Best Practices for Streamlining Your Cash Application Process

If you’re part of an accounts receivable team, you’d probably rather have a streamlined cash application process more than a fancy espresso machine in the break room. Especially after a scenario like this all too common one: A payment comes in–one you’ve been chasing down for months–and even though it’s through a bank transfer without helpful remittance information, you’re glad you can finally post the payment and close out the open invoice. Or is it invoices?

Because your customer paid for multiple invoices with that one transfer, it’s difficult to tell. And it gets worse, half the invoices had discounts that were to be applied. The invoice numbers that came in a separate email don’t match up either. So you spend hours trying to locate the invoices in your system, checking with Sales to verify the discounts and communicating with the customer for more information. 

One payment posted and how many more like it to go?

What is the Cash Application Process and Why is it Important?

In the order-to-cash cycle, cash application, or when you apply a customer’s payment to their outstanding balance, is the final step. The first step is when an order or a commitment to buy is placed. The next step in the process may be credit management or on down the line to accounts receivable where an invoice is created and sent to the customer. When the revenue comes in, it’s recognized and recorded in your ERP or accounting system, marking the end of the cycle for that purchase.

As a matching mechanism, cash application fills in the gaps and fulfills several important goals for businesses. First, it allows a business to finally access the cash it was expecting for use any way the business sees fit–expenses, growth, investment, etc. Until a payment is posted, it should be considered non-existent and therefore can’t be used. 

Second, the cash application process gives you information about your business. It will tell you what customers are paying, giving you useful information about which of your products or services are selling best. These insights help you define your marketing efforts. Or without accurate cash application, you could discover that you’re still delivering a service to customers who haven’t been paying.

Additionally, if your cash application isn’t current, it can cause problems for your customers. If the funds aren’t withdrawn in a timely manner or they don’t get a receipt, they will experience difficulties with their own accounting and forecasting. 

Like all the other parts of accounts receivable management, cash application is important but riddled with time-consuming, error-prone manual tasks. Large companies will often have a team of cash application specialists whose job is to manage incoming payments from various channels–paper checks, ACH transfers, credit cards, wired funds–all day long. 

How to Streamline Your Cash Application Process

Having a specialized team to focus on cash application is one way of streamlining your cash application process; however, it’s not practical for all businesses. Even for larger companies that can afford a team of specialists, a workforce dedicated to that one particular task is not sustainable for a few reasons.

For starters, more and more businesses are using e-payments these days, and too many times those electronic payments come in without any remittance advice. Then there’s the fact that some customers ask that vendors access payments from AP portals, meaning the cash application specialist has to log in to a customer’s portal to get payment information. And finally manual processes, no matter how many specialists are on a team, provide too many opportunities for error. One inverted number can mean a payment is applied wrongly and lead to inaccuracies in your own accounting as well as unhappy customers who then have to waste their own time contacting you about your mistake.

Most small to mid-market size businesses aren’t in a position to have a team–or one person, for that matter–focused only on matching remittances to outstanding invoices. They have to divide and conquer all the manual tasks involved in AR. But at some point, AR teams will begin to experience the symptoms of a less-than streamlined cash application process:

1. Large amounts of cash that have not yet been applied to outstanding balances.
2. Many payments that have not been filed.
3. An increase in the number of customers who ask for a receipt.
4. A lack of high-level reporting regarding cash application.
5. Higher AR costs.

Automation is the Best Practice for Streamlining Cash Application

Digital technology has improved the payment process in B2B and ecommerce immensely, but at the same time it has complicated the work of AR teams who aren’t on board yet with automation and advanced technologies. Cash application has become even more labor-intensive due to an increase in the volume of electronic transactions, all the additional payment options and other changes that automated AP processes introduced. 

For that reason, the list of best practices for streamlining your cash application process is a short one. A very short one: Add automation enhanced with artificial intelligence (AI) and machine learning (ML) to your cash application process. According to a survey of CFOs by Dun & Bradstreet, 41% of respondents indicated that they would consider automating cash application before other parts of their AR process because of how critical it is to cash flow.

Here’s What to Look for in a Cash Application Solution 

Once you’ve decided to integrate the best practice of automation into your business, you’ll notice that the market is flooded with cash application tools. Choose one that is powered by AI and ML. It should have the ability to retrieve and organize remittances from multiple sources–web portals, emails and lockboxes– into one central location. The technology will then match, identify discounts or other deductions, and link important codes to your ERP system.

Look for an AI-driven cash application solution that includes the following:

An efficient matching system. Greater efficiency comes with being able to customize for your specific needs. The solution you choose should be able to match about 90% of your payments, handling them at lightning speed without error.

The ability to improve over time. Smart technologies like AI and ML learn from historical data, so over time they will learn your customers’ banks and data. Your cash application process will get better and better.

Flexibility to meet your needs. The best platforms will be able to import from any data sets you require and aggregate that data automatically for you.

Robust dashboard reporting. A system should allow you to run any of the reports you and your management needs for decision-making.

A smarter and faster cash application process means you can offer your customers more options and be more flexible with what types of payments you accept without increasing the size of your AR team. And with real-time financial data, you’ll also be able to provide your CFO with accurate, meaningful reporting.

Payference is an AI-powered all-in-one cash management tool designed for small to mid-market businesses, offering all the features they need at an affordable cost. 

With Payference, you can reduce the time spent on cash application by up to 75% and grow your business faster without adding to your AR team. Read this case study to learn how a video platform company was able to manage a significant increase in business without adding to their AR team.