Top 10 Proven Tips For Automating Your Cash Application Process

10 April, 2023
2 min
Patrick Petti, AVP, Value Optimization

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12.17 min

Table of Content

Key Takeaways
Introduction
What are the Cash Application Process Steps?
How To Improve Cash Application Process?
Why does Cash Application need to Be Automated?
10 Tips to Automate Cash Application Process
6 Ways AR Cash Application Automation Can Benefit Your Business
Choosing the Right Vendor to Automate Cash Posting
FAQs on Cash Application Automation

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Key Takeaways

  • Manual cash application processes are prone to errors and inefficiencies, leading to delays and inaccuracies in posting payments.
  • Automating the cash application process can significantly enhance efficiency, reduce manual errors, and accelerate payments posting.
  • Cash application automation eliminates lockbox key-in fees and reduces reliance on human resources, resulting in substantial cost savings for your organization.
  • When selecting a vendor for cash application automation, consider factors like IT effort, cost, purpose-built customization, and decision-making capabilities.
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Introduction

Cash application plays a critical role in managing the accounts receivable process of any organization. It involves matching incoming payments to the correct customer accounts, invoices, and purchase orders. Manual cash application processes are often time-consuming, error-prone, and can result in delayed or inaccurate posting of payments. This can create a domino effect on other business processes, leading to delayed payments to vendors, inaccurate financial reporting, and strained relationships with customers.

Automating the cash application process can help organizations streamline their accounts receivable operations and improve cash flow management. By leveraging technology to automate cash application, businesses can reduce errors, improve efficiency, and gain real-time visibility into their cash inflows. This can help finance leaders make better-informed decisions, improve forecasting accuracy, and drive business growth.

What are the Cash Application Process Steps?

Cash application is a critical process in managing accounts receivable and cash flow. It involves matching incoming payments with open invoices to ensure accurate and timely posting of payments. Cash application teams receive checks, ACH, wire or card payments and they match those payments with the outstanding invoices to mark them as paid.

However, this seemingly simple process can be complicated and error-prone due to several factors, such as incomplete or inaccurate remittance advice, discrepancies between payment amount and invoice amount, and deductions taken from payments.

Here are the six major steps that cover the cash application process flow:

  1. Aggregating Payment and Remittance Data
  2. Matching Payments to Open Invoices
  3. Handling Exceptions and Coding Deduction
  4. Cash Posting to the ERP
  5. Handle Exceptions
  6. Posting Cash to the ERP
Top 10 Proven Tips For Automating Your Cash Application Process

How To Improve Cash Application Process?

Organizations need to adopt strategies that streamline operations for a more efficient and error-free cash application process. Here are six proven methods that can elevate your cash application process:

1. Streamline data aggregation

Simplify the collection of payment and remittance data by utilizing digital tools. Automated data extraction from various sources can save time and reduce errors.

2. Leverage automation for matching

Harness the power of automation to match payments with open invoices accurately. Automated matching algorithms can swiftly identify and link payments to corresponding invoices.

3. Implement exception handling workflows

Develop predefined workflows for handling exceptions and coding deductions. Streamlining this process can help reduce delays and errors in cash application.

4. Integrate with ERP systems

Seamlessly integrate your cash application system with your ERP (Enterprise Resource Planning) software. This ensures efficient cash posting and keeps your financial records up to date.

5. Regular reconciliation audits

Conduct periodic reconciliation audits to ensure your cash application process is operating smoothly. Identify and rectify any discrepancies promptly.

6. Regularly monitor KPIs and promote continuous improvement

Keep a close eye on key performance indicators (KPIs) such as cash conversion cycle, cash forecasting accuracy, and deduction resolution time. Use these metrics to identify areas for improvement and continually refine your cash application process.

Why does Cash Application need to Be Automated?

Automating the cash application process can bring significant benefits to organizations in terms of efficiency, accuracy, and cost savings. Manual cash application processes can be time-consuming and error-prone, leading to delays in posting payments and strained relationships with customers.

Additionally, organizations end up spending a lot on FTE costs, processing fees for third-party vendors, or bank lockbox key-in fees, making cash application an expensive process.

