Draft Management in M3

This document explains how you manage drafts (bills of exchange) in M3 Accounts Receivable and M3 Accounts Payable.

This includes:

  • Recording received drafts in accounts receivable, allocating them to invoice, remitting them to the bank to be collected, and reconciling them in accounts receivable
  • Creating or recording supplier drafts in accounts payable.
Note: Definite postdated checks (type 1) are managed as drafts in M3.

Outcome

Customer drafts and supplier drafts are processed correctly. For information about transactions created and change of statuses, see the respective process and related instructions in Processing Customer Payments.

Draft management overview

A draft is a bill of exchange, a payment document indicating that the customer will pay a certain amount at a certain date (the due date) and from a certain bank. Accepted drafts have the same legal value as checks and are also in several ways managed like checks. In fact, an accepted draft is like a check with a due date. That is why definite postdated checks (type 1) are managed like drafts and recorded as payment 4 class documents in M3. In some countries, drafts are preferred as the payment method when the number of days between invoice date and due date is large, often between 60 and 180 days.

  • Draft Management: Supplier - Customer - Bank

    The model below illustrates the interaction between the customer, the supplier, and their respective banks when using drafts as the payment method.

    For information about the various steps included in M3 draft management in accounts receivable and accounts payable, see below.

  • Acceptance of Draft

    The customer must accept the draft sent by the supplier within a certain number of days of the invoice date. This is a legal requirement in some countries. It is common to send a reminder to the customer a few days after the draft has been issued. The bank and due date can be changed as long as the draft is not officially accepted. However, the supplier is not required to accept any changes concerning payment terms. If the customer does not accept the invoiced amount, he or she has these options:

    • Inform the supplier that the draft is not accepted and ask for a new draft, or
    • Issue a promissory note for the new amount.

    When the draft is accepted, the supplier can decide to:

    • Wait until due date before collecting the draft.
    • Send the draft to the bank to be discounted, before due date.

    When the draft is received by the bank, these will happen:

    1. The draft is collected on the due date or discounted and the amount is transferred to the payee's account.
    2. The bank contacts the customer bank to have the money transferred to an account of its own.
      • The customer bank may notify the customer that they have received this draft, for acceptance or rejection. Whether this applies is regulated in the agreement between the customer and the customer bank.
    3. These are the alternatives at this stage:
      • The draft cannot be collected due to insufficient funds or some other reason (see below under Draft Rejected by Bank). The bank informs the payee that the draft has been canceled and withdraws the amount that was previously transferred.
      • The draft is collected on the due date/discounted. After a certain number of days without having heard from the bank the payee can eliminate the customer risk. The payment is final.

    If the draft is to be discounted before the due date, the bank will first decide whether to accept the draft. If so, the bank will deduct interest for the remaining days and any bank fees, including VAT. The bank will then process the draft on the due date.

    For information about the procedure for drafts without acceptance, see below.

  • Collection of Drafts

    A draft can be converted to money by the bank in these ways:

    1. Collection on due date, also called cash remittance: The draft is collected. The money is transferred to the supplier's account on the specified due date.
    2. Discount: The supplier can choose to send the draft to be collected before the due date, that is, cashed prematurely. The money is transferred directly to the supplier's account. However, a deduction of the draft amount is made based on the calculated interest between the discount date and the due date and any fixed charges for discounting the draft.

    The bank then sends the draft to the customer's bank to have the money transferred to its own account.

    In this documentation, collection without any mention of due date refers to both collection on the due date and discounting.

