Cash Application | B2B Finance Glossary

What is Cash Application?

Cash application is part of the accounts receivable process: it occurs when incoming customer payments are matched with their respective open invoices.

Why is Cash Application Important?

Cash application offers an essential way for businesses to track cash flow and capital so that company funds can be used in a way that’s efficient, accurate, and quick.

For example, when a company receives a payment, it must be matched with its respective open invoice for the company to be sure that it has a right to those funds. Once the company can confirm that the funds belong to it, it can use that money for company purposes, including payroll, investments, and business expenses.

Additionally, faster cash application cycles lead to faster access to cash. As a result, cash application must occur daily to ensure every payment is applied and reflected in the company’s bookkeeping process as cash inflows.

What Are the Different Elements Involved in Cash Application?

Cash application is a process made up of many different components. Here are the main parts:

Payment

The payment is the money transferred from the customer to the company. Payments can come in many forms, and it’s up to every company to decide which method it will accept. Payments can come in many forms, including ACH payments, wire transfers, credit cards, paper checks, eChecks, etc.

Remittance Advice

Remittance is the data that shows why a payment is being made and can include the invoice number that is tied to the payment along with any follow-up information, such as a note from the customer that they are only paying a partial amount of the invoice if the products were delivered in a way that is damaged. Sometimes, remittance is included alongside the payment itself, but it can also be transferred separately from the payment in an email, phone call, or web portal.

Invoice

The invoice was initially sent to the customer to let them know how much is due and when the payment needs to be made. A cash application specialist uses remittance advice to understand what invoices are being paid by the funds transferred from the buyer.

Once the cash application process has begun, a member of the AR team will match the payment to the invoice and then mark the invoice paid. Usually, this information is recorded in the company’s ERP system or some other record-keeping system.

What Makes Cash Application Complex?

Today, cash application is a much more complex process than it used to be because there are many different forms of payment besides paper checks. Paper checks come in as payments with already attached remittances, allowing for a simple one-to-one matching process that does not involve much work.

However, as digital payments continue to grow, remittances often come separately from the payment through mail, email, web portals, or other systems.

Additionally, when accounts payable departments send a single electronic payment for multiple invoices, more issues can occur: it’s much more challenging to do matching properly since the AR department can’t simply look at the dollar amounts of payments to match their corresponding invoices.

Remittance becomes all the more critical as it is the only means of relating the payment to the correct invoice. On top of that, it’s complicated for AR departments to gather remittances from web portals, and this process alone can require the time and attention of multiple full-time employees.

Customers sometimes make short payments for many reasons, including early payment discounts or disputed goods. When sending the remittance, the customers usually explain the reason for the short payment. As a result, cash application analysts have to identify the short payments and manually note them.

Finally, Lockbox services can also make cash applications complex: lockbox key-in services are charged based on keystrokes and usually cost between one and three dollars for every check. This means that cash application can become an expensive process. Moreover, sometimes the lockbox key-in data is incomplete, and the missing information must be entered manually by scanning check images.

How Can You Improve Your Cash Application?

Automated solutions specifically designed for cash application are becoming increasingly available. These solutions are designed to make remittance and matching effortless, allowing AR teams to save countless hours on manual tasks.

Paystand’s Smart Lockbox, for example, completely digitizes the cash cycle from payer to merchant and eliminates the need for paper check payments for good. With this product, your finance team can forget about spending time driving to the bank to pick up paper checks, get immediate visibility into the cash flow through payment data that’s displayed as it comes in, a centralized collections process, and reduced receivables risk with 24/7 payment tracking; it also makes it possible for check information, reconciliation status, and transaction details to be fully integrated into your trusted ERP system. Smart Lockbox also offers remote remittance processing that speeds up the cash application process.

If you want to learn more about how Paystand can help your finance team automate essential systems and speed up your cash application, schedule a demo with one of our payment experts today.