Top 10 Proven Tips For Automating Your Cash Application Process

By automating the cash application process, businesses can reduce their reliance on human resources and bank lockbox fees. This results in increased productivity and faster cash application rates.

Automated solutions can match payments to open invoices accurately, handle exceptions and deductions efficiently, and post cash to the ERP system in real-time, ensuring accurate and timely financial reporting.

Automation of cash application can also reduce operating costs by streamlining accounts receivable processes and eliminating the need for manual data entry, reconciliation, and fetching. With more than 95% straight-through cash posting rates, businesses can reduce their processing costs and improve their bottom line.

Cut Down Costs, Efforts and Time: 5 Ways to Automate Cash Application – Download eBook

10 Tips to Automate Cash Application Process

Automating the cash application process can have a significant impact on an organization's financial health. However, it's essential to consider the right focus areas to ensure a smooth transition to automation. Here are the top ten focus areas that any A/R leader should consider while automating their cash application process:

1. Capture of Remittances from Multiple Sources

You should automate the capture of remittance details across emails(both email body and attachments), web portals, EDIs, and other formats. Additionally, it is important that you accept all standard file formats, including CSVs, PDFs, JPEG, PNG, XML, HTML, excel.
Build a Robust Remittance Processing Workflow for Checks and e-Payments - Download eBook

2. Accurate Capture of Check Remittance to Reduce Lockbox Key-In Fees

To reduce dependency on bank lockbox key-in fees or in-house resources, cash application teams should leverage AI-based OCR engines to accurately capture check stub information. This is how they can eliminate lockbox key-in fees.

3. Automatic Linking of Remittance and Payments for e-Payments

For electronic payments, customers send cash remittances through emails, EDIs, or even upload them to their A/P portals. Cash application teams manually extract these remittances and map them to the incoming payments with the correct invoice number, payment data, etc. However, exceptions often arise due to incomplete and non-standard remittance information. Organizations should implement automation to automatically link payment and remittance files for e-payments.

4. Customer Identification for Incoming Payments

As soon as the payment information is received, the cash application system should be able to auto-match the payments to the customers’ open invoices. Customer identification takes place through customer reference fields such as MICR and IBANs for checks and account numbers in the case of e-remittance and payments.

5. Handling & Mapping Complex Parent-Child Relationships

Mapping payments to customers is often complicated due to the parent-child relationships. In some scenarios, sales invoices are closed on a parent account level, but the deductions are posted at the child level. Technology should help your cash application teams to identify and map parent-child relationships in the customer master to avoid exceptions during cash posting.

6. Open A/R Invoice Matching and Exception Handling

Cash application teams often encounter exceptions such as missing remittance information or incorrect invoice number. This leads to unapplied payments or, sometimes, delays in cash posting. How could you prevent unapplied and misapplied payments? The answer is through automation. cash application automation should be able to match invoices to payments even in exceptions with the help of AI-based technology.

7. Short-Payment Identification and Application of Reason Codes

Sometimes, customers make short payments and might not share the reason code information how you expect them to. An ideal cash application tool should identify short payments and map the customer-provided reason code to your internal reason codes.

8. Post Cash Directly to Your ERP

Cash application automation tools should be able to generate output files that are compatible with any ERP system. This requires the capability to generate file formats as per the particular ERP system’s requirements, including BAI, EDI, and several others. Therefore it reduces the manual effort to reconfigure the file, and the cash directly gets posted to the ERP system.

9. AI and Machine-Learning to Contextual Intelligence

Cash application teams would ideally want to encounter lesser exceptions so that they can spend more time on root-cause analysis. With the help of AI and machine learning algorithms, the auto cash application tool can self-learn from the exceptions and the analyst behavior in the past so that these exceptions can be automatically resolved in the future without human intervention.

10. Generate Performance Metrics and Reports

Automation in cash application should help A/R managers and executives to monitor day-to-day activities, analyst KPIs, and cash application process metrics. With intuitive reports and dashboards, the C-suite will be able to analyze the performance of the cash application process in O2C on a global and regional scale.
Top 10 Proven Tips For Automating Your Cash Application Process

6 Ways AR Cash Application Automation Can Benefit Your Business

Automating your AR cash application process can revolutionize your financial operations. Here are the six key benefits of cash application automation:

1. Enhanced efficiency

Automation significantly speeds up the cash application process. This means faster payments posting, reduced backlog, and a more streamlined AR workflow.

