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How Cash Application Automation Software Works

  • 10 min read

Cash application automation software completes cash application tasks without requiring the full attention of a human. Learn how the technology works and why finance teams love it.

Cash application automation software matches payments with invoices and remittance advice

While it’s easy to get excited once you receive payment for a good or service, there’s still work to do. You may think you know what the payment is for, but your accounting records likely do not—and unfortunately, that discrepancy is going to cause a lot of problems.

That’s where cash application comes in. At a high level, this concept involves formally matching a payment to a record of the transaction. Given how many different invoices and payment methods a modern organization deals with, this can be quite challenging. And that’s before you factor in customers paying partial amounts, or for multiple invoices in one lump sum.

The good news? Cash application automation solutions can help you not only cut down on the work involved, but also deliver more accurate results in much less time. And with the cost of capital rising and economic growth slowing, finding new efficiencies in existing processes is more critical than ever.

In this blog, you’ll learn:

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🎥 In a hurry? Watch Versapay's cash application product demo to learn how we use machine learning to match any payment type with open receivables:

    What is cash application automation, and why do finance teams love it?

    Cash application is the process of recording revenue once you’ve received a payment. This typically includes tasks like gathering payment and remittance data, matching that information to outstanding invoices, and posting it to your ERP system.

    Cash application automation involves using digital solutions to complete cash application tasks without requiring the full attention of a human.

    As this chart shows, cash application is a complicated process with a significant number of variables. While there are many reasons finance teams find it helpful, these three benefits of cash application automation are especially notable:

    Cash application automation saves time

    Completing cash application tasks like matching remittance data to payments manually can require a significant amount of work. Cash application automation handles this task much faster by leveraging tools like artificial intelligence (AI), Optical Character Recognition (OCR), and machine learning (ML).

    In fact, cash application solutions like Versapay’s can increase efficiency by up to 75%.

    Cash application automation reduces errors

    Between documents like invoices and remittance data, and sources like email, EDI, and more, the cash application process is packed with data. Sorting through all of it can feel like putting together a puzzle without a picture of what you’re creating.

    With automation, you can accomplish these tasks without human error—which C-suite executives say is the greatest cause of invoice disputes.

    Cash application automation keeps cash flowing

    Because humans cannot complete cash application tasks as quickly as software, the time between an invoice being paid and the recording of that payment is longer without automation. This gap makes it difficult to see which accounts are truly delinquent, slowing your collections and potentially creating awkward situations with customers.

    Customers are rarely pleased when you call to tell them they’re past-due on an invoice they already paid. Cash application automation helps you avoid this while also reducing that gap in time, ensuring you have the cash on hand you need to keep your operations running smoothly.

    Much of this is made possible by cash application automation’s capacity for straight-through processing. Straight-through processing is defined as “payment processing that is completely free of human intervention.” Given all the human involvement required in manual payment processing, you can imagine why this is something finance teams aim for. With the right automation solution, you can achieve straight-through processing rates over 90%.

    How does cash application automation software capture payment and data types?

    Typically, cash application automation software captures payment and data types through integrations with ERP and payment processing systems. This process can prove challenging as customers and internal accounting teams rely on many different systems, meaning that each one may capture different types of data and format it in unique ways.

    Smart payments are a powerful solution to this issue. These payments carry critical business information alongside the payment itself. That means as businesses transact with each other, data flows alongside the money, giving it context and helping accounts receivable and accounts payable (AP) teams fully understand and assess the purpose of each payment. Smart payments make the entire B2B payment process faster, more cohesive, and less labor-intensive.

    But, smart payments are only part of the equation. For cash application automation software to automatically capture payments and uniquely formatted data types, there are other considerations and capabilities the solution must possess. This includes proficient optical character recognition capabilities to digitize remittance data, and AI-powered complex matching logic to maximize straight-through processing and matching abilities. Both of these elements are covered below.

    How does cash application automation software digitize remittance data with optical character recognition?

    Before a cash application automation solution can begin matching incoming payments with the correct invoices, it first needs to read, digitize, and import remittance data. That’s where tools like optical character recognition come in.

    What is remittance data?

