Accounts receivable executives are familiar with the term cash application. In this blog, we will look into what is cash application, why is it important, what makes it complex, and how to overcome the challenges of cash application automation.
Cash application is the process of matching customer payments and remittance info to corresponding invoices. Unless this is done and the cash is posted in the ERP system, the funds will not be available for use. Cash application is simple in concept but complex in practice.
What is Cash Application?
Cash application refers to the crucial procedure of aligning incoming payments with unpaid invoices and directing them to the appropriate accounts for recording. This crucial practice enables businesses to effectively monitor the flow of cash and capital, ensuring that funds are utilized with utmost efficiency, accuracy, and promptness.
By meticulously executing cash application, organizations can maintain a clear and transparent record of their financial transactions, facilitating optimal financial management and decision-making.
How a Global Medical Supplies Leader Achieved Over 90% Auto-cash Posting. Download Case Study
How is Cash Application Used?
Cash application is an integral part of the broader accounts receivable (AR) process, as it effectively allocates incoming payments to their respective customer accounts and outstanding invoices. Until cash is appropriately assigned, businesses are unable to utilize it for various purposes.
The expedited utilization of cash enables companies to promptly fulfill financial obligations such as paying employee salaries and bills, satisfying purchase orders, exploring additional investment opportunities, and providing dividends to investors. In the digital age, cash application becomes significantly more prominent due to the multitude of payment methods available to customers.
This digital landscape introduces fresh complexities and obstacles for organizations to navigate, demanding innovative strategies and robust systems to effectively manage and reconcile incoming payments. By proactively addressing these challenges, businesses can ensure accurate cash application, minimize discrepancies, and maintain strong customer relationships.
What are the Steps in the Cash Application Process?
1. Receiving Payment and Remittance
Upon receiving a customer’s payment, you typically receive a remittance advice indicating the specific invoice(s) the payment is intended for. For payments made by check, the remittance information may be included in the memo line or an accompanying document attached to the check.
Electronic payments, on the other hand, are more complex. With methods such as ACH, EFT, wire transfers, and virtual cards, the remittance advice may arrive separately in various formats. It is important to note that buyers are not obligated to provide remittance advice, although it is considered a courteous practice. Therefore, there is a possibility of receiving a payment without any associated remittance information.
Modernizing Cash Application with the 3As: Automation, Analytics, and AI. Download Ebook Now
2. Matching the Payment with the Right Invoice
Once a payment is received from a customer, you will compare it with your accounting system to ensure that it is correctly linked to the corresponding invoice. Even when a payment is accompanied by a remittance, the process of matching the payment to the correct invoice can still become intricate.
A single payment can encompass multiple invoices, sometimes exceeding 40 to 50 invoices. Alternatively, you can encounter a situation where the payment does not precisely match the invoice amount. This occurs when a customer has made a partial payment due to a discount or an issue with their order. In such a case, additional investigation by your accounts receivable team is necessary.
What are the Elements of Cash Application?
There are three elements of cash application: Invoice, Payment, and Remittance Advice.
Invoice: The invoice is the document sent to the customer detailing product or service provided and requesting payment per terms and has a corresponding entry in the AR ledger. Invoice document records the money earned by and owed to the company through the sale of products or services on credit. Payment: Payment is the transfer of funds from the buyer to the supplier. There are many payment methods in business-to-business (B2B) transactions, including paper checks, ACH, wire transfer, credit card, virtual card, and a host of digital payment methods. Remittance Advice: Remittance advice is the data describing what the payment is being made for. Also known as remittance information or simply remittance, remittance advice is sent along with the payment and includes the invoice number. While the remittance advice is sent with the payment for digital payments, in other modes of payment, this information is sent separately from the actual payment transaction. Customers might send the remittance info in several ways and various formats. These formats could include email, PDF, image file, phone call, or web portal. 
What’s Wrong with Typical (read: manual) Cash Application Processes
1. Time-consuming
When manually performing cash applications, it becomes necessary to allocate personnel to meticulously analyze and input remittance data, especially in cases where the information is either missing or difficult to decipher. To mitigate such challenges, numerous businesses opt for receiving payments via checks, as these often come with an accompanying remittance advice.
