In the process of commercial transactions, the flow of goods and services often doesn't wait for payments to process. If the relationship between two businesses in good standing is solid, their accounts are assumed to be sufficient to cover regular exchanges of service. However, this agreeable arrangement makes for more complex accounting than business-to-consumer exchanges due to the delay in the transaction period and the vague and unpredictable quote to cash.
With consumers, their payment is challenged and, if approved, order and payment are created at the same time. With B2B services, orders/invoices are made and payments often arrive sometime later, meaning payments need to be matched to their invoices and processed after-the-fact.
What is Cash Application?
Cash application is the process of accurately matching payments from B2B customers to their orders, then processing the payment so the money is available to be spent. Originally this process was done by controllers and accountants, very carefully and by hand, ensuring that each B2B transaction is fulfilled accurately and completely. However, with the volume and complexity of commercial transactions, a manual method isn’t practical or efficient anymore.
What Makes Cash Application Complex?
Before the electronic banking methods and easy long-distance business brought on by the 'digital age', cash application was fairly simple. Orders would come in and be recorded, followed by a check for the invoiced amount. The remaining task left for an accountant was to match the client's name and amount on the order to the check to confirm the transaction was accurate, and last, cash the check to make the earned funds available to the business bank accounts. Now there are dozens of ways for orders to come in, from electronic invoicing, to digital payment-portals, to proprietary B2B apps.
Payments can also come in from traditional lockbox services, paper checks, wire transfers, ACH, and private cards, all of which need to be compared to the orders coming in from their various sources. To further complicate the process, a single invoice is usually sent for multiple orders, denying the ease of simple amount-comparison. Due to the fact that the payment will usually not match the invoice or full amount due on the account and is received at different times during the month, this will prevent the AR team from closing out daily reconciliations, creating an incredible amount of tedious and manual work for an Accounts Receivable member/team.
Why is Cash Application Important?
Cash application is key for predictable and steady cash flow, and to put to rest any DSO’s. To put it simply: If you don't have it you can't spend it. Without control over cash flow, you will run into snags. In order to make profits, companies need to use their money as efficiently as possible, but they can't do this if the money is bottlenecked at posting. Orders and payments waiting to be "applied" are not useful to anyone. When a company has been paid but is waiting on cash application, it is still essentially an IOU as it cannot be used or invested in replacement products. The finance department can't even say they have a solid picture of current funds because there are payments waiting to be processed. The faster cash application is performed, the sooner the money it can be spent on something essential and/or time sensitive.
How Cash Application Impacts Business Relationships
Slow cash application isn't just irritating for the company that has been paid. As anyone who's waited for a check to be cashed knows, an inaccurate bank balance is misleading and unsettling. After a strategic (and frequently lengthy) partnership is established in the a B2B realm, expectations are high in receiving a seamless transaction flow; waiting for cash application on their orders creates the same sensation of unease and roadblocks in their checks and balances.
ERPs are a common and vital piece to commercial business structure, and it is it common best practice for accountants to close their books at the end of the day based on the structure established in that ERP software; knowing there is an unprocessed payment, they face a certain amount of frustration because the number in their bank balance does not equal the amount of money they are clear to spend. A timely cash application process in B2B sales is both a relief and a courtesy to your business customers, allowing them to keep their books as tidily as you like to keep yours.
Digital Solutions to Cash Application
The rising tide of technology floats all ships. As multiple sources of orders and payments complicate the process of cash application and increase manual labor cost, fortunately, new software is invented to automate it as well. Setting up automation in the accounts receivable flow is essential for software, such as an ERP, that can retrieve order and payment information from multiple sources, then compare, match, and process them in order to save accountants and customers alike precious time and headaches.
Paystand's software integrates easily with ERPs and can reconcile payment remittance using a ‘pay now button’ that can be implemented in your invoice. With a myriad of other cutting edge features, Paystand tenders an advanced complete payment platform services for the modern accountant. Our Payments-as-a-Service business model helps controllers and accountants customize their financial processes with intuitive dashboards and real-time analytics. It's time for accountants to put down those receipt stubs and enter the future of software accounting.
Contact us today to learn more about Paystand's solutions for your business needs.