Cash application is a vital part of the accounts receivable process.
It’s simple in concept. Payment from a customer must be matched to the corresponding invoice being paid. But in practice, things are never quite as simple as they sound on paper. Decoupled remittances, split payments, and short payments can all make the process more difficult, especially if cash application is being handled manually.
Decoupled Remittances
Perhaps the most common cash application challenge is decoupled remittance, which is when remittance arrives separate from the payment. It’s also one of the leading time wasters for your accounts receivable team. When it occurs, a member of the AR team must spend time digging through emails, banking and records, and other systems in an effort to connect the remittance with the appropriate payment.
Allowing customers to make payments through a self-service payment portal is a simple way to solve this issue. It lets customers select the invoice or invoices being paid, and then make payments using their preferred method — be it ACH, wire, or credit. Because they are personally selecting the invoice to be paid, the payment itself is automatically matched to it, eliminating the need for your accounts receivable team to go digging through records.
Payment Received Without Customer Data
Occasionally, AR teams will receive a payment that has no identifiable or recognizable customer data associated with it. This presents an obvious problem for the team: identifying not only the appropriate invoice but the relevant customer as well. Using traditional, manual methods leaves employees combing through records and making their best guess as to who the payment should be attributed to. Not exactly an ideal way to go about business.
A key step toward solving this issue is adopting a solution that makes use of artificial intelligence and machine learning. The software analyzes data and then makes suggestions about the accounts most likely to be associated with the payment, reducing the amount of guesswork and helping speed up identification.
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Multiple Remittance File Types
Different customers will frequently supply remittance information using different methods. Sometimes this might be PDF or inside the body of an email. A method rising in popularity is electronic data interchange (EDI).
EDI - the intercompany communication of business documents in a standard format, where information moves directly from a computer application in one organization to a computer application in another.
A variety of complications can arise when working with various remittance types. Blurred images due to formatting errors or missing characters within the document are just a few of the problems that a team may encounter. All of this can make it difficult for members of the AR team to extract the relevant data needed.
The simplest way to eliminate this problem is to adopt an AR solution that automatically extracts remittance data regardless of the file type and matches it up to the appropriate customer and invoice in real-time.
Ideally, teams should employ a solution with remittance advice extraction, a machine learning feature that scans remittance emails and extracts remittance data in a structured form. This feature often uses Object Character Recognition (OCR) which extracts text data from image files like PDFs. In addition, machine learning adapts to these circumstances, storing the knowledge gained for future reference.
Missing Remittance Data
The inclusion of remittance data is not a formal requirement for customers and is technically a courtesy. This means that, at times, customers may submit payment without remittance information. When that happens, teams reliant on manual processes must take time to contact the customer for clarification, typically in the form of a phone call or a series of emails. Not only does this add additional work to your AR team’s plate, but it also increases your days sales outstanding (DSO) by perpetuating the payment process.
With an automated cash application process, when payment is received without remittance information, team members can simply select invoices, credit, and approve. The remaining balances can have reviews set up and be pushed to the ERP.
Short and Split Payments
A less common, but by no means rare, occurrence is when a customer short-pays an invoice or submits a payment intended for multiple invoices simultaneously. When it happens, a member of the AR team must investigate to determine the reason for the discrepancy.
Allowing customers to pay via a self-service portal is an effective way of managing this process as well. The software allows customers to set up partial payments and submit disputes from the same centralized location. In addition, disputes are automatically assessed by the software and directed to the appropriate employee for prompt resolution. In addition, relevant supporting documents can be attached. Customers can also make a promise to pay, in which case they will be moved to a reminder cadence of communications.
Better processes for a better experience
As the final step in the order-to-cash process, cash application is arguably the most important. It ensures that the money you have been paid is applied and becomes actual cash in your bank account. For teams still using manual processes, it can be labor intensive. In addition, it can lead to frequent and potentially overwhelming communications with your customer. Adopting an automation solution is key not only to improving your team’s performance but to optimizing customer experience as well.
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