How Advanced Cash Application Automation Shapes AR | Versapay (2024)

Introduction

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Cash application is a critical component of youraccounts receivable operation and focuses onmatching incoming payments with customeraccounts and the correct open receivable invoices.

When done manually, it is time-consumingand error-prone, yet completely necessary tomarry payments received with company billingsand invoices. It impacts many aspects of thebusiness—especially working capital and theutilization of resources.

With the advent of digital payments, the cashapplication process has become even morecomplicated. Whereas payments made by checkare usually accompanied by a remittance slipthat identifies which invoice has been paid, theremittances that accompany electronic paymentsare often sent separately (if at all), creating morework for cash application specialists. Finance teamsnow find themselves manually identifying whatpayments were for based on partial information.

The benefits of swiftly and correctly applyingcash are plentiful: better straight throughprocessing rates, lower processing costs,reduced days sales outstanding (DSO)—or ARaging, resulting in more timely financial closings—greater efficiencies, the reallocation of resourcesto higher value work, and improved customerservice. Plus, by unlocking cash, you’ll moreeasily meet operational expenses such as salariesand utilities, reinvest in the business, and fundexpansion plans.

Luckily, with payment options growing insophistication, so too have the solutions forhelping finance teams manage cash application. Byharnessing powerful tools such as AI and machinelearning, you can transform your AR team’s cashapplication problems into smart processes that arefaster, more accurate, and more efficient, therebyimproving your cash flow, bottom line, employeeproductivity, and customer experiences.

In this guide, you’ll learn:

• What the cash application process is
• The risks of manual application and applyingpayments incorrectly
• What cash application automation is
• The differences between AI-powered cashapplication and manual application
• How automation can transform your AR todrive efficiency
• How to evaluate cash application automationsolutions

You’ll even hear from Versapay’s customers onhow automation has made matching paymentswith open receivables simple and easy—and thebusiness value that’s led to.

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Section 1: Getting started with cash application

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Cash application and theorder to cash cycle

Cash application is one component of yourholistic accounts receivable operation, belongingto a standard accounting process called order tocash (O2C). Understanding how cash applicationrelates to O2C will help you improve how youmanage it.

O2C involves the steps taken from the time acustomer places an order to when payment ofcash is collected and reported on. At its mostbasic definition, O2C is the process of receivingand fulfilling customers’ requests for goods and/or services and getting paid for them, recordingpayment, and managing the data.

Another term to be aware of is invoice to cash(I2C) processing, which is a subset of the O2Cprocess—it involves the steps taken from whenyou invoice your customers to when you collectand record payment.

Think of this cycle as a crucial part of your entiresales operation—you can sell as much as youlike, but without proper invoicing, collections,and cash application, you’re not making revenueor profit, or able to apply your earnings to otheraspects of the business. And without a solid cyclethat delivers for your customer in a winning way,you’re also unlikely to obtain repeat business oracquire referrals.

Step 1: Receive Order

You receive the customer’s order. This could bevia email, internet, salesperson or some other form.It could be a simple one-time purchase request oran entire contract for goods and/or services.

Step 2: Fill Order

You fill out their order for the good or service. Thisneeds to be documented with the specific detailsof the order and relayed to the appropriatedepartment(s) that will be fulfilling the order.

Step 3: Ship Order

You ship the order or fulfill the service. This couldbe done through an internal department or a third-party such as the postal service, private deliveryservice or other subcontractors.

Step 4: Send Invoice

You prepare and send the invoice. Once theproduct has been shipped and delivered, or theservice performed, next comes the creation of aninvoice that matches the specific order.

Step 5: Collect Payment

You collect payment from the customer (often longafter the order was received, or the servicerendered). Payment methods, particularly electronicones, are varied and can make cash applicationmore challenging as remittances are often sentseparate (if at all) from the digital payment.

Step 6: Record Payment

You match payments with the correct remittances,customer accounts, and receivable invoices,record the payment and enter it into your ERP.

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The benefits of streamlining theorder to cash process

Businesses large and small face challengeswhen making sure payments are correctlyposted—think of the times you needed to applya discount, a customer paid multiple invoicesat once, or a balance was paid through multipleaccounts. Manually managing that can require alot of work and there is potential for error, costoverruns, delays in getting paid, and customerdissatisfaction.

