An efficient cash application process is critical to maintaining a healthy cash flow.
But achieving a smooth cash application is easier said than done for most organizations. Treasurers face several barriers that can create friction in the cash application process, leading to delays, errors, inefficiencies, and strained customer relationships. Understanding these barriers to cash application and knowing how to eliminate them is crucial to optimizing the treasury management function.
This blog provides tips to overcome the biggest barriers to frictionless cash application.
1. Manual processes and data entry errors
Barrier: Many organizations still rely on manual processes for cash application, which involve keying remittance details, matching payments to invoices, and reconciling transactions. Errors are inevitable whenever humans are involved. Incorrect entries, misapplied payments, and processing delays can lead to rework, customer dissatisfaction, and a lack of real-time cash flow visibility.
Solution: The most effective way to overcome the challenges of manual processes is to implement an automated cash application solution. Automation eliminates the need for manual data entry by using artificial intelligence (AI) and machine learning to automatically extract data from remittance documents and other sources and match payments to open invoices based on preset rules and criteria. This not only reduces errors but also accelerates the entire process, allowing for faster clearing.
2. Complex payment matching
Barrier: Organizations typically receive payments in multiple payment methods, currencies, and formats. Payments can come in via bank transfers, credit cards, checks, or electronic payment systems, each with different reference numbers and data formats. This complexity can make it difficult to accurately match payments to the correct invoices, leading to delays and discrepancies.
Solution: To address the challenge of complex payment matching, treasurers should look for a cash application solution that offers robust matching capabilities. These solutions use AI and machine learning to normalize the processing of different payment methods, currencies, and formats, and identify patterns and anomalies. By leveraging these advanced technologies, organizations can ensure that payments are matched correctly, regardless of their complexity. Additionally, implementing a solution that integrates seamlessly with an organization’s ERP system can further streamline the matching process, reducing manual intervention and improving accuracy.
3. Lack of standardization
Barrier: The lack of standardization across different payment methods and channels is another barrier to frictionless cash application. Payment remittances may arrive in different formats, such as PDFs, emails, or even physical documents. In some cases, organizations may not receive remittance details. All this makes it hard to quickly and accurately consolidate and reconcile payments. This lack of standardization can lead to delays in cash application and increase the likelihood of errors.
Solution: Standardizing payment remittance processes is key to frictionless cash application. Treasurers can work with their banking partners and payment providers to establish standardized formats for payment remittances. Additionally, adopting a cash application solution that can automatically read and process various remittance formats, including unstructured data, will streamline the process. AI and optical character recognition (OCR) technology can be used to extract relevant data from documents and convert it into a standardized format for easier reconciliation.
4. Customer payment behavior
Barrier: Inconsistent or incomplete remittance details from customers can create significant friction in the cash application process. Customers may fail to include necessary details, such as invoice numbers or reference codes, when making payments, leaving finance staff to manually investigate and match payments. This slows down the cash application process and increases the risk of errors.
Solution: Improving customer communication and education can help reduce the occurrence of incomplete or inconsistent payment information. Treasurers can work with their accounts receivable (AR) teams to develop clear guidelines and instructions for customers on how to provide accurate remittance information. Additionally, implementing a customer portal that allows customers to view and manage their invoices and payments can encourage more consistent payment behavior. Automated cash application solutions can also help by using AI-driven tools to predict and match payments based on historical data, even when remittance information is incomplete or missing.
5. Integration challenges
Barrier: Many organizations struggle with integrating their cash application processes with other financial systems, such as enterprise resource planning (ERP), customer relationship management (CRM), and banking platforms. Disconnected systems can lead to data silos, where critical payment details are not easily accessible, resulting in delays and inefficiencies in the cash application process.
Solution: To overcome integration challenges, treasurers should seek out cash application solutions that offer seamless integration with their existing financial systems. A solution that provides Application Programming Interface (API) connectivity can enable real-time data exchange between systems, ensuring that payment data flows smoothly across the organization. This integration reduces the need for manual data entry and reconciliation, allowing for a more streamlined and efficient cash application process. Cloud-based solutions can offer additional flexibility and scalability, making it easier to integrate with multiple systems and adapt to changing business needs.
6. Limited cash flow visibility
Barrier: Delays in the cash application process can hinder or obscure real-time visibility into an organization’s cash position. Without accurate and up-to-date information, treasurers may struggle to make informed decisions about cash management, cash forecasting, and liquidity planning.
Solution: Automated cash application solutions provide real-time updates on the status of incoming payments and their application to invoices. This enhanced visibility allows treasurers to monitor cash flow more effectively and make timely decisions about cash allocation, investment, and risk management. Dashboards and reporting tools provide treasurers with insights into key metrics, such as day’s sales outstanding (DSO) and unapplied cash, improving their ability to manage cash flow.
Conclusion
Frictionless cash application is essential for maintaining a steady cash flow. However, treasurers must overcome several barriers to efficient cash application, including manual processes, complex payment matching, lack of standardization, inconsistent customer payment behavior, integration challenges, and limited cash flow visibility. By adopting automated cash application solutions, standardizing processes, improving customer communication and education, and integrating financial systems, treasurers can overcome these obstacles and achieve a more streamlined and efficient cash application process. In doing so, they will not only enhance the overall efficiency of the treasury function but also contribute to the financial health and long-term success of the organization.
