Everything you need to know about Cash Application


What you’ll learn


  • Understand the importance of cash application process
  • Learn about how the process evolved bringing new challenges
  • Know about how technology can solve these challenges simplifying the process


Overview

With emerging companies coming up with diverse ways and technologies for the ease of customers, they strive towards giving a better customer experience. In the B2B world, the order to cash process has a significant role to play when it comes to driving the relationship between the company and the customer. As soon as the customer places an order, the cycle begins and moves forward in a streamlined way till the payment is received and the customer is satisfied. Understanding the process, the challenges that have crept in with time, and the possible solutions for an enhanced process helps analyze things better. One such part of the order to cash cycle we are diving into is the cash application. The cash application process comes into picture once payment for a particular product or service has been made to the company by the customer. So we start by merely understanding the importance of cash application as a process.

Introduction

Cash application is vital for steady cash flow. Simply put: If you don’t have it, you can’t spend it. Without control over cash flow, a company may run into bankruptcy. To make gains, companies need to use their money as efficiently as possible, but they can’t do this if the cash is stuck at posting. Payments remaining to be applied are not useful to anyone. When a company has been paid but is waiting on cash application, it cannot be used or invested elsewhere. The finance team can’t even say they have a decent picture of current funds because payments are waiting to be processed. The faster is the application of cash, the sooner the money can be spent on something essential and time-sensitive.

The traditional cash application process was pretty simple. Orders would come in and be registered, followed by check for the invoiced amount. Then the customer name and amount on order to the check would be matched by the analyst. After confirming that the transaction was accurate, the check would be cashed to make the earned funds available to the business bank accounts.

The cash application team has several specific goals:

  • Speed. A key objective is to apply payments as soon as possible, thereby reducing days sales outstanding(DSO) and allowing the company to use the cash at the earliest opportunity.
  • Accuracy. While speed is essential in the cash application process, it is also crucial that money is applied correctly. Inaccurate application of cash can lead to negative customer feedback, as well as delaying the initiation of the dunning process. To apply cash successfully, companies need to have sturdy processes in place to collect relevant information from customers.
  • Standardization. A further goal is to standardize and harmonize. For international organizations, different country-specific methods and payment types can make it challenging to apply cash consistently across the organization. By ensuring that the process is as harmonized as possible across different markets, companies can increase efficiency and reduce compliance challenges.

How the process evolved brewing challenges

The cash application process is not as straightforward as it used to be. Now there are several ways for orders to come in, from electronic invoicing to digital payment-portals, to proprietary B2B apps. Payments also go in there from traditional lockbox services, paper checks, wire transfers, ACH, and private cards, all of which need to be matched to the orders coming in from their multiple sources. To further complicate the process, a particular invoice is usually sent for many orders, refusing the ease of simple amount-comparison. Since the payment will often not match the invoice or entire amount unpaid on the account and is collected at different times during the month, this will stop the AR team from closing out everyday agreements, creating an incredible amount of tedious and manual work for an Accounts Receivable member/team. In order to cash space, we thus notice that cash application, which is comparatively of low strategic importance, now demands maximum resources. It makes it very important to identify the challenges and optimize the current process.

To reduce the time spent and the amount of manual work, many companies decide to automate their cash application processes by choosing a suitable IT system. Usually, companies look for an easy-to-implement solution that has minimal impact on the company’s existing ERP system. They also look for a system that will reduce the time spent on cash application and deliver efficiency gains. But for now, let’s look further into the challenges in the process.

Lockbox Key-In

Lockboxes are designed to allow a bank to collect and deposit payments on behalf of a client. Information on those transactions is then sent electronically to the client for reconciliation of accounts. The benefits of utilizing a lockbox key-in are accelerated cash flow and improved accounts receivable processing efficiency. Now, what we do not know about lockbox keying in service is that in spite of spending quite some amount on these services, we end up doing double the work. A high volume of checks necessitates costly key-in services. Companies end up paying a fortune for these. Banks charge for capture, keystrokes, and transmission costs. Sometimes the lockbox key-in data is incomplete, and analysts fill in the missing data manually by going through the scanned check images. The pseudo benefits boasted by this service end up increasing our efforts. There are lockbox automation services available now, which provide lower operating costs for accurate, same-day, on-invoice cash posting. So in case, your company is still paying 1 to 3 dollars on each check processed, you should look at your options to optimize the same.

