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5 Benefits of Automated Cash Application

Published on 6 min read

There are many shortcomings associated with manual cash application processes. The solution? Automation!

In this blog, we explore why it's unwise to manage your cash application process manually and the five most common benefits of automated cash application.

Illustration of an accounts receivable person in an illustrated, hybrid tablet-pool, surrounded by cash

According to a PYMNTS.com report, 74% of accounting staff say they experience hurdles when manually processing invoice data. On the flip side, 60% of firms that automate invoice and expense management say they’ve experienced a decline in missing invoice cases.

How well you manage your order to cash cycle determines whether your company is in the former or latter category, and your cash application process is a key piece of that puzzle.

In this blog, we’ll explain what the cash application process is, whether or not you should manage it manually, and how a cash application automation solution can benefit your organization.

What is the cash application process?

The cash application process involves matching incoming payments to the correct remittance information, invoices, and customer accounts. Accounts receivable (AR) teams must then reconcile all this within their enterprise resource planning (ERP) system. It sounds simple and straightforward, but there are a host of cash application challenges that can make the job tough for AR specialists. These include dealing with payments that are separated from their remittances, working with various types of remittance formats, and handling short payments to name a few.

The specifics of the cash application process vary from company to company. This is in part due to companies having differences in their volume of customers, quantity of invoices, invoice delivery, and accepted payment methods.

This cash application flowchart shows just how quickly the process can increase in complexity as more variables are introduced, such as additional payment methods and types of remittances.

Your business might receive payments through a combination of:

  • Wire transfers

  • ACH

  • Credit and debit card

  • Checks and lockbox

  • Other electronic funds transfers such as corporate trade exchange (CTX)

Meanwhile, the associated remittance advice (letting your team know what a payment is for) might arrive in the form of an:

  • Email

  • Image or PDF

  • Excel sheet

  • Web portal (such as an accounts payable system)

  • Electronic data interchange (EDI)

With more variables comes a higher chance of running into problems.

Should you manage the cash application process manually?

Traditional cash application processes—those done manually—involve matching incoming payments to remittance information and invoices one by one.

For all but the smallest business operations—if you’re processing fewer than 1,000 invoices each month—it’s unwise to manage the cash application process manually for a few reasons: time, cash flow, and errors.

1. Time

The cash application process is labor-intensive when done manually. You need to assign staff to painstakingly parse and enter remittance data—that is if it’s not omitted or hard to read. Many businesses prefer their customers pay them by check as the remittance advice is usually provided along with it. But, these documents aren’t always the most legible.

With electronic payments like ACH, the remittance information does not travel with the payment. As a courtesy, a customer will usually provide an additional document for the remittance advice, but this isn’t always the case.

The high cost of manually processing invoices is largely attributable to the time it takes for AR staff to track down which payment goes with which invoice, owing to split, illegible, or missing remittances.

2. Cash Flow

When done manually, the cash application process increases your days sales outstanding (DSO), which has a negative impact on your cash flow. Why is that? With a manual process, the time between a sale and the completion of payment is longer and it becomes difficult to quickly identify delinquent accounts.

3. Errors

Even if you have detail-oriented staff, having to manually key in data means errors will inevitably pop up. If a customer sees errors crop up more than once, you could be putting the relationship in jeopardy. For instance, if delays or misapplied cash make it look like a customer’s balance is overdue even when they’ve already paid, this creates strain for their accounts payable (AP) team.

Cash application automation is the solution

By now, you surely realize the shortcomings of manual cash application processes, but you may be wondering—what’s the alternative?

How does cash application automation work?

Automation in cash application refers to the use of software to ease the process of matching incoming payments with open receivables. The most advanced cash application automation solutions are equipped with capabilities like machine learning, robotic process automation (RPA), optical character recognition (OCR), and artificial intelligence (AI).

Remember all the sources of remittances? Cash application automation software goes through all those file types and puts them together, matching them with the correct invoices and customer accounts.

What are the benefits of an automated cash application process?

Here are five of the most common benefits of automated cash application over manual application:

1. Faster payments

Instead of needing a member of your staff to comb through every piece of remittance data and match it with the right invoice, you can let accounts receivable software do all the work. Speeding up the matching process results in faster cash availability, improving your business’ cash position.

2. Time and cost savings

How much time and money could companies save with automated cash application software? As it turns out, quite a bit. In our experience, automated cash application can increase efficiency by 75% and reduce AR costs by up to 50%. Instead of assigning tedious tasks to your staff, you can give them time back to focus instead on more strategic projects.

3. Fewer errors

The beauty of artificial intelligence is that the more you use it, the smarter it gets. With AI-enabled cash application software, your match rates increase the longer you use the platform. More automatic matches and fewer errors help drive better customer experiences. Suppliers that have delved into automation are experiencing as much: a study done by PYMNTS.com found that 75% of firms report automated AR functions help them provide superior customer experiences.

4. Increased ability to scale

Even if your company is currently able to make do with manual cash application, you’re limiting your future potential by doing so. More sales equals more invoices, which ultimately means you'll need to hire more staff if your processes don’t evolve. That can get expensive.

And what if your customers gravitate towards a new payment method that your processes don’t currently support? There are more than 200 alternative payment methods worldwide, so it’s only a matter of time before that happens. In that event, it’ll be much easier to pivot with cash application software.

5. Enhanced financial reporting possibilities

When cash sits unapplied for long periods of time, it becomes difficult for senior finance leadership to get an accurate view of the status of receivables. Automation software makes it easy to track what payments still need to be applied and brings together all the relevant data at your fingertips. Tools equipped with dashboards help you observe potential trends at a glance.

Not sure if you need a cash application solution?

If any of the pains of manual cash application we mentioned earlier resonate with you, it’s likely time for you to revisit your processes.

There are a few signs you may need help, including difficulty accommodating increased demand for electronic payments, a stressed out cash application team, and an influx of customer complaints.

By automating the cash application process, you can get rid of those issues and remove any obstacles preventing your company from reaching its full potential.

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