2. More Prone to Errors
Despite having meticulous staff, errors are bound to occur when manually inputting data. If a customer notices recurring errors, it can potentially jeopardize the relationship between the parties involved.
3. Slow Down Cash Flow
A manual cash application process increases the time between a sale and the recording of a payment, resulting in higher days of sales outstanding. Delays in cash application also hinder the ability to obtain an accurate and current overview of outstanding receivables.
Touchless Cash Posting Made Easy for Global Businesses. Download Your Guide
Understanding the Objectives of the Cash Application Process
- Speed: The primary goal is to expedite cash application to minimize days of sales outstanding (DSO) and enable the company to utilize the funds as early as possible.
- Accuracy: Analysts must prioritize cash application accuracy. Errors in cash application can result in dissatisfied clients and disrupt the tracking of cash flow and working capital.
- Standardization: Standardization poses a challenge for global enterprises, as different payment methods and cash remittance file formats across various regions make it difficult to consistently apply cash throughout the organization.
Why is Cash Application Important?
The key elements of cash application are the invoice, the payment, and the remittance advice. Most of the B2B transactions are made on credit. In a typical B2B sales process, the supplier delivers goods or services, expecting payment at a later date. The supplier sets a credit limit for the buyer. When a buyer makes use of the entire line of credit, they can’t make further purchases unless the past purchase payments are paid off. If the supplier’s cash application process is slow, it delays the credit replenishment for the buyer.
This, in turn, impacts the revenue generation for the supplier. Hence whenever a supplier receives a payment, it’s important to “apply cash” to use it back in the business. It’s only when the cash is applied and posted against the corresponding invoice, the money received will be available for use.
An efficient cash application process is vital because companies want to minimize the order-to-cash cycle. Fast cash application lowers past due AR and increases the accuracy of a customer’s account. Efficient cash application is also important to customer experience. For example, with a poor or slow process, the company’s collection specialists may call customers that have already paid. Besides being a waste of time, it reflects poorly on the company and impacts customer relations.
What Makes Cash Application Complex?
Cash Application process includes bringing invoices, receipts, and remittances coming from multiple sources such as emails, EDI, bank files, lockbox files etc., in multiple formats, in multiple languages and in multiple currencies. Key challenges associated with cash application process include:
- Data capture from emails, documents, bank files and vendor portals which is very cumbersome
- Matching invoices to receipts is often complex and time-consuming involving several rules
- Data entry and posting into different ERP systems is very tedious and error-prone
Given the number of payment methods and the remittance information coming in different methods and formats—often in unstructured documents such as PDF, Word, or image files—capturing this information poses a huge challenge in cash application.
Further, while matching, some remittance information might be incomplete, complicating the process and requiring contact with the customer to clarify. A thorough matching process requires reference to other customer information (ex: customer purchase orders or internal sales orders along with invoices). In addition, customer history can provide important clues. These all have required human intervention in the crucial effort to match payments to charges correctly, and they make cash application complex.
How to Achieve Digital World Class Cash Application Efficiency using AI. Get eBook
What are the Complexities Related to Cash Application?
1. Lockbox Fees Become Too High of an Expense
Bank lockbox services consolidate all client checks in a centralized location, reducing the time it takes for checks to clear. Dedicated lockbox teams handle each check and input the relevant information into an electronic file shared with the cash application team.
However, lockbox key-in services incur charges based on the number of keystrokes required. Considering the cost of $1-3 per check, the cash application process can become expensive. Apart from the high lockbox key-in fees, this manual intervention consumes significant man-hours to reprocess a check already processed by the lockbox services.
2. Manual Payment-Remittance Linking
When it comes to electronic payments, customers transmit cash remittances through channels such as emails, EDIs, or A/P portals. Cash application teams then face the challenge of manually extracting or downloading this remittance from different sources and in various file formats.
The next step involves mapping these remittances to the corresponding incoming payments. This process is time-consuming and can significantly impact the efficiency of cash application analysts. Delays can cascade into slower cash visibility, which affects financial planning and working capital management.