And while manual processes—often involvingreams of paper and many labor hours—have beenthe standard in B2B accounting for decades,forward-thinking companies are now turning totechnology and automated software solutionsmore than ever to drive greater efficiencies acrossthe entire O2C cycle, cash application included.

Here are the four benefits of streamlining andautomating O2C:

• Customers are served more quickly andefficiently
• Fewer errors are made, and less delays areincurred
• Cash flow is vastly accelerated
• Data captured is more thoroughly analyzed, andopportunities for improvement are identified

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What cash application is and how it works

Cash application is a process that’s key to theentire O2C cycle. It involves matching incomingpayments to remittance information and theircorresponding invoices. It also comprisesreviewing payments made by check, credit card,electronic fund transfer (EFT), automatic clearinghouse (ACH), and many other payment methods,matching them to open invoices and markingthem as paid.

The two crucial business functionsefficient cash application impacts

• Financials—It increases straight throughprocessing rates, lowers accounts receivableprocessing costs, reduces DSO, and results inmore timely financial closing.
• Non-Financials—Increasing efficiencies reducestime spent manually applying cash, enables thereallocation of resources to higher value work,and improves customer service.

What your cash application systemshould provide

• Accuracy—Your accounts receivable should nothave errors. Errors can lead to delays and poorcustomer experiences.
• Speed—In applying cash more quickly, you’reable to reduce your DSO, significantly lower ARprocessing costs, and ensure your business hasaccess to its cash more quickly.
• Standardization—Standardized cash applicationprocesses eliminate inefficiencies and reducecompliance issues.

The three crucial pieces of data forcash application

• Invoices—These are the original bills that promptpayments to be made.
• Payments—These are the funds transferred fromyour customer to you.
• Remittances—These describe why a payment isbeing made (either through an invoice numberor—in some cases—payment information detailingwhy a customer made a partial payment, whetherdiscounts have been applied, or what thepayment terms are).

So, you have a variety of payment sources andthen a variety of remittance sources—and all thatinformation needs to be matched up and reconciled.

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The cash application flowchart

While no two companies follow the same cash application process—because companies vary in nature,size, volume of customers, quantity of invoices, and delivery and payment methods—there are generalsteps common to most.

• Step 1: Your team prepares an invoice requestingpayment for a goods or services and sends it toyour customer—via email, mail or courier, fax,cloud-based portal or in person.
• Step 2: You receive payment via check, wiretransfer, credit card payment, automated clearinghouse (ACH), electronic data interchange (EDI) orcorporate trade exchange (CTX).
• Step 3: Your customer sends remittances (whichspecify why the payment was made or for whatinvoices) either with the payment in the case ofchecks or separately via emails, Excel files, PDFs,web portals or image scans.
• Step 4: All the data needs to be reconciled toensure the information from the invoices andremittances matches with the payments made,either manually or through an automated process.Any discrepancies (for instance in the event acustomer has made a partial payment) need to beinvestigated and resolved.
• Step 5: Once reconciled, the payment getsofficially recorded in your company’s enterpriseresource planning (ERP) system, where day-to-day business operations such as accountingare managed.
• Step 6: The finished work and process isreviewed to look for any ways to optimize it.
  Your AR team might also send receipt of paymentto customers.

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How changing payment trends are impacting thecash application process

The move to digital payments has been fuelled by such factors as the need for costsavings and improved efficiency (ACH payments are cheaper and take less timeto process than checks), the need for improved cash management and reportingcapabilities, regulations making electronic payment methods easier and moresecure, large players like Walmart and Amazon mandating digital payments withsuppliers and customers, and the general growth of ecommerce in the B2B space.

Customers, too, are driving this trend with increased demand to pay usingdigital methods that they are accustomed to using as consumers, which is moreconvenient and results in a better customer experience.

And with payment trends increasingly going digital, AR departments and their cashapplication processes are undergoing a massive shift, with executives looking foropportunities to optimize their accounts receivable practices.

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Section 2: The risks of manualcash application and applyingpayments incorrectly

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Many are involved in cash application—accountants, data entry clerks,bank personnel, postal and delivery workers, IT support workers,as well as software like payment processors and ERPs. When donemanually, cash application is labor-intensive, with many specialistsrelying on Excel to perform data entry and analysis. The nature of theseprocesses is time-consuming and prone to errors, leading to losses inproductivity and increases in costs.