Electronic payments

The efficiency of cash application automation will be affected by means of payments used by the company’s customers. Data from NACHA and the Credit Research Foundation report that 32% of B2B payments are now ACH and expected to increase to 45% by 2020. Their survey also found that AR executives expect checks will decline to 34% by the end of this decade. As more and more companies are encountering the shift from check payments and remittances to electronic payments and disassociated remittances sources, it has formed a severe cash application challenges for these companies. Some forms of payment are checks, ACH transfers, Credit cards, Electronic funds transfers, and Online payment platforms. In the case of electronic payments, they are received from the bank in the form of payment files. Typically, analysts are required to log in to the bank portal and download these payment files ending into tremendous manual work.

As the number of electronic payments remains to rise, so will the concerns associated with processing these electronic remittances, leading to more complex cash application. Companies may find that increased payments come in at the same time each month, often mid or month end, making it tough for their current staff to manage these tops efficiently. During these times, teams are required to work overtime, leading to burnout and higher costs. Businesses often lack in-house expertise or resources to solve their remittance challenges. With electronic payments and remittances, companies are also likely to face the dilemma of decoupled remittances.

Data capture and linking

E-payments and remittance information are often received separately. Remittance comes in multiple formats (.txt, .csv, BAI2, .pdf) and through multiple channels (email, web-portals, fax). Turning all of this information into a standard format that can be processed by the company’s IT solution takes time. According to an IOFM (Institute of finance and management) survey, most of the remittance data has to be keyed-in by the analysts before posting. Analysts manually fetch, read, and match remittances to payment. The most significant contributing factor to this is the non-standardization in remittance formats. The remittances arrive decoupled with payments that are difficult to process. Analysts need to further manually aggregate paper check stubs received from print and mail, e-mail, or fax and key them on a spreadsheet. A/R teams collect the decoupled remittances from various sources such as e-mail, PDFs, Excel files, websites, and EDI files and read the remittance data to link each remittance with the payment file. The weight of manual work required to link the payment with remittance only increases.

Open AR invoice mapping and Exception handling

Once the payments are linked to their remittances, the next step is matching the amount with the open invoices. Analysts perform this matching based on the details present in the remittance information, such as invoice numbers and purchase order or shipment details. If these details and the paid amounts match, the open A/R invoice is closed. Analysts compare the open amount and the received amount at a customer level. If they match, then the amount gets closed, but mapping at an account level overlooks any discrepancies that could arise at a line-item level. The right level of doing mapping is line item mapping since it identifies deductions, discounts, and any inconsistencies for individual line-items. Exception handling comes into picture when say some remittance information is missing. In that case, the analyst has to spend much time by going back to check all the data captured and see from where the information could be fetched.With the help of technology, it is possible to be able to map payments to open invoices even if non-invoice reference information is shared on the remittance or the reference information does not precisely match the invoice numbers in the A/R data.

Short payments and ERP posting

Customers tend to make short-payments due to several reasons like trade promotions, early payment discounts, or disputed services or goods. Deduction analysts go through the customer data, followed by customer documentation such as Proof of Delivery and Bill of Lading, and interact with the sales and customer service teams to validate the short-payment. If the discount is eligible, the analysts need to map the relevant reason code for that discount to the payment before applying it to the ERP. All of the above processes consume much time, which drives analysts to write-off discounts within a specific threshold without proper research to avoid spending time through a pile of papers.

When matching payments with open invoices, if the received amount for a particular invoice is different from the due amount, analysts need to identify the reason for the inconsistency. For that, analysts need to pull out the remittance details for that particular payment and isolate the cause for short-payment.

The cash application is not complete until the payments have been successfully posted to ERP. Companies use multiple ERP systems, be it SAP, JD Edwards, Microsoft, or legacy systems, each with their unique configurations. Analysts need to handle exceptions or reconfigure the file before posting it to the ERP system.

