A Complete Guide to Cash Application in O2C

Cash application might seem to be a back-office, excel-based process, but it has a vital upstream impact on working capital optimization. Today, for any CFO, working capital holds utmost importance; they need to answer questions like: what is my working capital at this moment?

Now the question arises, how does cash application management impact working capital? It’s simple! Faster cash application means higher Accounts Receivable, which leads to optimized working capital. This is why cash application needs to happen daily to ensure every payment is applied and reflected in the books as cash inflows.

In most organizations, A/R cash application is a manual-intensive task. The analysts are heavily dependent on excel sheets to perform their day-to-day cash application entry. The manual cash application activities lead to a loss in productivity and impact the overall cost aspect in A/R.

Now that we have understood the overview of cash application, let us analyze the challenges encountered in this process:

• Lockbox Fees Leading to a Higher Cost of Doing Business 

Bank lockbox services collate all the checks from a customer in a single place, reducing the check float time. Lockbox teams process every check and key in the information in an electronic file shared with the cash application team. Lockbox key-in services are charged based on keystrokes. However, considering that they charge $1-3 per check, cash application becomes an expensive process. Moreover, sometimes the lockbox key-in data is incomplete, and analysts fill in the missing information manually by going through the scanned check images. Apart from the high lockbox key-in fees, it requires several man-hours to re-process a check processed by the lockbox services.

• Manual Payment-Remittance Linking

For electronic payments, customers send cash remittances through emails, EDIs, or even upload them to their A/P portals. Cash application teams have to manually extract or download these remittances and map them to the incoming payments. Manually downloading remittances across sources in various file formats is a time-consuming task that eats up cash application analyst’s efficiency.

• Manual Invoice Matching and Exception Handling

Cash application analysts match invoices with payments based on the details present in the remittance, such as invoice numbers, purchase orders, or shipment details. Sometimes, remittances might contain incorrect or truncated invoice numbers, due to which analysts cannot match invoices with payments. In such scenarios, incoming payments are applied at an account level. In some cases, the customer misses out on sending remittance advice, and the cash application analyst has to reach out to the customer, asking for the missing remittance. Similar to this, a thousand other exceptions delay cash posting.

• Short Payments and ERP Posting

Customers tend to make short payments for several reasons like trade promotions, early payment discounts, or disputed goods. While sending the remittance, the customers usually highlight the reason for the short payment. Cash application analysts have to manually identify the short payments and map the customer-specific reason codes to their ERP-specific reason codes. After this, they will be able to post cash to the ERP system. Companies use multiple ERP systems, be it SAP, JD Edwards, Microsoft, or legacy systems, each with unique configurations. Analysts need to handle exceptions or reconfigure the file before posting it to the ERP system.

• Downstream Impact of Cash Application

One of the significant issues of slow cash application is the impact on other A/R processes like credit and collections. For instance, if payments are not applied the same day, a collector, unaware that the customer has already paid, might reach out to the customer again with an erroneous dunning notice. This leads to a poor customer experience.

Automation in Cash Application is becoming common these days. This is because cash application automation yields benefits such as reduced bank lockbox key-in fees, improved accuracy, and speed of cash reconciliation.

Organizations have deployed advanced technologies such as RPA and AI in cash application to achieve straight-through cash posting rates up to even 95%. AI capabilities help aggregate remittances from various sources, including emails, EDIs, customer web portals, even with non-standardized remittance formats. Optical Character Recognition(OCR) automation helps auto-extract check stub information with increased accuracy in case of checks. Apart from this, with AI-based invoice matching and deduction coding, cash application teams meet their goals of speed and accuracy.

With automated cash application solutions, senior management can access several out-of-the-box dashboards and reports to analyze the overall cash application rates globally. The analytics-based approach helps A/R leaders to compare their cash application team’s performance with the industry’s cash application benchmark.