A Complete Guide to Cash Application in O2C

What is Cash Application?

Steps Involved in the Cash Application Process

Step 1: Payments and Remittances Aggregation

Step 2: Invoice Matching and Deduction Coding

Step 3: Cash Posting to the ERP

Understanding the Objectives of the Cash Application Process

The cash application team has some specific goals:

• Speed: The key objective is to apply cash as soon as possible, thereby reducing days sales outstanding (DSO) and allowing the company to use the cash at the earliest opportunity.
• Accuracy: The analysts should also focus on cash application accuracy. Inaccurate cash application can lead to negative customer feedback and flaws in tracking the cash flow and working capital.
• Standardization: For global enterprises, various global and regional payment methods and cash remittance file formats make it challenging to apply cash consistently across the organization.

Why is Cash Application Important?

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 lower accounts receivable turnover ratio, 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.

What are the Complexities Related to Cash Application?

• 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 A/P portals. Cash application teams have to manually extract or download these remittances across sources in various file formats and map them to the incoming payments. As it’s a time-consuming task, it 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 on a daily basis.

• 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, they 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. In several scenarios, 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 AR processes like credit and collections. For instance, if payments are not applied on 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.

How to Improve Cash Application Process: Introduction to Automated Cash Application

FAQs

What are the elements of cash application?

Within the cash application process, there are three elements that the team deals with daily: 

1. Payment
2. Remittance advice
3. Invoice

What is the role of the cash application team?

In a day in the life of a cash application analyst, their role is to aggregate payment and remittance, match it with the open invoice(s) and further, post the cash in the ERP.

Why is an invoice required for cash application?

The invoice is the original bill that prompted the payments to be made. Based on the invoice amount, a customer sends the payment to its supplier along with remittance advice. Further, the cash application team matches remittance with the invoice to post cash in the ERP.