The Importance of Cash Application Automation

For a business owner, real money in the bank is vital to the survival of the business.  You may carry a large balance in your accounts receivable (money you are owed by customers) account, but that doesn’t equate to positive cash flow.  

You’re seeking ways to improve your cash flow, but in order to do that you find yourself managing cash flow by calling and chasing down customers who carry a balance.  Because you’d like to streamline your work and spend more time on IPA (income producing activities), your cash application process needs to be automated.  So how do you automate the cash application process?

What is cash application?

First, let’s explore what “cash application” is.  If accounts receivable defines the money that customers owe you for services rendered, cash application means receiving and applying the payments from customers for services rendered.  

It’s a multi-step process that includes receiving the payment, finding the outstanding invoice (normally that information is found on the remittance form the customer will include with their payment), applying the payment to the customer account so that their “accounts receivable” balance decreases, and finally depositing the funds in the bank.  Doing this manually becomes tedious and time-consuming when you have a substantial amount of customers who make payments on any given day.  If any part of the cash application process falls behind, customers become irritated and service breaks down.  For example, undeposited funds accumulate when payments are received but don’t make it to the bank in a reasonable amount of time.  Also, when accounts receivable hasn’t been updated, customers may receive notices about payments they have already made.

To automate this would mean that the posting of each transaction takes place automatically.  Technology in this area continues to improve annually, making cash application more of an automated process.  According to Aberdeen Group, automated matching of incoming payments to invoices when payment is received by AR helps to differentiate the best-in-class from their lower-performing peers.   

Adoption of this technology equates to a shorter cash collection cycle as well.  The cash collection cycle is the number of days it takes to collect accounts receivable. This data is important for tracking the ability of a business to grant a reasonable amount of credit to worthy customers, as well as to collect receivables in a timely manner. 

Benefits of Cash Application Automation

What can automating your cash application process do for you?  Why is this crucial to running your business more efficiently?   

Efficiency and time savings. Companies with automated solutions to their AR processes are 46% more likely to also enjoy automated reconciliation between incoming cash and outstanding invoices.  This increases efficiency by allowing the bookkeeper to spend less time manually matching remittances & payments with accounts receivable records.  

You can then use the time you’ve saved to have your accounts receivable team focus on other areas of profitability.  You will save money by either paying them for less time, or redirecting their attention to more pressing financial matters.  

Your cash collection cycle is also shortened, specifically the time between receiving the money and posting the transaction.  This has the ability to provide real time data for the business owner.

Better customer service.  Teams with automated cash application processes provide more accurate information to their customers, and invoices are 46% more likely to be accurate and complete.  Automation decreases errors in recording and applying payments.  In addition, the customer has less paperwork to manage, as a remittance form is no longer needed to send in payment.

Ability to scale as business grows.  Better customer service starts with being able to onboard new customers quickly and easily.  Invoicing and collecting payment will then take significantly less time.  

As you can see, automating your cash application process tends to create greater efficiency in other areas of your business.  Your business will have the ability to spend more time  focused on growing the client base and providing accurate information to shareholders and owners.

So how do you implement cash application automation in your business?

Your accounting department should examine the types of software on the market that allow for automation. They need to determine the equipment and support budget it will take to set up the process to integrate with your current invoicing operations.

Once the technology has been adopted, the next steps are to automate each process of the task, automate invoicing, and include a way to capture payment data so that you can obtain payment automatically.  Managing your company finances with an automated system will give you the time and confidence needed to take the business to the next level.

Posted in Finance, Credit, Management