This blog post addresses customer tolerances, specifically what happens to the difference when a client underpays an invoice and how it can be managed.

Basic ideas:

  • Dimensional tolerances
  • Limitations for payment advise

The discrepancies must be addressed when a consumer underpays their invoices. The disparities are usually either promptly written off or placed up as a residual item on the customer account for further investigation and resolution. The possibilities for regulating how short and overpayments are accounted for during lockbox processing are covered in this blog.

Configuration of Customer Tolerance

The Permitted Payment Differences and Tolerances for Payment Advices sections on this screen are the most important ones. When processing manual cash applications and lockboxes, these two boxes control how payment disparities are handled. Depending on how you configure the numbers in the Permitted Payment Disparities column, if the differences exceed tolerance, the system will display the dreaded message: Difference too large for a clearance.

Figure 1 shows the OBA3 Customer Tolerance Configuration Screen.

Permitted Payment Variation

The system examines the numbers in the Permitted Payment Difference during manual cash application to calculate the maximum amount that may be written off.

The difference is immediately written off if the payment difference is less than the sum or percentage indicated in these sections. If not, the difference must be handled manually. For example, it must be written off to a general ledger account or created as a residual item.

This is regarded as the level of tolerance for checks and payments.

Acceptance of Payment Counsel:

The Permitted Payment Difference operates in conjunction with the Tolerance for Payment Advices during manual cash application with payment advices and automatic cash application. The criterion set forth here determines whether the difference qualifies for write-off. This tolerance—which is the line item tolerance—is compared to each line item of the remittance.

Constructing it

If you will, think of the Permitted Payment Difference as a “bucket”. You may only contribute up to $250 to the bucket.

A $25 shortfall exists in an incoming payment for an invoice.

  • Because $25 is less than the $50 tolerance for payment advices, it can be written off.
  • Because the permitted payment difference is less than $25, the excess will be automatically written off.

A $100 shortfall exists in an incoming payment for an invoice.

  • Given that $100 is greater than the $50 Tolerance for Payment Advices, a residual item may be created for it.
  • Because $100 is below the permitted payment difference, a residual item will be produced.

The payment will be applied, and residual items will be produced, provided that the total sum of all tiny variations does not exceed the Permitted Payment difference.

Example: One Invoice, One Payment

Figure 2: One Bill, One Payment

 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: Over Permitted Payment Difference on One Payment for Multiple Invoices

Additionally, the lockbox application will query each line item when a single payment covers many invoices.

  1. Does the difference go beyond the Payment Advice Tolerance?

i. No, it qualifies for a write-off.

ii. It can be generated as a residual item, yes.

2. Does the sum of the minor discrepancies go over the permitted payment difference?

i. No, the qualified things will be written off, and the remainder items will be organised. The payment’s        status will be “Applied.”

ii. Yes, manual intervention is necessary to post the payment because it will be posted on account with           the statement “Difference too Large for a Clearing.”

Figure 3’s example illustrates that although while each line item’s individual differences are all less than the $50 Tolerance for Payment Advices, the sum, $280, is higher than the $250 Permitted Payment Difference. It will result in the error Difference too Large for a Clearing. To make up the shortfall, the payment must be manually processed after it has been posted to the account.

Figure 3 shows an overpayment difference between one payment made to multiple invoices.

 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: Under Permitted Payment Difference for One Payment with Multiple Invoices

A combination of disparities that are both above and below the Tolerances for Payments Advices is shown in Figure 4. In this case, the total of the variations covered by the Payment Advice Tolerances is lower than the Variation in the Permitted Payment. In this instance

  • The little variances will be immediately written off.
  • The disparities will be set up as residual items if they exceed the Tolerances for Payment Advices.
  • Amount received will be “Applied”

The other items must be examined and resolved as part of the cash application procedure, but the payment itself will be sent and won’t require any additional manual processing.

Figure 4: Under Permitted Payment Difference for One Payment with Multiple Invoices

 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


Give the Business Partner the Tolerance Group

Where the customer tolerance is assigned in the Business Partner is shown in Figure 5: Customer: Payment Transactions, Customer Financial Accounting Role, FLCU00, in the Company Code section. You must at least specify a “blank” tolerance group if multiple tolerances are not used.

Figure 5: Assign the Business Partner to the Tolerance Group

This knowledge should boost your cash application rate and decrease manual payment processing. For more information, please see my other blog, Additional Customer Tolerance Components.

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