Understanding the Cash Application Process

Cash Application – The Final Step in Order-to-Cash

Cash application is the final step of the order-to-cash process; it’s when a company applies a payment to a customer’s outstanding balance. Some may say it’s the most important step because processing a payment signals the end of a successful sale.

The order-to-cash process begins when a customer places an “order” (or simply commits to purchase a product or service), then moves on​ ​to credit management ​–​​​ if they request a line of credit instead of paying for it in full upfront. Order-to-cash continues on​ ​to accounts receivable​ -​ when it’s time to pay for the purchase. Cash application is when the revenue is finalized – it’s been both recognized revenue (something was sold) and recorded revenue (noted in the general ledger that it was paid for).

The Cash Application Process – When it’s Manual, it’s Complex

While cash application is important, it can be one of the most manual, time-intensive, and error-prone processes in accounts receivable management. Larger companies will employ cash application specialists who apply payments and reconcile accounts all day long. This team has to manage incoming remittances from multiple channels – including paper checks, credit cards, ACH transfers,​ and​ even wire payments – and try to match them to outstanding invoices.

For a company with a lot of customers, a labor- and time-intensive process is not sustainable. Many times, these payments – especially e-payments – arrive with missing remittance data, and so cash application becomes a game of “matching.” With a paper check, the customer’s accounts payable (A/P) specialist can write the invoice or account number on the check.

However, with e-payments, remittance data (also known as remittance advice) is not always included with the payment, and so the specialist must try and match the payment to the correct invoice. In addition, some customers (including large retailers) require vendors to access payments from within their A/P portals, and so specialists may also find themselves logging into their customers’ A/P portals to check on whether a payment was issued on time.

Finally, the cash application process can be very error-prone – for example, one wrong digit and a payment gets applied against the incorrect invoice. These errors can lead to dissatisfied customers. It’s not a good customer experience if your customers are contacting you to find out why they’re still showing an outstanding balance on an invoice they issued payment for. Or if you still haven’t deposited the payment days after they issued it. It’s important to make it easy for your customers to do business with you.

​In fact, Dun & Bradstreet’s survey of CFOs found that cash application had the most potential to be automated – 41% of respondents said they would automate cash application before anything else, followed by billing/invoicing (39%), order management (38%), collections (35%), and credit risk (34%). According to the survey, it's “considered critical for maintaining a company’s cash flow but is often plagued by errors and requires many hours of manual effort to apply payments properly.”

Benefits of Automating Cash App​​​lication​

The main benefits ​of ​​to ​automating the cash application process with software are to improve:

• Your team’s efficiencies
• Your customer’s experience
• Your company’s cash flow

Eliminating manual processes through automation will help scale your team’s resources – allowing them to focus on more complex tasks, not just data entry, and become more efficient. Ideally, companies want to achieve “low touch” or “no touch” cash app​​​lication​ – meaning little or no human intervention is required to receive and apply payments.

Quickly applying payments – without error or the need to follow up with your customers about which payment needs to go toward which invoice – will help improve their experience with you, as well as improve your free cash flow.

How Dun & Bradstreet Can Help

D&B Finance Analytics Receivables Intelligence is an AI-driven platform that automates accounts receivable management – from e-invoicing, collections, payments, and cash application.

Its Cash Management feature uses machine learning to capture, match, process, and apply payments to enable low-touch or no-touch processes, and the platform easily integrates with any ERP. The system automatically applies and reconciles payments through integrated remittance management, predictive matching, and advanced deductions management. In addition, Cash Management can split a single check across multiple accounts, apply a check to a parent account, or apply a group of invoices across a group of accounts to achieve seamless payment processing. Users can also apply discounts, overrides, and write-off balances based on permissions including credit/debit note functions.

Learn more about Receivables Intelligence from D&B Finance Analytics.