What is Cash Application?

Cash Application Definition

Cash application is an accounts receivable process that matches incoming payments to appropriate customer accounts.

A dedicated automated cash application solution or AR automation software helps with high invoice volumes.

Cash application is in a shared service center to streamline operations and improve efficiency across multiple departments.

How Cash Application Works

There are two ways cash applications are done: through a manual process or an automated cash application process.

• Invoice Generation: Companies send invoices to customers. Invoices include the amount, due date, and payment information.
• Customer Payments: Customers clear the outstanding invoice. The payment method varies and includes checks, electronic payments, credit cards, or other modes.
• Matching and Allocation: The cash application process involves incoming payment matching to corresponding invoices through remittance information. This guarantees the correct allocation of each cash receipt.
• Customer Accounts: The unapplied cash is matched using the remittance advice, and the balance sheet is updated accordingly. This makes sure that the company's financial records accurately reflect the accounts receivable.
• Reconciliation: Regular reconciliation helps compare the total payments received to the expected revenue and identify payment discrepancies or errors.
• Cash Application Automation Software: Many companies use cash application software or accounts receivable software with cash posting capabilities. Automation simplifies the manual cash application process by minimizing errors.

Note: AP automation optimizes outgoing payments.

Who handles cash allocation?

The finance or accounting department typically handles cash application. Responsibilities are assigned to the accounts receivable team or a cash application specialist and managed by a cash application manager.

Large companies have a dedicated cash application for payment processing and invoice matching.

Note: Safeguarding personal information is vital during the cash application process. 

Cash Application Benefits

• Accuracy: Cash application automation reduces manual errors in allocating payments to customer accounts. 
• Efficiency: Automation streamlines the cash application process, allowing companies to process payments quickly and efficiently. 
• Cash Flow Management: Companies can better manage their cash flow by quickly applying payments to customer accounts. 
• CSAT: A well-managed cash application process leads to accurate and up-to-date customer accounts.
• Delinquencies: Timely and accurate payment application reduces delinquent accounts. 
• Reconciliation: Automated cash application simplifies the reconciliation process and makes it faster and more straightforward. 
• Cost: Automation prevents manual work in the cash application process.
• Scalability: When transaction volumes increase, an automated cash application system is scalable. 
• Compliance and Audit: Automated cash application systems provide a detailed audit trail. 

Note:  Ån automated solution transforms the cash application process by allocating incoming payments to correct invoices. 

Cash Application Challenges

• Data Entry Errors: Manual data entry increases errors, like a mistyped open invoice number or payment amounts, and leads to misapplied payments.
• Inaccurate Remittance Data: If remittance information accompanying payments is incomplete or incorrect, matching payments to multiple invoices or customer accounts is challenging, leading to problematic remittance capture.
• High Transaction Volumes: Managing large transactions can be time-consuming and prone to errors. 
• Delayed Payments: A delayed payment from customers later than expected can affect cash flow and the cash application process.
• Complex Payment Methods: Payments through various methods, like check, electronic payment, and credit card, makes the reconciliation and application process problematic. 
• Customer Disputes: Disputes over invoices or payment discrepancies can complicate the cash application process and require additional time and resources. 
• Automation: Companies can be stuck with manual processes or solutions without an automated system.
• Integration Issues: Incompatibility or integration of cash application systems with other software hinders seamless data.
• Improper Reconciliation: Payment reconciliation with revenue is time-consuming if there are discrepancies.
• Changes to Customer Information: Changes in customer data, like addresses or contact details, pose challenges in updating records and matching payments.
• Regulatory Compliance: Adhering to regulatory requirements can complicate the cash application process.

Note: Artificial intelligence in cash application processes enhances efficiency and accuracy by automating matching and significantly reducing manual effort and errors.

Accounts Receivable Collections and Cash Application

Cash application matches incoming payments to customer accounts. This helps companies maintain an accurate cash flow picture, reconcile accounts, and reduce errors. Cash application is critical to ensure companies can effectively manage their working capital.

Collections management is a broader process that companies follow to pursue and secure outstanding balances or overdue invoices. The collections process starts before the cash application.

FAQs

1) What is a cash application in simple words?

Cash application is the process of matching incoming payments to the right customer invoices or accounts.

2) What is the role of a cash application?

The role of cash application is to ensure that incoming payments are accurately matched and recorded against the correct customer invoices or accounts.

3) What are the different types of cash applications?

Different types of cash applications include manual entry, where payments are matched to invoices by hand; semi-automated, where software suggests matches for confirmation; and fully automated, where software automatically matches payments to invoices without human intervention.

4) What is the first step in the cash application process?

The first step in the cash application process is to identify and record the incoming payment details.