3. Invoice Matching and Exception Handling
Cash application analysts are responsible for correlating payments with invoices using the information provided in the remittance such as invoice numbers, purchase orders, or shipment details.
However, complications arise when remittances contain inaccurate or incomplete invoice numbers, making it difficult for analysts to accurately match invoices with payments. In such a situation, payments are applied at an account level rather than at an individual invoice level. Manual exception handling can be time-intensive and prone to human error, increasing the risk of misapplied cash.
How Cash Application Impacts Business Relationships
Customers often make short payments for various reasons, such as trade promotions, early payment discounts, or disputed goods. When providing the remittance, they typically indicate the reason for the short payment.
Cash application analysts are then tasked with manually identifying these short payments and mapping customer-specific reason codes to the corresponding reason codes within their specific ERP system. Companies utilize multiple ERP systems, including SAP, JD Edwards, Microsoft, or legacy systems, each with its unique configurations.
Analysts also have to handle exceptions or adjust the file as necessary before posting it to the appropriate ERP systems. Delays or errors can negatively impact customer trust, reporting accuracy, and overall business relationships.
How to Achieve Hyper-efficiency in Cash Application?
In a growing enterprise, manual cash application becomes unsustainable. Tools including OCR, auto-cash engines, and robotic process automation (RPA) help relieve companies of repetitive and manual process tasks, but their limitations still require significant human intervention.
With gaining control on cash becoming more critical than ever, AI-powered cash application can help achieve hyper-efficiency. These solutions combine automation, machine learning, and analytics to accelerate cash posting, reduce errors, and provide real-time insights into accounts receivable operations.
Cash application and cash posting can be accelerated using solutions such as Emagia AI-powered Cash Application – a cloud-based solution that integrates seamlessly with leading banks, electronic lockboxes, and ERP systems such as SAP, Oracle, NetSuite, JD Edwards, and others. This intelligent solution leverages automation, analytics, and AI to match invoices to incoming payments and remittances that come in multiple data and document formats, languages, and currencies.
The solution can empower businesses to achieve 90% and above auto-match rates while drastically reducing the time and effort involved with manual cash application processing. It even automates dispute resolution as well, supported by Gia – Emagia’s AI-powered Digital Finance Assistant.
Contact us to know more about how to gain exponential advantage in your AR operations with Emagia Cash Application.
The Benefits of Cash Application Automation
1. Less Time Spent Obtaining Remittances from Different Sources
Cash application software offers the convenience of gathering remittances from various sources such as lockboxes, AP portals, emails, and PDFs, eliminating the need for manual collection. These software platforms can extract relevant information such as invoice numbers, dates, and dollar amounts from the remittance data.
In cases where remittance is absent, but previous transactions have been made by the same customer, AI-enabled cash application software can accurately associate the payment with the correct account by leveraging data such as the numbers present at the bottom of a check.
2. Payments Matched with Invoices
Automated cash application eliminates manual intervention by matching a large volume of payments and invoices. Recent advancements in cash application software resulted in impressive match rates exceeding 90%.
Where there is a one-to-one match and it is not possible, AI software can determine which invoices are being paid. By analyzing potential combinations of invoices and considering the customer’s available credits, the software makes informed decisions. In cases where uncertainty remains regarding how to allocate customer payments, software that supports in-platform collaboration offers a convenient solution. This feature allows users to leave comments directly on invoices, facilitating communication with colleagues or customers without disrupting workflow.
Conclusion:
In conclusion, cash application is a critical process in financial operations that involves matching payments with invoices accurately and efficiently. Manual cash application methods can be time-consuming, prone to errors, and hinder the overall cash flow of a business. However, advancements in cash application software and automation have improved the process, allowing for faster and more accurate matching of payments and invoices.
Automated cash application software can aggregate remittances from various sources, extract relevant data, and normalize irregularly formatted information. With AI capabilities, it can even make educated guesses when a one-to-one match is not possible, considering available credits and potential invoice combinations.
By adopting automated cash application solutions, businesses can streamline their cash management processes, reduce errors, enhance customer satisfaction, and ultimately optimize their overall financial operations.
