Order to Cash Cycle | SAP FI-SD Integration

This article will give you an overview of Finance (SAP FI) and Sales (SAP SD) Integration with Order to Cash cycle. We will also check the accounting entries and various transaction codes used in entire process in SAP.

What is Order to Cash Cycle?

“Order to cash” or O2C cycle starts with pre-sales activity like sales inquiry, to opening an A/R line item and ends with collecting payment.

O2C cycle is handled in SAP through “Sales & Distribution(SAP SD)”, “Inventory management” and “Finance and Controlling(SAP FICO)” modules.

O2C cycle deals with the entire set of activities carried out by an organization to sell its products to its customers and realization of cash. Following are activities involved:

1. Activities with Accounting Entries
   • Sales or Customer Inquiry
   • Quotation for Customer Inquiry
   • Sales Order Creation
2. Account Entries
   • Post Goods Issue (PGI, Delivery is created) (transaction: VL01N)
   • Billing (Tax Invoice and Sales Invoice) (transaction: VF01)
   • Cash Receipts / Customer Payment (transaction: FB50)

In a regular business, the first two steps, that is Inquiry and Quotation, may or may not happen. For example, a new customer may inquire and ask for a quotation but a regular customer may directly order without quotation.

Below we will discuss these points in details, and will be using the below example to make things clear:

Cost Price of Material	800 INR
Selling Price of Material	1000 INR
Profit in selling single quantity	1000-8000 = 200 INR

Customer Inquiry | Step 1 in OTC Cycle

A request for information by customer is raised which can be termed as Sales inquiry.

Transaction Code

VA11 – Create Inquiry

Business Example: We received an enquiry of 10 Quantity of Goods

Accounting entry is not created at this step.

Sales Order | Step 2 in O2C Cycle

PO is placed by the customer which becomes Sales Order for the Organisation. It is a request from a customer to a company to deliver a defined quantity of products or provide a service at a certain time.

A Sales Document is the very first document in Sales Cycle which captures the basic information like: Customer details, Details of Organisation selling the material, Material details, Payment Terms, etc

Based on this document the further process in sales cycle are executed.

Transaction Code

VA01 – Create Sales Document VA02 – Change Sales Document VA03 – Display Sales Document

Business Example: As per our business Example, we will be creating the Sales Order for 10 Quantity with each quantity @ 1000INR

Quantity Of Good	10 pc
Price of 1 Quantity	1000 INR (Selling Price)
Total Amount	10,000 INR

*Accounting Entries are not create at this step. But it does give you all the information you’ll need to create a billing document.

*The Sales Order captures the Selling Price of Material, unlike the PGI step which captures the Cost Price of the Material. This will we be discussing in details in further topics.

Post Goods Issue (PGI) – Step 3 in OTC Cycle

This is the step were we create the outbound delivery. Here, the goods is issues and material mentioned in the sales order is picked and packed at inventory for delivery. At this stage, the very first financial entry of Order-to-Cash cycle happens.

Transaction Code

VL01N – Create Outbound Deliver, , making sure to reference the correct SO. Post Goods Issue – PGI

3.1 Account Entries for PGI will be:

Debit	Credit
COGS Account – Cost of Goods Sold	Stocks/Inventory Accounts
COGS Account is auto determined from OBYC setting, based on the GBB transaction and general modifier VAX.	Stocks Account is auto determined from OBYC setting, based on the BSX transaction and Material Valuation Class.

Business Example: As per our example, the financial entry at PGI will be as follows.

Debit – 8,000 INR	Credit – 8,000 INR
COGS Account – Cost of Goods Sold	Stocks/Inventory Accounts

NOTE: COGS account is booked at Good’s Cost Price. At PGI posting, we do not post a profit entry.

Billing Documents / Invoicing – Step 4 in O2C Cycle

At this step, the goods are delivered and we debit the customer account. Revenue from Goods Sold is realised at this stage. Billing Documents are invoices and are created in SD-Sales or SD-Billing.

IMPORTANT NOTE: At this stage, the SD_FI integration happens to determine the revenue account.

Transaction Code

VF01 – Create Billing Document VF02 – Change Billing Document VF03 – Display Billing Document

4.1 Account Entries at the time billing/ invoicing is:

Debit	Credit
Customer Account Discount Account (if any)	Revenue Account Tax (if applicable)
It is determined from Sales Order. The billing is created for the Sold-to-Party account.	Revenue Account is auto determined from VKOA setting. SD-FI Integration.

Business Example: As per our example, the financial entry of this stage will be as follows. Assume we are not giving any discount and we don’t have any tax component.

Debit – 10,000 INR	Credit – 10,000 INR
Customer Account	Revenue Account

So, the Profitability Calculation in our example will be:
= Revenue – COGS
= 10000 – 8000
= 2000 INR

NOTE, Billing Document and Sales Order have the same amount, which is Selling Rate.

Payment received from Customer – Final Step in OTC Cycle

Money is received at this stage. As Following entries are passed.

Debit	Credit
Bank Account	Customer Account

Payment can be manual or automatic based on the region and scenarios.

Possible Transaction Code

F-28 : Post incoming Payment F110 : In case of SEPA Payments FLB2 : Lockbox, via check EBS : Via Bank transfer to our account

Business Example: As per our example, we received the payment via check in our LOCKBOX account.

Process Exceptions

In the event that you need to make an adjustment to a line item, there are three transactions that you can use to remedy the issue. 

1. Credit Memo
   If an item is returned for whatever reason we post Credit Memo.
   • Transaction FB75 on credit adjustments not specific to SD-originated transactions
   • Transaction VF01 to adjust a transaction originating in SD.
     Here, Customer is Credited and Revenue is Debited. And for PGI, Stocks is Debited and COGS is credited.
2. Document Reversals
   If a line item error is discovered. It is simple corrections used on line items to reverse the issue so it can be changed. It’s important that the reversal is made in the module in which it originated.
   • Transaction VA02 : to reverse an item within the SO.
     Be sure to try to correct the issue within the SO, so you don’t have to delete an SO with multiple line items.
   • Transaction FV11 : for billing documents
   • Transaction VL09 : to reverse an outbound delivery
3. Changing Poster Documents
   If information is incorrect. We can change posted documents for different steps
   • Transaction VA02 : to change an SO line item created by VA01
   • Transaction VL02N : to change an outbound delivery.
   • Transaction FB02 : to change an A/R invoice.

Direct Invoices:

Sometimes you’ll find that invoices will need to be created outside of SD-Sales, within the A/R module. These invoices are called direct invoices.

The unique thing about direct invoices is that they aren’t tied to an SD billing document. Further, they’re also based on a different standard document type than invoices created in SD. In Instances when there is no SO at all. This is common for small purchases, one-time sales, and within certain industries. And lastly, many businesses nowadays have alternative business models. Rather than selling goods, they perform services that don’t require inventory management and the associated invoices.

Conclusion

With this the Order to Cash cycle completes. If you have any query, please let us know in the comment.