  • Reasons Why the Bank Might Not Collect a Draft

    The bank can choose to return the draft without collecting it for several reasons:

    • The bank does not trust the solidity of the payer.
    • The draft contains erroneous information (for example, incorrect payer bank).
    • The bank has been informed that customer and supplier have agreed to replace an already remitted draft with one or several other drafts. The replacement drafts may have different amounts and/or due dates. This is usually done to prevent a draft from being collected on a date when the customer's account balance is insufficient in order to avoid legal complications and substantial bank charges.
    • Due to insufficient funds.
  • Assessing Customer Risk for Drafts

    The customer risk, that is, the possibility that the bank will reject the draft, depends on the stage of the handling. The list below displays the different stages, beginning with the stages with the highest risk factor:

    1. Overdue invoices – drafts are not yet returned
    2. Drafts in portfolio, that is drafts are not yet remitted to bank to be collected
    3. Drafts remitted to bank but not yet collected
    4. Drafts are collected by the supplier's bank, but the number of days specified for risk cancellation is not exceeded.
  • Example of How a Draft is Used

    A company in the fashion industry orders fabrics for a certain collection from a supplier. This needs to be done long before the finished garments are available in the stores and sold. Since the company at this time has no revenues from this project, the supplier agrees to grant the company 180 days from the invoice date before full payment must be received. The company receives the invoice together with the draft. The draft is accepted and returned to the supplier within 10 days. The supplier can choose to either send the draft to his/her bank after six months for collection or discount it before due date if necessary.

Description of a Draft

  • Information Included in a Draft

    If the draft is created by the supplier, it is usually printed together with an invoice or a group invoice statement for invoices with the same due date and payment method. If the draft is issued by the customer, it is usually included in the payment statement sent to the supplier.

    A draft contains these information:

    • Amount
    • Due date
    • Payer bank
    • Drawee reference number, that is, the draft number
    • Payer's name and address
    • A field reserved for the customer's signature, the so-called acceptance, confirming that the payment terms are accepted
    • A field reserved for the supplier's fiscal stamp, which assigns the draft a definite legal value.
  • Draft Types
    Accepted draft A draft printed by the supplier and sent together with the invoice (or the group invoice statement) to the customer for acceptance.
    Draft without acceptance

    A draft printed by the supplier together with the invoice but not sent for acceptance.

    In Spain, for example, suppliers usually create drafts without the previous acceptance of the customers. Using drafts without acceptance facilitates the supplier's transaction entry, since such drafts do not require manual recording of payments in 'Payment Received. Record' (ARS110) as do the other types of drafts. Instead, account entries are created automatically in 'Draft without Acceptance. Open' (ARS370). After that, drafts are remitted to the bank as usual using 'Bank Remittance. Open' (ARS300).

    Drafts without acceptance are created for customer invoices with a payment method belonging to payment class 4 and with acceptance code 0 selected in 'AR Payment Method. Open' (CRS076/E). The 'Print draft document' field for the payment method determines when the draft is actually printed.

    Promissory note A draft printed by the customer and sent to the supplier.
  • Drawee Reference Number

    The drawee reference number is the customer's reference number. For accepted customer drafts it is entered manually when you record payments by draft in (ARS110). For drafts without acceptance, see below. For drafts created based on a payment proposal in 'Supplier Payment Proposal. Open' (APS130), the invoice number is automatically used as the drawee reference number, provided that the AP payment method used stipulates that each invoice generates one payment document, that is, that no grouping is done. Transactions with a drawee reference number are saved with additional information number 211 (drawee reference number), whereas the draft number itself is saved with number 213 in accounts receivable.

    The number provides traceability between the original invoice and the draft. It is used to do these:

    • Identify drafts in 'Customer Invoice. Display Separate' (ARS215), by using information view 5, and in 'Customer Draft. Display' (ARS280) by using information view 3.
    • Identify the invoice records on which a draft is based in 'Accounts Receivable. Display Additional Info' (ARS250) by selecting additional information number 211.
    • Select drafts based on drawee reference number on the search panel in 'Accounts Receivable. Display' (ARS200/S).
    • Display drafts by drawee reference number in (ARS200/B) using sorting order 8.
    • Identify drafts on printed statements of account created in 'AR Statement of Account. Open' (ARS140) or 'AR Statement of Account. Open' (ARS640) and on reports created in 'AR Portfolio. Print Specification' (ARS560).
    • Identify drafts when you review bank remittance proposals in (ARS300).
    • Select drafts when you report rejected drafts in 'Draft/Check. Open Unpaid or Rejected' (ARS340/S). (The drawee reference number is also displayed on the F panel in the same program.)