2. Elimination of key-in fees

Say goodbye to lockbox key-in fees with the help of AI-based technology that accurately captures check remittances, resulting in substantial cost savings.

3. Enhanced productivity

Improve your team’s productivity by automating remittance capture from various sources, freeing them from repetitive, non-value-added tasks.

4. Automated remittance aggregation 

Automatically extract remittances from multiple sources, including emails, checks, customer websites, and AP portals. This streamlines the process and accommodates various file formats and languages.

5. Efficient deduction coding

Let automation handle the identification of short payments and map reason codes to ERP-specific deduction codes, ensuring accuracy and reducing manual work.

6. Swift exception resolution

Speed up deduction resolution, even when dealing with missing remittances. Our system can predict potential remittances, reducing the need for manual customer master data maintenance and ensuring seamless operations.

By embracing cash application automation, your business can reap these benefits, significantly enhancing financial efficiency and success. Next, let’s explore the vital aspect of selecting the right vendor for automating cash posting.

Choosing the Right Vendor to Automate Cash Posting

When choosing a vendor for automating cash application, it’s crucial to consider the benefits and features of their solution. This chapter will help you develop a business case for implementing an automated cash application system, focusing on identifying and quantifying the benefits of the solutions provided by various vendors

To choose the right vendor, here are the questions you should ask before buying or implementing the solution:

IT Effort:

  • How much internal IT effort is required to implement the solution?
  • Does the solution work with your existing ERP, or will additional IT efforts be required?
  • Will you need to re-code RPA systems every time there’s a new payment or remittance format?
  • Is the solution on-premise or cloud-based?

Implementing an automatic cash application solution can require significant internal IT effort. With HighRadius’ AI-based Cash Application Software, you can minimize that effort. The solution is designed to work seamlessly with your existing ERP, eliminating the need for additional IT efforts. HighRadius’ cloud-based solution also ensures that you don’t have to re-code RPA systems every time there’s a new payment or remittance format.

Cost:

  • Does the automation tool have an annual or monthly payment scheme?
  • What is the ROI from the vendor’s other implementations with customers?

It is essential to consider the cost of the solution while choosing any vendor. HighRadius’ automation tool offers a budget-friendly annual payment scheme for organizations of all sizes. Additionally, the ROI from HighRadius’ other implementations with customers has been significant, improving financial health and cash application processes.

Purpose-built:

  • How customizable is the cash application tool?
  • Would the vendor be able to custom-build features based on your business requirements?

Customization is crucial when it comes to automating your cash application process. HighRadius’ cash application tool is highly customizable, and the vendor can custom-build features based on your business requirements. This makes the solution purpose-built for your specific needs, ensuring maximum benefits.

Decision-making:

  • Will the solution only follow a set of rules, or will it also assist in decision-making?

An automated cash application solution should not only follow a set of rules but should also assist in decision-making. HighRadius’ AI and ML-based proactive exception-handling features enable the solution to self-learn from the exceptions and analyst behavior in the past. This allows for better decision-making and proactive handling of exceptions.

When evaluating vendors, it’s essential to consider these factors to ensure that the selected solution meets your business needs and provides maximum benefits. By choosing HighRadius as your vendor for automating cash posting, you can benefit from key features such as 100% automated remittance aggregation, automated invoice matching, and faster exception resolution. HighRadius’ solution is purpose-built, and customizable, and assists in decision-making, providing maximum benefits for your business.

Top 10 Proven Tips For Automating Your Cash Application Process

FAQs on Cash Application Automation

Is it possible to achieve 100% cash application process automation?

The Cash Application process in O2C can be automated, and across industries, the A/R teams have achieved more than 95% straight-through cash posting. While the cash posting rates differ with industries because of their unique business problems, organizations should always focus on improving their cash application process and analyst productivity.

What are the benefits of automated cash application?

Automated cash application provides numerous benefits such as improved efficiency, reduced errors, faster exception resolution, and enhanced cash flow visibility. It also frees up time for your finance team to focus on more strategic tasks, making your organization more productive and profitable.

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