The Cash Application Process: Manual vs. Automated

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Published on6 min read

Doing your cash application manually is like cleaning your floors with a toothbrush. Save your team time and headaches by giving them the tools to apply payments quickly and accurately.

In this blog, we’ll look at the various steps of the cash application process and how managing it manually compares to managing it with automation.

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Cash application is the process of recording revenue once you’ve received a payment. As one of the most important parts of the order-to-cash cycle, the way you manage cash application has a deep impact on your business.

Until you’ve formally recorded an incoming payment in your accounting systems, you can consider that cash non-existent. By applying a payment to its matching invoice, you are ensuring the business has a right to those funds.

That’s why being able to quickly apply payments is so important. Manual cash application processes compromise this, as they’re more error-prone, time-consuming, and resource-intensive. Larger businesses often have multiple full-time accounting specialists working exclusively on cash application due to the effort involved.

But this is changing. A 2021 survey of 400 CFOs found that a top priority for finance leaders when it comes to digitization is tracking payments received and due. 48% say they’re currently managing this digitally to some degree and 24% say they’re hoping to digitize this within the next year.

In this blog, we examine the steps in the cash application process and discuss how you might manage each manually and with automation. Spoiler alert: automatic cash application reigns supreme.

What are the steps in the cash application process?

Step 1: You receive the payment and remittance

When you receive a customer’s payment, you’ll usually also receive some form of remittance advice. This lets you know which invoice(s) the payment is for. Checks might include remittance information in the memo line or in an accompanying document (usually right beneath the check).

Electronic payments, however, are less straightforward. With ACH, EFT, wire transfers, and virtual cards, the remittance advice will arrive separately in an array of possible formats.

In some cases—whether it’s a check or an electronic payment—a payment might come in without an associated remittance.

Without automated cash application

Your business more than likely accepts a mix of different payment methods. With manual cash application, your accounts receivable (AR) specialist has to retrieve remittance information from each source individually. As your customer base grows, this becomes harder and harder to keep up with.

Remittances can come in the form of mail, email, Excel, electronic data interchange (EDI), or accounts payable (AP) portals. This last option has recently become more popular as large companies like Walmart and Amazon developed their own online portals for sharing remittances.

If a payment arrives without any remittance information and you can’t match it with an invoice based on the dollar amount, you may need to reach out to the customer for clarification.

With automated cash application

Cash application automation software can pull remittances from various sources, saving you the trouble of rounding them up yourself. These platforms can also pinpoint the data points for invoice number, date, and dollar amount to simplify the matching process. Because there’s no standard format for remittance advice, this is especially helpful.

Remittances are also notoriously illegible—we’re talking blurred images, missing characters, and unreadable handwriting. Cash application automation software can analyze, normalize, and add structure to remittance data.

The most advanced cash application software, equipped with artificial intelligence (AI), can remember those weird formatting issues and correct them on future payments. If you receive a payment without remittance advice but have been paid by that customer before, AI-enabled cash application software can match it with the right account based on data like the numbers at the bottom of a check.

Step 2: You match the payment with the appropriate invoice

Even when a payment arrives with the remittance attached, matching the right payment with the right invoice can still get complicated. For example, you might receive a single payment that covers multiple invoices—in some cases upwards of 40 to 50. You might also find that the payment amount doesn’t match any invoice amount exactly. This usually happens because a customer has short paid due to a discount or an issue with their order.

When a payment arrives without remittance advice, dealing with partial payments and payments covering multiple invoices becomes even more challenging.

Without automated cash application

When a customer short pays without a clear explanation, you’ll need to find out why by asking amongst your team or getting in touch with the customer directly This will probably involve a series of emails, direct messages, and phone calls. The same applies for payments attributed to multiple invoices. If you can’t easily discern which payments are for which invoices, you’ll need to don your research cap and get to work!

Because these kinds of payment discrepancies happen often, your team could be sinking hours into looking for answers.

With automated cash application

With automation software, you can match a high volume of payments and invoices—without human intervention. Cash application software has advanced significantly in recent years, allowing for match rates of over 90%.

In cases where a one-to-one match isn’t possible (as with payments covering multiple invoices), AI-enabled software can guess which invoices are being paid. It will work through potential invoice combinations, considering customers’ available credits as well.

And in cases where you still aren’t sure how to apply a payment, the easiest way to request clarification is with software that offers in-platform collaboration. This allows you to leave a comment directly on an invoice for your colleague or customer to answer, avoiding disruptions to your workflow. No need to get on the phone or fire off an email.

Step 3: You post the payment to your ERP

The final mile of cash application is posting the payment to your ERP, signaling that the accounts receivable entry is no longer open.

Without automated cash application

Without a cash application solution that integrates directly with your existing systems, this can be a challenge.

Manual cash application processes often involve flipping between multiple Excel spreadsheets and your ERP, which isn’t the most efficient way to work. By having your team manually update all the ERP entries, you also introduce more opportunities for error.

With automated cash application

The best cash application automation solution is one that can be closely integrated with your ERP. This allows you to post payments automatically once they’ve been matched. Integrating with your ERP also helps with the trickier kinds of matches we described earlier. This way, the software can make guesses based on data like current open invoices, payment history, and available credits.

And the best part? Integration with your ERP allows you to carry out the cash application process all in one place. No more switching between countless open windows.

How to automate the cash application process

Why automate the cash application process?

Simple: it’s faster, more efficient, more accurate, and less vulnerable to human error than manual cash application processes.

What’s more, a smarter and faster cash application process lets you free up your AR staff to do more strategic work.

On average, B2B businesses dedicate 15% of their staff to supporting cash application or reconciliation. This may not sound like a lot, but think about it: what could you achieve if you were given even 10% more time? In one person's 40-hour work week, that still amounts to 4 hours. That’s 4 hours you could spend on strategic initiatives that improve your bottom line.

To learn how automation can reduce the time you spend managing cash application by 75%, download The Ultimate Guide to Cash Application.

You’ll find insights on:

  • How to measure the effectiveness of your cash application efforts
  • How automating the cash application process benefits your business
  • What to look for in a cash application automation solution