Value realization and prioritization for the object-centric Open Credit Memo app
The Open Credit Memo Open Credit Memo app calculates each open credit memo’s priority and the value that has been realized from it. Credit memo prioritization is always done in the same way, but you can choose between two value realization methods, “Per Credit Memo Item” and “Aggregated”.
With the “Per Credit Memo Item” method, the app only counts realized value for cleared credit memos with the status “In Progress” or “Resolved”. Rejected credit memos, and credit memos that were cleared without anyone changing their status in the Open Credit Memo app, are shown in the Cleared Credit Memos tab, but they aren’t included in the calculations of realized value.
With the “Aggregated” method, realized value is included for all credit memos cleared in the value realization time frame, instead of only cleared credit memos with an “In Progress” or “Resolved” status. The "Aggregated" method doesn’t require the augmented credit memo status.
“Per Credit Memo Item” is the default method. You can choose the value realization method in the Configure Tracking Value tab of the Validation and Value Assessment view, and you can change it at any time.
Value realization
The app calculates a credit memo’s realized value depending on its age when cleared. The realized value is calculated as part of the organization’s free cash flow (FCF) until the credit memo reaches a specified age threshold. After that, the realized value is calculated as part of the organization’s profit and loss (P&L). You can change the default assumptions about the time thresholds by setting the app’s runtime variables. Configuring settings for the object-centric Open Credit Memo app explains how.
Within the usual processing time (which defaults to 3 months), no realized value is assigned to a credit memo. You can adjust the usual processing time by setting the AP_RTV_DebitRegularClearingBaseline runtime variable.
After the usual processing time but before the free cash flow threshold (which defaults to 12 months), the app applies the free cash flow calculation, which is based on the time remaining before the credit memo reaches the free cash flow threshold. You can adjust the free cash flow threshold by setting the AP_RTV_DebitFreeCashFlowBaseline runtime variable.
After the free cash flow threshold but before the P&L write-off threshold (which defaults to 18 months), the app changes to the profit and loss calculation, which uses a proportion of the credit memo value. You can adjust the P&L write-off threshold by setting the AP_RTV_DebitHighWriteOffRiskBaseline runtime variable.
After the write-off threshold, when the credit memo is likely to be written off, the app attributes the full realized value for the credit memo.
You can adjust the realized value calculations by editing the appropriate KPIs in the Knowledge Model - Validating KPIs for the object-centric Open Credit Memo app explains how. For the "Per Credit Memo Item" method, the realized value calculations are:
AP_OCMApp_VendorAccountDebitItem_SUM_RealizedFreeCashFlowValue, the free cash flow calculation.
Credit Memo Value * (Free Cash Flow Threshold - Current Credit Memo Age) / Free Cash Flow Threshold
AP_OCMApp_VendorAccountDebitItem_SUM_RealizedPLValueWithLowWriteOffRisk, the profit and loss calculation.
Credit Memo Value * (Current Credit Memo Age - Free Cash Flow Threshold ) / ( Profit and Loss Threshold - Free Cash Flow Threshold)
AP_OCMApp_VendorAccountDebitItem_SUM_RealizedPLValueWithHighWriteOffRisk, the full realized value of the credit memo.
For the “Aggregated” method, the realized value calculations are:
AP_OCMApp_VendorAccountDebitItem_SUM_RealizedFreeCashFlowValue, the free cash flow calculation.
Realized Free Cash Flow = Credit Memo Value * (Clearing baseline - Clearing Time) / 365
AP_OCMApp_VendorAccountDebitItem_SUM_RealizedPLValueWithLowWriteOffRisk + AP_OCMApp_VendorAccountDebitItem_SUM_RealizedPLValueWithHighWriteOffRisk, the profit and loss calculation.
When Clearing Time >= Free Cash Flow Threshold: Realized Profit and Loss = Credit Memo Value
Important
For the Open Credit Memo app, if you change the runtime variables when the app is in use, the realized value changes for all credit memos, including those handled and resolved in the past. The app does not keep a log or history of realized value. Before you change the runtime variables, make a note of the existing realized value if you need to know what it was.
Prioritization
The app prioritizes credit memos using calculations based on the profit and loss impact if the age is over the free cash flow threshold, or the free cash flow impact if the age is below the free cash threshold. The free cash flow impact is the annualized impact of not invoicing the item for an additional day. The app assigns a priority icon to each credit memo depending on the quantile of the impact, considering credit memos in all aging stages with the respective impact calculation.
High priority - over the 0.75th quantile
Medium priority - over the 0.5th quantile
Low priority - over the 0.25th quantile
Very low priority - under the 0.25th quantile
You can adjust the priority calculation by editing the following KPIs in the Knowledge Model - Validating KPIs for the object-centric Open Credit Memo app explains how:
AP_OCMApp_VendorAccountDebitItem_CLASSIFICATION_PrioritizationLogic, which returns the value that is used for prioritization.
AP_OCMApp_VendorAccountDebitItem_CLASSIFICATION_PrioritizationScore, which prioritizes the credit memos.