    Remittance data is the clarification a customer provides along with their payment that tells their supplier what invoice the payment is for. Without it, determining which open receivable to match a payment to requires more manual effort. Remittance advice can also act as confirmation that a payment is on the way. Some companies call this a remittance slip, or even a payment voucher.

    However, even when you set guidelines for how remittance data should accompany payments, it is often structured improperly or with critical details missing.

    Why is disorganized remittance data so common?

    Traditional payments like checks generally include information in the memo line about how they should be applied.

    However, while modern electronic payments–like eChecks, for example–are faster, their remittance data is more complicated. When dealing with ACH, EFT, wire transfers, and virtual cards, remittance data will arrive separately in an array of possible formats. Also, remittance data is technically a courtesy, meaning that there’s no requirement for your buyer to send any at all.

    This example of a remittance slip shows commonly included details, such as invoice numbers, discounts, paid amount, and more.

    What is optical character recognition?

    Optical character recognition (OCR) is the process of converting an image of text into a machine-readable text format. In the context of cash application automation, it is the technology that auto-extracts check stub information easily and accurately. It does this by either using templates to identify the parts of an image that contain needed data, or with AI that searches for specific items indicating areas of interest.

    And when paired with AI, it’s able to do so faster and more accurately the more frequently it’s used.

    Beyond physical checks, OCR can also interpret data from a variety of sources, including:

    • Ingesting data from lockbox files
    • Mining AP portals and emails for remittance data
    • Configuring payment application rules
    • Matching buyer codes with supplier codes

      How does cash application automation handle complex matching?

      Cash application is rarely as easy as simply matching a payment to an invoice of that exact amount. Buyers frequently submit one large payment for a number of individual items, or make partial payments.

      The good news is that powerful cash application automation solutions can handle complex situations like these.

      There are a few reasons a buyer may short-pay. Perhaps they were promised a discount yet that information was never relayed to the accounts receivable team, or perhaps they did not receive all the items they ordered. When paying invoices through a payment portal, customers can flag a short-pay and select a reason code.

      These reasons often include the aforementioned missing items, as well as things like damaged goods or unrendered services.

      From there, cash application automation solutions can search for the reason code and use that to find the matching invoice amount. And when you use a cash application solution like Versapay’s, comments directly in the platform that explain a short payment (such as those missing items).

      When buyers have purchased a significant amount of items from you, it’s often easier for them to send payment for all the items in one lump sum. When this occurs, AI–built within the cash application automation solution–kicks in and does the math to determine that the amount paid is equal to a unique combination of outstanding invoices, and applies the payment accordingly. This saves your team the time it would take to search for all these invoices and attempt to solve the puzzle.

      How does cash application automation software support exception handling?

      Even with the most advanced automation software, there are bound to be some situations where straight-through processing simply isn’t possible. After all, AI and machine learning can’t figure out how to solve a problem until they’ve encountered it at least once.

      While there are many causes for exceptions, they frequently involve things like short-pays or a severe lack of critical information. When this happens, a cash application automation solution’s exception handling capabilities should kick in.

      When setting up and using the solution, the user can create routing rules that determine where information about an exception should be sent. From there, an employee can review the information and take the appropriate action. And because so many other tasks have been taken off their hands by automation, they’re able to fully focus on solving this problem, rather than having it sit for days.

      On top of that, some cash applications solutions–like Versapay’s–provide a collaborative payment portal so you can connect with customers to resolve the dispute directly within it. That means you don’t have to worry about endless email chains or games of phone tag that take up valuable hours of your team’s time.

      Get an even deeper understanding of cash application

      As you can see, cash application automation is critical to helping your AR team keep up with the speed of the modern business world. It can easily be the difference between slow cash flow and a healthy stream of income.

      It’s also important to remember that your cash application automation solution doesn’t just affect your day-to-day life—it has a major impact on customer experience. And in times like these, holding on to every customer you can is critical.

      To get an even better understanding of cash application itself, check out The Ultimate Guide to Cash Application. This guide will walk you through the steps in the cash application process and detail the key challenges finance teams face.

      About the author

      Joe Crawford headshot

      Joe Crawford

      Joe Crawford is the Senior Copywriter at Versapay. While currently focused on Fintech, he’s written extensively across industries including automotive, telecom, and communications technology. Coming from a background in comedy, he welcomes any chance he can to introduce some levity to world of Accounts Receivable.

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