
As financial controllers, use Oracle Cloud ERP to settle open receivables and payables transactions through Netting when suppliers and customers are the same party. This can be done in a single step, without any cash flow. Company A owes USD 1,500 to company B which owes USD 1,200 to company A. Instead of both companies initiating cash flows for USD 1,500 and USD 1,200 respectively, use netting to settle USD 1,200. Only company A needs to issue a payment for the balance of USD 300. In the context of a continuous business relationship, this balance of USD 300 can also be netted with future transactions.
Which Companies / Industries Can Use Netting
Across many industries having the same party as customer and supplier is very common. That said, Netting can benefit all companies. Here are some examples:
Retail
Most of the suppliers are customers as well for various activities and services rendered to them by the retailers. The retailers agree with suppliers to take discounts based on sales volume over a period. If more than X units are sold, the retailer is entitled to a certain discount. If the volume exceeds by a certain percentage, an extra discount is given. These discounts, calculated outside ERP, usually in the retail application, are billed to the suppliers by the retailers. The retailers can also charge the suppliers for trade promotion activities such as in-store displays. Hence the suppliers have both payables and receivables invoices which can be netted.
Communications
Most communications companies around the globe are suppliers to each other for roaming services. There are cases when mobile phone owners use their phones on other provider networks, typically outside of the subscription country. Telco providers issue invoices in XDR (currency code for Special Drawing Rights) to each other, to be paid in the service provider currency. Telco companies can also use Netting to settle invoices with third party distributors. Supermarkets and other retailers charge the Telco company for the commissions they earn for selling call plans. The Telco company bills the distributor for the equipment and accessories they sell.
Other Industries
Invoices settlement by netting can be done in any company and any industry where third parties are both customers and suppliers. For example, company A sells furniture to company B who rents offices to company A. Company C sells raw materials to company D and buys finished goods from them.
Key Benefits
Synchronize Disbursements with Receipts
With Netting, you ensure that both parties get their debts and receivables settled without delay and timing difference. This eliminates largely the risk of paying the debts without collecting the receivables.
No Cash in Transit Since No Physical Cash Flow
There is no cash flow associated with Netting. The settlement of invoices is driven by an automated process with associated accounting entry generation. Without cash flow, there is no cash in transit.
Optimize Discounts
Run Netting regularly to optimize discounts taken.
Improve Efficiency and Save Costs
Netting helps simplify your transactional flows. Netting reduces the burden of payment initiation and file exchanges with banks. It also simplifies bank statement reconciliation and reduces the collection efforts. You can settle large volumes of payables invoices and receivables transactions, with a single process which can be scheduled to run daily.
Reduce Period Close Reconciliation and Audit Efforts
Netting reduces the number of open transactions and therefore simplifies the reconciliation effort at the end of each period.
Setup and Processing
Key Setup Steps
The steps to implement are documented in detail in the Netting Topical Essay. Configure the agreement definitions through the User Interface, ADFdi spreadsheet, or Rest API for greater automation. The agreements define the conditions of the netting approach decided with your trading partners and the transactions eligible for Netting. The main attributes of an agreement are:
Legal Entity for which it is defined
Suppliers and customers involved in the agreement. There can be multiple, and a priority order is assigned.
Order Rule: First the older transactions, or the largest or the smallest.
Balance Rule: Always net or only when payables is greater than receivables.
Currency: You want to net only transactions in one currency, or if there are potentially transactions in multiple currencies you may choose “Net within each currency”.
Include payables invoices based on pay groups and types.
Include receivables transactions based on types.
Define letters and emails to be sent to the trading partners with the detail of the settlements.
There is a lot of flexibility to select payables invoices and receivables transactions. You can specifically include only some types or include all and exclude some. You can also include and exclude invoices and transactions at the time of entry, and later during the settlement review. You can assign netting agreements in netting groups to launch the process for multiple agreements at once. There are additional steps, particularly related to the payments and receipts processing, which are documented in the Netting Topical Essay.
Create Netting Settlements
Create netting settlements using the “Manage Netting Settlements” page or by launching the “Generate Netting Settlements” process. In both cases settlements will be created for one specific agreement, for a netting group, or for all agreements. You can also schedule “Generate Netting Settlements” process as a recurring process. The settlements can be reviewed before being finally submitted and the payments and receipts created. Upon review you can remove or add invoices and transactions through a spreadsheet. Additional information on execution parameters, options, and reports is available in the Netting Topical Essay.
Some Best Practices
Settle the Settlements
You can run Netting with or without a review step before finally settling the settlements. Until they are settled, the settlements are in selected status, all initially selected transactions and invoices remain locked. These invoices and transactions are not available for other netting settlements or payments. There can be multiple invoices selected and locked even if only some are finally settled.
Settle Without Review for Touchless Processing
Once you are confident with the agreements you defined and the way transactions are selected, you can run Netting without review. Running Netting with the Settle Without Review parameter set to “Yes” makes the entire process touchless. Netting completes without any manual intervention, informs the trading partners if you set up the netting letters to be emailed.
Run Netting Before Payment Process
You should run Netting before any payment process requests to ensure that invoices are not paid through a normal payment if they can be netted. You should also avoid having settlements in selected status when a payment process is run. This could result in invoices not being selected and paid while they may not be netted either.
Set Withholding Tax Option at Invoice Time
If you only have withholding tax calculated at invoice time, set the calculation point to Invoice in the Configuration Owner Withholding Tax Options setup. The Netting process does not select transactions for a legal entity or business unit if the calculation point is set to Payment or Both.
Conclusion
When you use Netting, you can settle payables and receivables without issuing a physical payment. You reduce the cash flows, optimize the discounts on payables invoices, and improve the efficiency of your financial team. You can find more detail about the implementation steps by reading the Netting Topical Essay. You can also listen to the Oracle Cloud Customer Connect (CCC) event webcast from February 23, 2022 about the latest Netting enhancements and some industry use cases. You just need to log in to CCC first and then use this direct link here.
Authors
Laurent Oudot
Director, Financials Product Strategy
Laurent has 24 years of experience with the Oracle ERP products, dating back to the Release 10.7 days of Ebusiness Suite. His experience at Oracle includes ERP implementation in multinationals across industries and product development focused on finance localizations for countries around the globe.
Laurent's background is in Accounting and Finance. Prior to Oracle Laurent spent 12 years in French and pan-European financial roles.
As a member of the ACE team, Laurent works with strategic customers on their transformation journey.