    If you manually split an invoice record with a drawee reference number by selecting option 21 in 'Accounts Receivable. Display' (ARS200), as described in Work with Recorded Customer Invoices, the new invoice record automatically receives the same drawee reference number as the original invoice record.

    The payment method determines whether the drawee reference number is mandatory or must be unique.

    Information about the drawee reference number is added in the printout of Accounts Receivables (ARS501PF), in the Statement of Account proposal (ARS143PF) and in the Detailed Statement of Account for the external document (ARS512PF).

    In 'AR Statement of Account - proposal' (ARS143PF), the drawee reference number is added to the printout for invoices with remittance status > 00, which are draft invoices.

    'Acc Receivable. Print' (ARS500) contains a new setting to be able to print the drawee reference number instead of the invoice number for draft invoices (with remittance status > 00). If the drawee reference number is blank for some reason, the invoice number will be printed.

    In 'AR Statement of Account - Detailed external document' (ARS512PF), the reference field (Drawee reference number, Check number, Split invoice number, and Group invoice number) is added to the stream file and the printout. The references are retrieved in the order above.

    To use this new functionality, 'Draft reference control' must be set to 1 in 'AR Payment Method. Open' (CRS076) for payment methods with payment class 4 (Draft). This means that the drawee reference number is mandatory and must be unique for the payer.

  • Drawee Reference Number for Drafts without Acceptance

    Invoices split manually in (ARS200) are included in proposals created in (ARS370). Draft records automatically receive the same drawee reference number when split manually. When you approve a proposal in (ARS370), invoices that are split automatically during customer order processing, as defined by the payment terms, receive their drawee reference number from the customer order's invoice number (additional information number 228).

    When you manually group invoices in (ARS200), as described in Manually Create Group Invoice, and select a payment method for drafts without acceptance for the new group invoice, the result is a draft record with remittance status 10 that will not be included in the (ARS370) routine. The invoice number of the first invoice included in the grouping is used as the drawee reference number in this case.

  • Acceptance Routines per Draft Type
    Acceptance – Accepted Draft
    • If the draft is accepted, it is returned to the supplier, who sends it to the bank for collection or discount.
    • If the draft is not accepted within a specified number of days, the supplier will include the customer in the payment reminder routine. The supplier may also block future orders or deliveries.
    Acceptance – Draft without Acceptance

    1. The supplier sends the invoice or the group invoice statement to the customer but keeps the draft that is not accepted (draft without acceptance). This is usually only done between close business partners and is regulated in the customer/supplier agreement.

    2. The supplier sends the draft to the bank for collection or discounting, although it is not officially accepted by the customer.

    3. The customer receives a list from the bank of drafts without acceptance, for approval 5–10 days before the due date.
    Acceptance – Promissory Note This third type of draft is also called a promissory note. It is regarded as automatically accepted by the customer. The supplier then sends the draft to the bank for collection. The bank notifies the customer before collecting the draft on the due date.

Steps included in Accounts Receivable

The model below illustrates the steps included in managing drafts in accounts receivable.