How Emagia’s AI-Powered Cash Application Transforms Accounts Receivable
Emagia’s AI-driven cash application solution revolutionizes accounts receivable by leveraging artificial intelligence, machine learning, and advanced automation. It eliminates manual intervention, reduces errors, and accelerates the entire cash application cycle.
Key AI-Driven Features of Emagia’s Cash Application Solution
- AI-Powered Payment Matching
- Automatically matches incoming payments with open invoices using machine learning algorithms.
- Improves accuracy by handling complex scenarios, such as partial payments, deductions, and multi-invoice payments.
- Supports multi-currency and multi-language transactions for global enterprises.
- Smart Remittance Capture with AI
- Uses Natural Language Processing (NLP) to extract remittance details from emails, PDFs, bank statements, and customer portals.
- AI ensures data accuracy, even when remittance formats vary or data is incomplete.
- Reduces time spent manually collecting and inputting remittance information.
- Predictive Analytics for Cash Flow Management
- Analyzes historical payment patterns to forecast future cash inflows.
- Provides insights to optimize working capital, reduce revenue leakage, and improve financial planning.
- Helps finance teams make proactive decisions regarding credit limits and cash allocation.
- Automated Exception Handling with AI
- Identifies mismatches and payment exceptions and provides suggested resolutions based on historical data.
- Minimizes human intervention and accelerates the handling of complex payment discrepancies.
- Seamless ERP Integration with AI-Enabled Data Mapping
- Automatically transforms and maps incoming payment data for ERP systems such as SAP, Oracle, JD Edwards, and NetSuite.
- Eliminates manual posting and reduces errors caused by incompatible formats or data inconsistencies.
- Real-Time Cash Visibility and AI-Driven Insights
- Provides dashboards with real-time updates on accounts receivable status.
- Offers actionable insights to enhance decision-making and ensure optimal cash utilization.
- AI-Powered Fraud Detection and Compliance Monitoring
- Detects anomalies and potential fraud in payment transactions.
- Ensures compliance with internal policies and regulatory requirements.
Enterprise Use Cases and Benefits
1. Global Multicurrency Payment Handling
For multinational organizations, cash application involves payments in multiple currencies and languages. Emagia’s AI can automatically detect the currency, convert amounts, and match payments with the correct invoices across geographies, reducing manual intervention and currency errors.
2. High-Volume Payment Environments
Industries such as manufacturing, logistics, and retail often process thousands of payments daily. Emagia’s platform can handle high-volume transactions, automatically matching the majority of payments and flagging exceptions for review, reducing operational costs and speeding up cash availability.
3. Handling Partial Payments and Deductions
Partial payments, short payments, or deductions are common in B2B transactions. Emagia’s AI identifies the reason for payment discrepancies, applies payments accurately, and recommends adjustments to invoices, ensuring accurate ledger records and maintaining customer trust.
4. Automated Dispute Resolution
When discrepancies arise, AI suggests potential solutions based on historical patterns and previous resolutions. Cash application teams can resolve disputes faster, improving customer satisfaction and reducing outstanding receivables.
5. Enhanced Compliance and Audit Readiness
AI-powered logging of all payment processing activities ensures transparency and traceability. Enterprises can easily generate audit trails, verify compliance, and maintain accountability without manual record-keeping.
Metrics and KPIs Improved by Emagia
- Auto-Match Rate: Achieve 90%+ automated matching of payments to invoices.
- Days Sales Outstanding (DSO): Reduce DSO by accelerating payment posting and allocation.
- Error Reduction: Minimize misapplied cash and manual correction efforts.
- Exception Resolution Time: Shorten the time needed to resolve mismatched payments and disputes.
- Operational Efficiency: Reduce manual workload and reallocation of finance team resources to strategic activities.
Integrating Emagia AI with Existing Financial Workflows
Emagia’s AI solution integrates seamlessly with existing ERP systems, bank portals, and customer payment platforms. This enables:
- Real-time synchronization of cash application data.
- Automated posting of payments into ERP ledgers.
- Unified dashboards that consolidate insights from multiple payment channels.
