Accelerating Cash Flow with Automated Cash Application

Every dollar counts in uncertain economic times like these. 

But many organizations have a lot of cash stuck in slow-moving cash application processes.  In some cases, it can take an organization days or weeks to match customer payments with open invoices.  

Delays in applying customer payments can put a stranglehold on an organization’s working capital.

But it doesn’t have to be this way. 

Modern automation streamlines cash application. 

The importance of cash application

Few finance functions are as important as cash application.  Cash application is often considered the central nervous system of an organization’s cash flow – moving money throughout the enterprise. 

The faster an organization can match payments to open invoices, the faster it can access the money it has earned to pay suppliers, invest in growth initiatives, and meet payroll obligations.  Delays in applying payments can cause a cash shortfall that results in costly borrowing or missed opportunities. 

Efficient cash application processes can also help reduce Day’s Sales Outstanding (DSO) – a metric that measures how long it takes an organization to collect payment after a sale.  Faster cash application means less money tied up in accounts receivable (AR), freeing up working capital that can be used to help grow the organization.

In addition, efficient and accurate cash application processes provide finance leaders with a clear picture of how quickly customers are settling their bills.  These insights enable an organization to allocate resources, invest funds, forecast its cash accurately, and make better-informed decisions about potential discounts offered for faster payments.   

Finally, timely cash application helps organizations reduce the risk of bad debt.  Identifying payment issues early enables organizations to step up their collection efforts and adjust their credit policies.

These are just a few of the reasons that the cash application process is critical for optimizing cash flow.

Biggest cash application challenges

Manual and semi-automated approaches to cash application can impede an organization’s cash flow.  Here are some of the most common challenges that organizations face in applying payments.

• Cost.  Manually matching payments to open invoices is labor-intensive.  And organizations that rely on manual cash application processes must hire additional staff as they grow.

• Delays.  Manually matching payments to open invoices is a time-consuming process that can lead to delays in posting cash receipts to the general ledger and impact financial reporting.

• Errors.  Mistakes are inevitable when human intervention is involved.  Mis-keyed data or incorrectly matched payments can lead to reconciliation issues, customer support issues or inaccurate cash forecasts.        

• Poor visibility.  Manual and semi-automated cash application processes make it difficult for finance leaders to track the status of payments, identify bottlenecks, and optimize workflows.

• Integration.  Without automation, AR staff must manually collect data from multiple sources.  These fragmented processes can create data silos and bog down processes.

These challenges can significantly impact an organization’s overall financial health.

How automated cash application works

Automation transforms the cash application process.

A biller’s invoices are loaded into the cloud.  Customers use a secure hosted webpage to pay a single invoice via an ACH transaction or credit card payment, or customers can review a batch of pending payments for accuracy and fund the payments with the touch of a button.  Payments are then deposited directly into the biller’s bank account.  Payment and remittance details are submitted electronically to the biller for streamlined application in their AR system.  Any canceled or refunded payments are promptly refunded back to the customer.

Billers can track the status of invoices and payments through submission, approval, and delivery.

Benefits of automated cash application

Automated cash application solutions provide significant benefits to organizations of all sizes. 

• Increased staff productivity.  Automating tasks like extracting data, matching payments to invoices, and resolving exceptions, frees AR staff to focus more time on higher-value tasks.  In addition, automation can be scaled to accommodate higher volumes, without incrementally increasing staffing costs.  

• Reduced Day’s Sales Outstanding (DSO).  An efficient cash application process helps an organization improve its cash position by reducing DSO, a measure of the time it takes to collect payment after a sale.  The lower an organization’s DSO, the better its cash utilization. 

• Increased funds availability.  Applying customer payments more quickly enables organizations to free up cash to meet financial obligations, pay for goods and services, and invest in growth initiatives.

• Fewer errors.  Automation reduces the possibility of inaccurate data capture and mismatched payments and invoices, resulting in more accurate and reliable financial reporting and happier customers.

• Less bad debt.  Effective cash application enables an organization to protect its financial health and profitability by identifying and addressing late and short payments more quickly.

• Better visibility.  Efficient cash application enables organizations to forecast their incoming cash flow, make informed financial decisions, and avoid overestimating their cash on hand.  Automation also helps organizations track payments and identify potential bottlenecks.

• Enhanced customer experience.  Timely and accurate application of customer payments means they won’t have to call or email about incorrect or delayed posting of payments.  Additionally, credit lines will be cleared faster, allowing customers to buy more goods and services.

• Improved decision-making.  Timely insights into cash flow enables an organization to make better decisions about resource allocation, investments, and customer discounts.

These are some of the ways that automation empowers organizations to optimize their cash flow.

Embrace automated cash application

Optimizing working capital is crucial in today’s uncertain economy.  Manual and semi-automated approaches to managing receivables can impede cash flow.  By automating the cash application function, organizations of all sizes can accelerate cash flow, improve financial decision-making, and free receivables staff to focus more time on fulfilling, value-added activities.