These are the challenges you’ll want to conquer in your cashapplication process.

If your B2B operation is small—less than 1,000 invoices processedeach month—the complexities of cash application might not be asonerous, even with a manual system. But what if you have thousandsof customers operating in different jurisdictions and whose paymentmethods, such as ACH, have remittances that arrive separately frommultiple sources?

Another somewhat recent challenge for AR departments has beenextracting remittances from web portals, which started when manylarge operators such as Walmart and Amazon set up web portals as acheaper way to deliver remittances, forcing suppliers to comply.

All these nuances and complexities can make it difficult to trackwhat information corresponds with what. Also, errors and paymentprocessing delays are more likely to occur, affecting how much capitalyour business has available to use in its operations. Even if there aren’terrors, the time and energy spent on manual cash application could bebetter utilized elsewhere in your business.

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The challenges of matching payments with open receivables

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What frequent misapplication of payments means foryour business

Until you’ve formally recorded an incomingpayment in your accounting system, you canconsider that cash non-existent. That’s why beingable to quickly—and correctly—apply incomingpayments is so important.

Traditional cash application processes, however,compromise this, as they’re error-prone, time-consuming, and resource-intensive. And ratherthan isolate and remedy the root cause of thesechallenges, many businesses opt for employingmultiple full-time accounting specialists to workexclusively on cash application due to theeffort involved.

In fact, approximately 85% of finance leaders arestill manually matching payments with remittanceinformation. And nearly 20% claim this is theirprocess for all their payments.

Applying a customer’s payment to the wronginvoice could mean their balance remains openwhen it shouldn’t. If the customer has surpassedtheir allowed credit limit, this error could preventthem from making any more purchases from you.

Frequent misapplication of payments also meansyour AR team will be forced to seek clarificationfrom customers on what to do with their paymenton a recurring basis. Much of this stems fromhaving no clear way to manage short payments,payments lacking remittance information, orpayments covering multiple invoices.

Plus, highly manual cash application processesinvolve unnecessary flipping between multipleExcel spreadsheets, payment systems, and yourERP—which introduces numerous opportunitiesfor data entry errors.

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The signs your cash application efforts are inefficient

As you can see from some of the challenges we’ve discussed, or perhaps from your own painfulexperiences with cash application, highly manual and inefficient processes harm your businessand create poor customer experiences.

What are the signs you need help?

If you’re noticing any of these symptoms in your organization, you should consider a better cashapplication solution:

How can you monitor if your cash application efforts areworking well?

• The speed at which payments are being applied—Once remittance data has beenreceived, how quickly are payments being applied? Is it the same day? The next day?The following week? Ideally cash is applied as quickly as possible. The longer cashgoes unapplied, the less readily available cash you’ll have on hand.
• Whether or not cash application errors are present—The more payments you receive,the higher the likelihood of cash application errors occurring. While cash applicationspecialists are exceedingly diligent, meticulous and thorough, any matching workthat’s performed manually is still subject to errors. Automation can significantlydecrease the likelihood of errors—striving for zero errors is recommended.
• The volume of remittances received—A lack of remittance data means furtherclarification is required on behalf of the cash application specialist before they’reable to match payments with the correct customer account and open receivable.To prevent slowing down the cash application process, you’ll want to monitor whatpercentage of payments are received without remittance data and work at reducingthat volume.

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Section 3: How to acceleratecash flow with advanced cashapplication automation

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What advanced cash applicationautomation is and how it works

Improving the cash application process has become increasinglyimportant. The solution lies in advanced cash application automationtools that reduce the amount of time, money, and resources previouslyneeded for manual cash application.

How do the most sophisticated advanced cashapplication automation solutions work?

Advanced automation in cash application—This has becomeincreasingly sophisticated, using modern technologies such asrobotic process automation (RPA), artificial intelligence (AI), andother machine learning capabilities.

• These can help you retrieve and aggregate remittances fromvarious sources, such as emails and web portals, and put themall into a centralized archive, sparing cash application teams fromhaving to go through many sources of remittances manually.
• These smart technologies can also match invoices, automaticallyidentify and validate deductions and discounts, and mapcustomer reason codes back to ERPs.

