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5 Reasons to Automate Your Cash Application Process

automate cash application

Cash application is the lifeblood of any organization.

Organizations depend on cash for:

  • The purchase of raw materials
  • Sales and marketing
  • The manufacturing and delivery of goods
  • Payroll and administration

In these uncertain economic times, cash flow is especially important.

But applying customer payments is easier said than done for most organizations. 

The root of the problem is the manual processes on which most organizations rely.  While many organizations have invested in automated accounts payable solutions (which impact suppliers), most organizations have not automated accounts receivable (which impact customers).  And few legacy enterprise resource planning (ERP) applications are set up to easily receive remittance data.    

As a result, most organizations manually apply most of the payments that they receive.  Worse, many organizations cannot apply any of the payments they receive without human operator intervention, since remittance data often arrives in a format that cannot be ingested by legacy accounts receivable systems.  The result is lots of keying.  In fact, applying customer payments is so complex that organizations lose lots of money annually to unauthorized deductions that cannot be resolved.  It’s easier to write the deduction off than to go through the trouble of sorting it out, they reason.    

Electronic payments growth is making things worse for organizations that manually apply cash:

  • Organizations frequently receive electronic payments that are decoupled from their remittance advice, which are typically e-mailed as a PDF attachment, Word document or an Excel spreadsheet or embedded in the body of an e-mail.
  • The lack of U.S. remittance standards means that billers can never be sure what format they will receive remittance data from customers – or if they will receive any data at all.
  • Even in cases where customers are willing to pay an extra fee to transmit remittance data as part of an ACH payment record, the lack of U.S. remittance standards requires a biller’s time-strapped IT department to map the data for import. 
  • Bank lockbox providers use different file formats for transmitting remittance data to billers, requiring a biller’s IT department to map the data for import.

Receivables departments have better things to do than spend all their time on low-value tasks such as manual data entry, hunting down remittances, resolving exceptions and posting receivables.  This is especially true in today’s expanding economy, where receivable departments must compete for talent, and where senior management is looking for ways to redeploy staff to focus on strategic activities such as data analysis, working capital optimization, and customer management.

Moreover, inefficiencies in the cash application process exacerbate slow cash flow and make it extremley difficult for cash managers to accurately report on the financial health of the organization.

Does your cash application need automation?

Here are five tell-tale signs that it’s time to automate your cash application process: 

  1. You have lots of manual processes: In most organizations, matching payments with remittance advices is a manual and increasingly complex affair.  The reason is that there are no standards for remittance advices in the United States.  The data on remittance advices is frequently inaccurate, incomplete and hard to find – if the customer sends it all.  Organizations also receive multiple remittance file formats from bank lockbox providers.  And most accounts receivable departments cannot access the IT resources that they need to map the remittance data in bank files and ACH payment records for import into their legacy systems.  All these manual processes slow the cash application process down – significantly!  
  • Your costs are high: Organizations spend over $100 billion annually on their receivables processes, studies show.  Much of that money is wrapped up in the human labor required to process and match payments and remittance advices.  Some organizations pay bank lockbox providers enormous fees (as much as $50,000 a month, in some cases) to process their customer payments and to capture or key the data from remittance advices.  Unfortunately, the data provided by banks is so unreliable that most organizations apply a puny percentage of their electronic payments straight-through to their ERP application or system of record.  Without good data on payments, it’s hard for cash managers to forecast their cash.     
  • You have lots of unapplied cash: Ineffective posting of payments and remittance advices results in a high amount of unapplied cash (money that’s held in a general account while the organization tries to determine how the funds should be applied to customer invoices).  Beyond the potential customer service implications of not applying a payment correctly or in a timely manner, unapplied cash can also create complex escheatment issues in many states.      
  • You have customer service issues: Poor cash application opens the door to customer issues such as lots of inquiries regarding payment status, erroneous collections activity, delayed shipments (think: just-in-time deliveries) and unnecessary credit holds (which can result in customers taking their business elsewhere while you determine how to apply their payment).  
  • You do business internationally: Global businesses — which may have financial shared services facilities across several continents — must manage numerous banks and currencies, multiple enterprise resource planning (ERP) applications and divisions (with potentially complex parent/child relationships), and various file formats and payment methods (e.g. EDI 820, MT 940 and MT 942, BACS, RIBA and SEPA).  Making matters worse, it is not customary to send a remittance advice in the United Kingdom and other countries in Europe.  Global cash application inefficiencies can slow international expansion and skew reporting.   

If your organization is experiencing any of these issues, you have no time to waste in automating.

Automated cash application can help your finance team improve efficiency and cash forecasting.

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Cash Management Forum by CMLI

March 18-19, 2025

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