  1. Programs Used for Draft Management in Accounts Receivable
    • Configure the processing of drafts for payment methods belonging to payment class 4 in 'AR Payment Method. Open' (CRS076). The payment method determines whether the draft must be accepted by the customer before processing, whether a drawee reference number is mandatory and/or unique, when in the process the actual draft is printed (see below), whether the draft amount is to be printed in text form (see below) and whether it is possible to change the customer's bank account for the draft in 'Accounts Receivable. Display' (ARS200) after the draft is registered.
    • Create one or more customer invoices in an M3 invoicing program.
    • Create a draft based on a group invoice in 'Customer Invoice. Group' (ARS190).
    • Record customer payments received in the form of drafts in 'Payment Document. Enter' (ARS105) or 'Payment Received. Record' (ARS110).
    • Create an interest invoice automatically when recording a draft with a due date later than the invoice due date. When recording such a draft, 'Customer Invoice. Enter Manual' (ARS120) is automatically displayed with proposed values for the interest invoice. (This provides that a detail record with panel layout 30 under FAM function AR20 is connected to a payment method. This payment method must then be connected to the FAM function detail record selected for the entry.)
    • Define a general interest for such an interest invoice in 'Settings – General Interest Rate Drafts' (CRS475) or a customer-specific one in 'Customer. Open' (CRS610/K).
    • Create a group invoice by matching several draft records by selecting option 22 in 'Accounts Receivable. Display' (ARS200).
    • Match a draft record against a credit note with the same amount by selecting function key F20 in (ARS200).
    • Manually print or reprint a draft by selecting function key F20 in (ARS200) or by selecting option 23='Print draft' in 'Customer Invoice. Display in Number Sequence' (ARS205).
    • Change the bank in (ARS200) for a draft already remitted to bank. Whether this is possible depends on the national legislation and the payment method used.
    • Select function key F21 in (ARS200) to open 'Customer Draft. Display' (ARS280) to display drafts for the payer selected in (ARS200).
    • Identify which drawee reference number relates to which draft number by selecting sorting order 8 in (ARS200/B). This sorting order lists all "regular" customer invoices by invoice number and all drafts by drawee reference number. For the latter category the corresponding draft number is specified as well.
    • Create account entries for invoices recorded with a payment method for drafts without acceptance in 'Draft without Acceptance. Open Payment' (ARS370). This way you do not have to enter the draft payments manually in 'Payment Received. Record' (ARS110).
    • Post non-remitted drafts to an account for doubtful debts in 'Customer Invoice. Process Doubtful' (ARS360).
    • Create remittance statements, that is, orders for remitting the drafts to one or more banks, in 'Bank Remittance. Open' (ARS300).
    • Use the bank statement returned to report all collected drafts in 'Bank Remittance. Reconcile Payment' (ARS350) or in 'Bank Remitt. Reconcile Payt per Due Date' (ARS355).
    • Eliminate the customer risk in 'Customer Risk Cancellation. Create' (ARS330).
    • Report drafts rejected before or after collection in 'Draft/Check. Open Unpaid or Rejected' (ARS340). There you define how to proceed with the matter, whether the original invoice should be reopened or a new draft be created.
    • Print a list of all drafts creating a balance at a certain general ledger account (for example, Drafts not remitted) in 'AR Portfolio. Print Specification' (ARS560).
  2. Printout of Drafts

    In accounts receivable, the value selected for the payment method in the 'Print draft document' field determines when a draft is printed:

    0 No printouts.
    1 When you create a group invoice in 'Customer Invoice. Group' (ARS190). The draft is printed in the footer of the invoice.
    2 When you confirm a draft in 'Draft without Acceptance. Open Payment' (ARS370).
    3 When you confirm a bank remittance proposal in 'Bank Remittance. Open' (ARS300).
    4 When you print a draft manually in 'Accounts Receivable. Display' (ARS200) and in 'Customer Invoice. Display in Number Sequence' (ARS205).
  3. Printing Amounts and Currency Names as Text

    When you print a draft, the amount is also printed in text form. The 'Printout of amounts' field for the payment method in 'AR Payment Method. Open' (CRS076/E) determines what syntax to apply.

    The amounts written as text are retrieved from 'Check. Write Amount as Text' (CRS180). The names of the currency and coin are retrieved from 'Currency. Write as Text per Language' (CRS182). For details, see Convert Document Amounts and Currency Names to Text.

  • Settings and Account Entries Created during Draft Management in Accounts Receivable

    For detailed information about settings required, see the respective sub-process or instruction in Processing Customer Payments for detailed information.

    Additional information number 013 (bank remittance number) is added to all transactions created when:

    • Remitting drafts to bank in (ARS300)
    • Reporting collected drafts in (ARS350) or (ARS355)
    • Reporting rejected drafts in (ARS340)
    • Eliminating the risk that drafts may be rejected by the bank in (ARS330).

    You can display all of these transactions for each bank remittance by entering the bank remittance number for additional information number 013 in 'General Ledger. Display Additional Info' (GLS250).