Optical character recognition (OCR)—This technology helps auto-extract check stub information with ease and accuracy, by eitherusing templates to map out which regions of an image containneeded data or with AI to search for specific items that indicateareas of interest.

• With AI, the longer and more often an advanced cash applicationsystem is used, the more it learns and becomes smarter over time.

Two advanced cash application automationapproaches

OCR Template Approach:

• Ingests data from lockbox files.
• Mines AP portals and emails for remittance data.
• Configures payment application rules.
• Matches buyer codes with supplier codes.

AI-Based OCR Approach:

• Uses intelligent OCR and machine learning to quickly matchpayments to invoices without manual intervention.

• Works with all these formats: traditional checks, image scans,lockbox files, wire transfers, emails, ACH, ETF, and AP web portals.

• Streamlines exception handling—identifying payments that needhuman intervention and offering collaboration tools.

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AI-powered cash application versus manual cash application

Here are eight benefits of advanced cash application automation over manual application:

Benefits 1 to 3:

Benefits 4 to 8:

🎥 Want to see artificial intelligence in action? The video above looks at how Madison Resources transformed cash application with Versapay:

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So, what can automation help you with?

A little bit of everything! Look at this graphic for an idea of where cash applicationautomation can lend a helping hand:

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How to evaluate cash application automation solutions

The best cash application solutions solve all the challenges discussed in this guide and drive majorefficiency improvements by automating the majority of manual work. That way you can reap thebenefits—resulting in a better operation for you andyour customers.

The cash application automation solution evaluation criteria (1 to 6):

The cash application automation solution evaluation criteria (7 to 9):

The cash application automation solution checklist:

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Section 4: Real-world accountsreceivable automation success stories

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This healthcare service provider gives 4.5 hoursback to cash application specialists dailywith automation

Demand for services of this healthcare company skyrocketed;yet while explosive growth is tantamount to winning the jackpotfor most, surprise growth often comes with a cost.

For a company relying on highly manual accounts receivableprocesses, facing unprecedented sales meant having tocompensate by exhausting resources to perform daily,essential tasks like cash application. And unfortunately, dailyoften meant working until 10:00PM.

With cash application automation, this healthcare servicesprovider streamlined their cash application process, and inturn made their customers happier. And, since implementingVersapay, they’ve redeployed numerous teammates to take onhigher value, more strategic projects.

Get the whole story, here →

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Automated cash application helps TireHub moveresources to a higher class of problem solving

TireHub is a joint venture of tire manufacturing giants Goodyear andBridgestone, serving as a last-mile service provider for both.

Taking on last-mile operations meant inheriting those companies’existing client bases—and the varying billing and discountingpractices those customers were used to.

With cash application automation, TireHub was able to reduce theapplication errors previously faced with their manual processes,allowing them to uncover considerable operational savings andstrengthen their relationships with customers.

“With that much manual cash application, you’re bound tomake mistakes,” says Matt Marin, TireHub’s Senior Manager ofFinancial Processes and Data Management. “And that was causingfrustration for our customers. We also couldn’t hold customersaccountable for what they owed when we were misapplyingpayments and credits. We were really struggling to manage ouraccounts and our customers were frustrated with the mistakes wewere making.”

Get the whole story, here →

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Introduce automated cash applicationinto your AR process today

Cash application is an important part of yourbusiness but doing it manually brings challenges,such as decreased speed and accuracy, longer DSO,less working capital when you might need it most,and compromised relationships with your customers.

Digitization is enabling the use and acceptanceof more digital payment methods—a shift thatdelivers to customers a more integrated andenjoyable payment experience and that getssuppliers paid faster and drives higher retentionrates and sales growth. However, with this riseof digital payment systems, cash application hasbecome much more complex, making manualprocesses even harder.

With advanced cash application automationtechnology, you’re able to harness powerful high-tech tools that can make your cash applicationprocess smarter, faster, and stronger. Matchingpayments with remittance data for cash andaccount reconciliation should be easy, andthe software you evaluate should substantiallyincrease the efficiency of your accountsreceivable teams.

If you’re looking for a better cash applicationprocess, Versapay can help. Learn more about ouradvanced cash application automation solutionsand contact us for a free demo or consultation atversapay.com/demo.