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When a business supplies goods or services to another business, payment typically arrives sometime after the transaction has happened. The seller may receive a remittance advice, advising them that their customer has made payment. A cash application specialist will then need to reconcile this remittance with the outstanding invoice in the company’s finance system.

Why is cash application hard?

Remittance advice do not come in a standard format – each customer’s document looks different. They may be emailed in a variety of file types, uploaded to portals, or even posted hard copy. A company’s accounts receivables staff usually manually process remittances, with each variation requiring a slightly different workflow.

Further, several payments may be included on one remittance advice. This means accounts receivables staff need to reconcile each line item against an outstanding debt to ensure everything has been paid for. If this reconciliation process is not done efficiently and effectively, it becomes more difficult for the business to know its true cash position and confidently manage cash flow.

Manual cash application is extremely labour intensive and slow. According to the Institute of Finance & Management, it can take some businesses weeks to manually apply the payments that they receive. Nonetheless, it’s important work to keep track of receivables and successfully manage customer relationships.

Why does a poor process matter?

Inefficiency in cash application may extend a company’s Days Sales Outstanding – the number of days it takes a business to collect its receivables. When cash is collected quickly, there is more working capital available for a company to spend and invest.

Manual processes are inherently expensive; they are typically slow and inefficient with their cost to the business being the amount of time an employee spends on a particular task. Further, employees make mistakes that need to be identified and corrected, and this re-work adds to the cost of the inefficient process.

In accounts receivable, errors may be made in applying payments to the wrong customer accounts. This can be an extremely costly mistake for the business. It may mean that some of a company’s best customers are blocked from placing orders, which not only loses sales but may threaten the ongoing relationship.

There is also the cost of the wasted time for the supplier and the customer in identifying and rectifying mistakes. If a customer account is not kept up to date, it can quickly become a muddle. This could lead to outstanding amounts being missed by accounts receivable, and eventually written off.

Why automate cash application?

Currently, only 23% of businesses have automated their cash application, which represents a significant missed opportunity for many firms.

As organisations grow, it becomes more time-consuming, difficult, and expensive to manually match customer payments with line items on open invoices. It also becomes more important to effective cash management, and to avoiding audit and compliance issues of unapplied or wrongly applied cash.

Automation ensures accuracy and efficiency in cash application. It enables cost savings in accounts receivable, while also freeing up team members to take on higher value and more rewarding work.

How to automate cash application?

As many organisations receive remittance advice over email, an automated cash application solution should include Optical Character Recognition (OCR) technology for data capture. The most sophisticated OCRs will be able to extract header and line items from the payer’s remittance advice. They will also have machine-learning capabilities to recognise patterns and become more efficient with each extraction.

The solution should integrate seamlessly with your finance system so that it can pass data for auto-reconciliation of remittance line items with open invoices. If the remittance does not match the open invoice, then a pre-configured workflow should activate to route the remittance to a nominated user for exception handling.

All remittance advice should be saved within the solution, making payment information available and easily retrievable in accounts receivable and facilitating an easier and more effective auditing process. The solution should be fully searchable and be able to generate reports, making life easier for employees and empowering a better customer experience.

What results can we expect?

According to the Institute of Finance & Management, intelligent cash application has helped some organisations reduce their DSO by up to 10 days and reduce their manual workflows by as much as 85%. This saves costs while delivering better outcomes for the organisation. Cash application is just one of the many finance processes that can – and in many organisations should – be automated to get the best results.  

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