- Cross-team collaboration through annotation features, allowing finance teams to manage exceptions efficiently.
By implementing Emagia’s AI-powered cash application solution, businesses can automate over 95% of their cash application process, reduce Days Sales Outstanding (DSO), and gain full control over their cash flow.
Frequently Asked Questions (FAQs)
Is it safe to use cash application software?
Yes. Modern cash application software, such as Emagia’s AI-powered platform, employs secure data encryption, user authentication, and compliance monitoring to ensure that payment information and financial records are protected.
Are there benefits to using cash applications?
Yes. Efficient cash application enables businesses to apply incoming payments quickly, improving cash flow, reducing Days Sales Outstanding (DSO), and freeing up funds for payroll, investments, and operational needs.
What is the rate of a cash application?
The cash application rate measures the accuracy and speed at which payments are matched to invoices. High rates indicate efficient processes with minimal manual intervention or errors.
What are the key factors in cash application?
Cash application relies on three essential elements: the payment itself, the remittance advice detailing what the payment is for, and the corresponding invoice. Accurate capture of all three elements is critical for successful application.
What does a cash application manager do?
A cash application manager oversees the process of applying payments to invoices within ERP systems like SAP, Oracle, NetSuite, or JD Edwards. They ensure accuracy, manage exceptions, and optimize the overall efficiency of accounts receivable operations.
What is cash application in accounts receivable?
Cash application is the process of matching incoming customer payments to their corresponding invoices in the accounts receivable system. It ensures accurate financial records, proper allocation of cash, and improved cash flow visibility.
Why is cash application important?
Cash application is critical for maintaining accurate accounts, reducing payment discrepancies, optimizing cash flow, improving customer relationships, and enabling faster financial decision-making.
How does automation improve the cash application process?
Automation eliminates manual data entry, increases accuracy, accelerates processing times, reduces operational costs, and provides real-time insights into cash flow, allowing finance teams to focus on strategic activities.
What are the common challenges in manual cash application?
Manual cash application can be slow, error-prone, and resource-intensive. Challenges include handling diverse remittance formats, reconciling partial payments, delayed cash visibility, and labor-intensive exception management.
How does AI-powered cash application work?
AI-powered cash application leverages machine learning to automatically match payments with invoices, extract remittance details from multiple sources, handle exceptions, and integrate with ERP systems for seamless accounts receivable management.
What are the key features of a good cash application solution?
Essential features include automated payment matching, multi-channel remittance processing, AI-driven exception management, ERP integration, predictive analytics, real-time reporting, and secure compliance monitoring.
How can Emagia’s cash application solution help businesses?
Emagia’s AI-driven cash application automates over 95% of the process, reduces manual intervention, handles complex remittance data, improves accuracy, shortens DSO, and provides real-time cash flow insights for strategic decision-making.
What industries benefit most from cash application automation?
Industries with high transaction volumes, such as manufacturing, retail, healthcare, financial services, logistics, and B2B enterprises, benefit greatly from cash application automation due to improved efficiency and accuracy.
How does cash application integrate with ERP systems?
Cash application solutions integrate with ERP systems via APIs or native connectors, automating data posting, reconciling payments with invoices, and providing real-time visibility into accounts receivable.
What is the future of cash application?
The future of cash application lies in AI-driven automation, predictive analytics for cash forecasting, blockchain-enabled secure payments, and seamless integration with cloud-based ERP systems, resulting in faster, more accurate, and more transparent cash management.
Final Thoughts
A well-optimized cash application process is essential for efficient accounts receivable management. Businesses that adopt AI-powered automation, such as Emagia’s solution, can experience faster payment processing, reduced errors, improved cash visibility, and enhanced operational efficiency.
By leveraging modern technology, companies can streamline cash application, minimize revenue leakage, and improve overall financial operations. AI-driven automation ensures accurate payment allocation, reduces manual workloads, and empowers finance teams to focus on strategic financial initiatives.
Investing in AI-powered cash application is critical for businesses looking to stay competitive, optimize working capital, and deliver a superior customer experience in today’s fast-paced financial landscape.
