Cash Application

What is a Cash Application in Accounts Receivable?

Cash application in accounts receivable is the reconciliation (matching) of incoming payments to the corresponding customer invoices. It is a process that helps businesses identify, or match, paid, outstanding or unpaid invoices to the correct account receivable. This process is often a complex and manual process that involves challenges. Automation in cash application can alleviate these complexities and streamline it for optimal cash flow management.

There are several different types of cash application:

Automatic. Match invoices, credits, and payments with quotes and sales orders automatically using advanced AI algorithms to ensure the correct amounts are being processed (i.e. automatic reconciliation) with 100% accuracy.
Semi-automatic. Match invoices, credits, and payments with quotes and sales orders using semi-automatically advanced AI algorithms.
Manual. Match invoices, credits, and payments from one single point in the platform manually.

The 3 Main Elements of Cash Application

The cash application process includes several essential elements that work together to manage your accounts receivable cash application.

Invoice. An invoice is the bill given to the customer after the receival of a good or service. After a payment is received, it must be matched with the open invoice.
Payment. A payment is the cash transferred to the customer via check, electronic transfer, ACH, wire transfer, credit cards, and third-party payment providers.
Remittance advice. This is the description of the payment that explains why it was made. It typically contains information such as the invoice number, dates, balance due, invoice number, customer name and address, etc. Since remittance advice may be communicated via different methods (e.g., emails, written memos, transmitted verbally through phone calls or via payment portals) it can be challenging for collectors to gather the required payment information to match it to invoices.

Challenges With an Inefficient Cash Application Approach

As the world of B2B payments has become more sophisticated, each of the above elements of cash application has grown increasingly complex. Manual approaches to cash application for large transaction volumes are no longer sufficient, since they easily lead to human error. As a result, businesses look to A/R invoice-to-cash management platforms to help them.

The main challenges of B2B payments include:

Complex choice of payment methods. In the digital age, customers have the option to pay through a variety of third-party payment providers, checks, ACH, wire transfers, credit cards and digital payments. The many options require a more robust method for matching invoices to customer payments.
Complex manner of payment options. Customers also have the option of choosing from different types of payments. These include: payment of multiple invoices together in one payment, overpayments, partial payments and short payments all complicate the cash application process. Many ERPs do not have the ability to match these types of complex payments. Disputes of invoice amounts complicate the payment process further.

Why Organizations Should Use Automated Cash Application

As a result of the complexities of B2B payments, many businesses look for a solution, such as an A/R invoice-to-cash management platform, that centralizes customer and payment information in one place. This is critical for delivering visibility so that businesses can track credit-related activities to facilitate and maintain an audit trail. However, automated cash application is only an available option when payments are made through a payment portal. When this is not possible for all payments, semi-automatic payments are a viable option, which also employ advanced AI algorithms to match invoices, credits and payments with quotes and sales orders.

The benefits of automating your cash application include:

Greater accuracy. Automation can help eliminate human error that is more common with the traditionally manual steps of the cash application process cycle.
Faster. Quicker matching of payments to invoices means that your organization can reduce the administrative burden involved in cash application.
Optimal cash flow management. Businesses can take advantage of faster application of cash by paying its staff and bills on time, filling purchase orders and/or investing it in growth opportunities or paying off debts.
Easier to scale. Automated processes that reduce human error that are faster and are more accurate are ideal for scaling your A/R application process.
Customization of dunning workflows. Workflows can also be customized according to your business requirements and customer’s needs, such as customers that pay via check, smaller or larger payments, partial payments, etc.
Enhanced business relationships with customers. A more accurate, quicker cash application process means satisfied customers that place greater trust in your business.
Access to advanced analytics. When you use an integrated invoice-to-cash A/R management platform, the data from a cash application can be leveraged for credit management application or for improving metrics such as payment history and customer risk.

Automate and Streamline Cash Application with Gaviti

Gaviti’s A/R invoice-to-cash platform automates the cash application process, delivering an unmatched level of accuracy through its payment portal and eliminating the need for the traditionally manual and cumbersome cash application process. Powered by AI-driven algorithms, it enables precise application of both automated and semi-automated payments and their reconciliation and supports manual payments as well. It also connects with multiple banks to achieve real-time reconciliation with multiple payment sources. In addition, the real-time visibility and reporting help your business monitor cash application metrics and provide you with deeper insights about your cash application, including payments related to unapplied cash or discrepancies.

When connected to Gaviti’s full invoice-to-cash solution, businesses can leverage data from the cash application solution to its credit management application, automatically evaluating a prospective customer’s credit rating and managing and providing credit limits as necessary.

Want to learn more about how Gaviti can help automate your cash application process and optimize your cash flow? Book your demo today.