RDC and Mobile payments

When it comes to the processing of checks ( NET deposit), the check and remittance are scanned separately, increasing efforts, and the overall hit rate also goes about 30-40%. Remote deposit capture(RDC) is a technology-based method that allows banks to accept checks for deposit using electronic means instead of the original, physical, paper versions. To use remote deposit capture, a bank customer submits the check electronically to the bank over the internet using a computer or smartphone. Technology has left no area untouched and has helped RDC integrate with the cash application process of a company. The new versions of RDC enable scanning of checks and remittances together in one batch, and data is captured with high accuracy due to inbuilt magnetic strip based MICR and OCR based capture.RDC 2.0 has enabled real-time cash application.

Strategies for improving the cash application process

Everyone handles receivables and payables differently. The overall process is similar, but challenges come with internal processing. Even with an experienced team, posting payments quickly and accurately becomes more challenging if there is no right cash application solution in place. A best practice that could be implemented to the cash application platform is that it adapts to all the different customer payment habits, uses data from e-mails and other systems to post, and learns posting rules based on how your customers pay or how your team posts cash. Let’s have a look at some more strategies.

  • Evaluating the existing technology aspect
    Companies should first assess the current cash application process in place and any specific pain points. As every company may face different pain points, the best practices may vary as well, depending on various factors like geographical footprint or banking relationships. It is typically noticed that organizations achieve around 80% auto-match with their ERPs. To get to 90% or higher, they must optimize their ERP, add smart automation, and implement an auto-cash solution.
  • Employing customizable technology to handle different formats and payments
    Another strategy is to have a solution in place which is adaptable enough to manage any format, from PDF to paper, and to get the related information and make it ready in the company’s ERP system. Users of the system need not ask different analysts where different payment advices are located but instead should be able to find them instantly in a central repository and linked to the corresponding payments. Companies operating internationally should select a global solution which can handle all of the challenges, rather than having different country-specific solutions in place.
  • Taking advantage of customer data
    Banks can be asked to share Corporate Trade Exchange (CTX) error files, and apply automation to upload the data into the ERP system as another remittance source. Most CTX errors can be resolved through formatting changes and can yield a 3%–5% improvement in cash apps hit-rate results. Pulling remittance data ahead of time by automating the integration between the portals and the ERP is yet another effective practice. It can also be assured that remittances are leveraged by the auto-cash engine, which can add around 3%–5% into the overall hit rate. Doing the same with mailboxes by applying smart automation to integrate remittances sent to the mailboxes with an ERP repository can add 5%–8% to overall hit-rate results.

Advent of technology

  • Machine-learning for further automation
    Successful enterprises need to drive innovations without disrupting their current business processes and applications. Even when existing system landscapes are highly complex, with a cloud extension, the benefit would be seen immediately. Machine learning, for example, optimizes the matching of payments with invoices. It Includes linking the payment advice with the bank statement item. Also, it enables companies to ensure that as soon as remittance advice is received, it is accepted in the IT environment and processed automatically to achieve straight-through processing. Using robotic process automation, incremental logic, and a machine-learning algorithm, it is possible to automatically apply a customer’s payment to the relevant open invoice – so-called auto-pay. Machine learning also helps to identify exceptions. With the introduction of robust ERP infrastructures, it is also possible to push the limits of real-time big data analysis further to allow a more automated finance process.
  • NLP for assimilation of payment information
    Using NLP and intelligent optical character recognition, the system is being made capable of receiving data in any format. It can then analyze patterns to extract actionable data and context. It also aims to reduce the need for standardized input. Dynamic workflows are being built to help resolve exceptions by automating the creation, classification, and routing of exceptions. Built-in natural-language-processing algorithms that assimilate unstructured data support this process.

Conclusion

The main problem with the cash application process is the massive amount of manual work and resources that it demands. While many companies are already achieving high levels of automation in the area of cash application, further possibilities continue to develop. Cash application includes repetitive steps, such as matching invoice numbers against open items, which have many scopes to be upgraded with robotic process automation. Meanwhile, companies that have implemented shared services may have possibilities to outsource their cash application process. Before doing so, companies should first evaluate how thoroughly they can enhance the area of cash application from both a technological and process perspective. Looking forward, standardizing and harmonizing the cash application process will only become more relevant. Cash application is not a static process: it is a very dynamic area, with new payment methods and evolving payment behavior introducing further challenges. Companies are continuing to look for new possibilities to automate processes across the entire order-to-cash cycle in finance – and cash application is an excellent place to start as the return of investment for enhancement projects is high.

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