Introduction
For years, traditional lockbox operations passed along remittance details via next day courier. A/R clerks then worked from the documentation to manually post receipts in the accounting system. Cash application was never easy with all the manual work that came along with it.
Today, those details are most often delivered via an FTP folder containing the check images and accompanying remittance documentation. Remittance advice can also be transmitted in a BAI file or similar format and contains the bank routing number and account number, both machine captured from the MICR line of the check, as well as the check amount, which an operator must key in. Additional remittance details, such as invoice numbers and payment amounts, can also be added to the file, but with the traditional lockbox that requires additional data entry at a cost. The data in the remittance file can then be used to automatically post payments to an A/R system, but achieving a high match rate is usually problematic.
Because there are now so many electronic payment channels, organizations must capture remittance details sent in emails, via EDI, entered into web portals as well as those associated with RDC, credit cards or via ACH. All these payment channels demand an integrated process – otherwise, all their data must be re-keyed into the A/R system. While there has been huge growth in the world of electronic payments in recent years, there still remains a considerable amount of inefficiency in posting B2B remittance data to the A/R.
OCR technologies, however, have advanced to the point where templates and contextual search tools require minimal or no human intervention. Images are automatically converted to electronic files and then run through the auto-cash algorithms for automatic posting to the A/R. This reduces both lockbox and cash posting costs substantially.
Finding a Match
Matching payments to customers and invoices, figuring out what to do if the remittance is different from the receivables and properly coding all exceptions are the three primary activities involved in posting payments to open receivables. Broken down further, the individual manual tasks include:
- Identifying the payee and invoice
- Reconciling payments to receivables if details are missing
- Determining if prompt pay discounts were timely
- Deciding if a customer needs to be charged back for underpayments
- Preparing debit memos for unauthorized deductions (with proper reason codes)
- Preparing credit memos for authorized promotional adjustments or payment deductions
- Preparing credit memos for overpayments and payment on account
These seven steps must be incorporated into any automated remittance algorithm to ensure remittance details captured from both the lockbox and other electronic payment channels are matched correctly to the receivables database. Because of the complexity required, the auto-remit capabilities of A/R software solutions are often inadequate. Only matching 40 to 60 percent of remittances automatically will not realize the true benefits of automated remittance processing from either an efficiency or cost perspective, because it is the difficult postings that consume the most time.
Since the ability to process remittance advice transmitted by emails, often on a spreadsheet, is increasingly important, you also need a technology solution to automatically extract and interpret content from emails and their attachments. Additionally, algorithms are needed that can recognize the most common forms of payment deductions. Combined with automated workflow, these algorithms will automatically generate credits when applicable or route exceptions to a resolver on the rare occasional human intervention is needed.
The higher the automatic match rate the greater your processing efficiency and the lower your unit costs. Most cash receipts can be matched with minimal additional processing. The typical interface can capture up to two-thirds of payments. The remaining remittances are those that are progressively more difficult to match. When your automated solution is tailored to capture and push even these problematic remittances through, then you know you’ve achieved a best-of-class level of efficiency.
Have you incorporated each of the 7 steps into your remittance process? If not, what are the challenges you believe you would face?