  • Reviewing Draft Portfolio and Status

    You can review the current statuses of all customer drafts, indicating the different steps in the process, and the invoices involved. You do this in 'Customer Draft. Open' (ARS280). You can also open this program to display drafts for a selected payer by selecting function key F21 in 'Accounts Receivable. Display' (ARS200).

    As mentioned above, you can print a list of all drafts creating a balance at a certain general ledger account (for example, Drafts not remitted) in 'AR Portfolio. Print Specification' (ARS560).

    Bank-Remitted Amounts

    For each bank account used for the remittance, you can see the current amount for collected and discounted drafts, respectively, for which the customer risk is not yet canceled. The values are displayed in 'Bank Account. Open' (CRS692/F).

    Value Types in the Accounts Receivable Balance File

    You can use the following value types in 'AR Inquiry Column Template. Open' (ARS066) to review the situation in 'Accounts Receivable. Display Balances' (ARS225):

    • 40 = Payment document not submitted to bank
    • 41 = Payment document past due
    • 41 = Customer risk not canceled for payment document
    • 50 = Rejected amount – check/draft
    • 51 = Number of rejected checks/drafts.

Steps Included in Accounts Payable

These workflows are available to processi drafts in accounts payable.

  • Draft Created by Supplier and Sent for Acceptance

    In this workflow, the purchasing company records draft payments manually in 'Supplier Payment. Enter Manually' (APS120). One draft can cover several supplier invoices with the same due date.

    Steps included in this workflow:

    1. Company Records Invoice in (APS100)
    2. Company Accepts Supplier Draft by Signing it
    3. Company Returns Draft to Supplier
    4. Supplier Remits Draft to Bank
    5. Bank Notifies Company before Collection
    6. Company Accepts (or Rejects) Collection of Draft
    7. If accepted, the company records Draft Payment in (APS120). The bank confirms collection of Draft.
    8. Company Reports Bank Confirmation in (APS175).
  • Draft Created by Purchasing Company

    In this workflow, the purchasing company creates a draft and corresponding payment records when approving a payment proposal in 'Supplier Payment Proposal. Open' (APS130). A draft can cover several invoices with the same due date.

    Steps included in this workflow:

    1. Company Records Invoice in (APS100)
    2. Company Creates Supplier Draft in (APS130). Draft Payment Automatically Recorded.
    3. Company Sends Draft to Supplier
    4. Supplier Remits Draft to Bank
    5. Bank Notifies Company before Collection
    6. Company Accepts (or Rejects) Collection of Draft
    7. If accepted, the bank Confirms Collection of Draft
    8. Company Reports Bank Confirmation in (APS175).
  • Draft without Acceptance

    In this workflow, the purchasing company automatically generates payment account entries for drafts without acceptance in 'Draft without Acceptance. Open Payment' (APS380) based on supplier invoices with a corresponding payment method. The draft itself – usually one draft per invoice – is printed by the supplier.

    Steps included in this workflow:

    1. Company Records Invoice in (APS100)
    2. Create Account Entries for Draft Payments in (APS380). Draft Payment Automatically Recorded.
    3. Supplier Creates Draft
    4. Supplier Sends Draft to Bank
    5. Bank Notifies Company before Collection
    6. Company Accepts (or Rejects) Collection of Draft
    7. If accepted, the Bank Confirms Collection of Draft
    8. Company Reports Bank Confirmation in (APS175).

Programs Used for Draft Management in Accounts Payable

  • Record drafts sent by the supplier for acceptance in 'Supplier Payment. Enter Manual' (APS120).
  • Create drafts to be sent to the supplier in 'Supplier Payment Proposal. Open' (APS130).
  • Create account entries for drafts without acceptance in 'Draft without Acceptance. Open Payment' (APS380). This closes the invoices with the selected payment method as paid.
  • Record bank confirmation of the remitted drafts in 'Draft. Reconcile Confirmations' (APS175). You can change the company bank for individual drafts during the reconciliation.
Related topics