Cash Application Process – Leveraging Automation

22 May, 2018
4 min read
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What you'll learn

  • Understand the factors that limit automation effectiveness.
  • Learn to analyze automation failure in order to improve the overall process.
  • Understand automation and its role as a basic requirement for the company’s A/R process.
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I have spent the majority of my 25+ year career working in various aspects of the Order to Cash process in 4 well known Consumer Products Companies. During my career, I have developed a passion for “continuous improvement” by streamlining, simplifying, and automating the different components of the order to cash process.

Cash Application is an important and often overlooked part of Receivable Management. Timeliness and accuracy are two key metrics looked at to measure the effectiveness of a company’s cash application process. If payments are not posted accurately and timely, inefficiencies are created in the downstream processes that include Credit, Collections, and Deduction Management. It can also have a negative impact on a company’s day’s sales outstanding (DSO) which is a key financial ratio that illustrates how well a company’s Accounts Receivables are being managed. This process represents a great opportunity to improve efficiencies through automation.

Automation – Basic Requirement

Automation is critical to ensure payments are applied in a timely manner. Payments need to be received electronically to enable the auto cash application process. There are two ways this is accomplished:

  • The customer sends payment through the vendor’s bank electronically utilizing EFT (Electronic Funds Transfer) and EDI 820 (remittance detail). This is the preferred method since it enables full automation. There are customers however who cannot or will not send electronic payments.
  • Bank Lockbox utilization – In this scenario, customer check payments are sent to a P.O. Box designated to a specific company and managed by a bank’s lockbox processing center. The bank accounts for the deposit and then creates the electronic file by capturing all check and remittance detail by utilizing OCR (Optical Character Recognition) or by manual data entry if the OCR process is not successful.

In both of these scenarios, the electronic file is sent into the Vendor’s Accounts Receivable system. Depending on the system being utilized and the sophistication of the algorithms in the cash application programs, the level of success will vary.

Factors that Limit Automation Effectiveness

The amount of automation that can be achieved from the auto cash program in most Receivables Management systems is limited by a number of factors that include, but are not limited to:

  • The way customers reflect short pays on their remittances. If they pay an invoice short and adjust the cash discount amount accordingly a company’s cash app program may not be able to properly reconcile the payment to ensure the short payment is properly reflected.
  • System constraints such as a limitation on the number of remittance line items per payment. i.e. – SAP currently has a 999 line item limitation.
  • Customers with multiple A/R account numbers where certain disputes/claims need to be set up based on customer-specific reference numbers or coding. This introduces customer-specific complexity that is difficult to properly code into the auto cash programs.

These issues result in either a partially applied or unapplied payment.
In many cases, customer deductions for disputes or trade promotion claims are taken from customer payments. Downstream workflow is usually different for each claim type so it is beneficial to assign reason codes to each deduction. They can be assigned at the time of cash application and this almost always requires manual effort. In some organizations, the coding may be done at a later time by one of the downstream processes. Reason codes are determined based on the reference number used or in some cases, a separate deduction type code is assigned and provided by the customer.

Automation – Continuous Improvement

In the spirit of continuous improvement, when automation fails it is important to do root cause analysis to determine what specifically caused the process breakdown. It is equally important that all findings coming out of a root cause analysis get documented. This can be used to determine if additional action is warranted. Unfortunately, additional program changes needed to account for customer-specific complexity is usually difficult and cost-prohibitive, however recent technology that has become available through SaaS vendors like HighRadius has provided a cost-effective way of setting complex rules at a customer level. This breakthrough enables companies to improve their “auto-hit rate” significantly. The technology also enables reason codes to be assigned automatically.

Key Performance Indicators

As noted earlier, timeliness and accuracy are two important metrics to determine the effectiveness of a company’s overall cash application process. By effectively leveraging automation, both timeliness and accuracy should be maximized.

An additional measurement used to determine the effectiveness of automation is the “hit rate”.  Most companies calculate the hit rate based on payments applied automatically as a percentage of total payments received.  This way of calculating can be misleading however since it doesn’t factor in the number of line items on each payment.   In order to get a more realistic picture of auto cash effectiveness companies should consider calculating hit rate based online items applied automatically.
To illustrate, consider this simple example:

  • 9 payments paying 2 invoices each applied automatically = 18 line items
  • 1 payment of 100 line items (invoices and deductions) unapplied due to one of the reasons discussed earlier


  • 9 of 10 payments applied automatically = 90% hit rate (Traditional calculation)
  • Reality: 18 of 118 line items applied automatically = 15% hit rate (More accurate calculation and better illustrates where companies may have an opportunity to improve.)

If your organization handles high volumes of payments, automating cash application may represent an opportunity for improved productivity and reduced costs. If you have a process in place but still have significant resources handling exceptions, a comprehensive review of your existing program may be warranted. This will determine what is driving the exceptions and assess whether they can be eliminated by process/system changes or by taking advantage of SaaS technology, such as HighRadius’ cash application automation solutions.

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HighRadius Cash Application Software enables the end-to-end automation of the cash application process that covers major benefits such as AI-enabled data capture for remittances, auto-linking of payments with open invoices, cost-cutting on lockbox fees and easy compatibility with any system due to its ERP-agnostic Saas infrastructure. Apart from the major benefits that it has, there are some key features which can not be missed out, some of them are Email Remittance capture, Discounts and Deductions Handling, Check Remittance Capture, Web Remittance Capture, Invoice Matching, and RDC & Mobile Payments.

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