The Challenges of the Cash Application Process and How to Address Them

The cash application process cycle starts soon after the customer places the order. The process continues in a streamlined fashion until the businesses receive the payments and the client is satisfied. Understanding the entire process and knowing the challenges and possible ways of addressing them helps enterprises analyze their operations better. One area of the order to cash cycle is the cash application, which enters the picture after payment for service or products has been made by the client to the customer.

What is Cash Application in Accounts Receivable?

Cash application plays a crucial role in having a steady flow of cash. After all, companies won’t have anything to spend if they don’t have the cash. Failing to control the cash flow can drive a business into bankruptcy. Companies must use their money wisely and efficiently, but they can’t spend their money if they are stuck at posting.

Sure, businesses have pending payments that are still to be applied, but they are not useful to the company or anyone. Companies cannot use the money even if they have been paid for products delivered or services rendered as they are still waiting on the cash application. Even the finance department can’t provide a clear picture of its current funds because many payments made are still waiting to be processed.

The quicker the accounts receivable cash application, the sooner the company can spend the funds on essential expenses.

The traditional cash application process was quite basic. Orders would come in and be registered, and the company would receive a check for the invoiced amount. The analyst will then cross-check the amount and the customer name to evaluate the accuracy of the transaction. Once verified by the analyst, the finance team would cash the check and the funds would be made available to the business’ bank accounts.

The Specific Goals of the Cash Application Team

The goal of the cash application team are as follows:

Accuracy- The money must be applied correctly as any inaccuracy in the application of cash can result in poor customer feedback. Failing to apply cash properly can also lead to the delay of the initiation of the dunning process. To ensure accuracy, companies must have standard processes in place to collect pertinent data from their customers.

Speed- Applying for payments as quickly as possible is one of the cash application team’s goals. A speedy application can reduce the days sales outstanding (DSO) and help the firm use the cash at the earliest time possible.

Standardization- Standardization is another goal of the team. This is especially important for international entities as they deal with various country-specific payment types and methods, making the application to cash more challenging. Having standard processes in place across companies and various markets will both reduce compliance changes and eliminate inefficiencies.

How the Process Evolved

The cash application process is more complicated compared to before. Businesses are looking for different ways and new technological solutions so they can offer greater convenience to their customers. Their end goal is to provide a good customer experience.

These days, there are various ways for orders to come in, such as proprietary B2B apps, digital payment portals and electronic invoicing. The order to cash process plays a crucial role for B2B companies as it drives the relationship between the firm and its clients.

Payment also comes in different varieties such as paper checks, traditional lockbox services, ACH, wire transfers, and private cards. These payments have to be matched with their orders coming from different channels or sources.

Complicating the process is when an invoice is sent for multiple orders, making the simple amount comparison even more complicated. It’s hard for the accounts receivable (AR) team to reconcile the payments, invoices, and orders. As a result, the AR team requires more hours and more people to deal with all these complexities.

Many companies have already automated their cash application process by investing in suitable technological solutions to reduce the manual paperwork and hours spent on them. Firms tend to find easy-to-use and implement systems that minimally impact their current ERP systems.

Electronic Payments

The efficiency of the cash application automation is also affected by the payment method used by the firms’ clients. According to a report from the Credit Research Foundation and NACHA, 32 percent of B2B payments are now ACH, and this figure is likely to increase to 45% by 2020.

The same report also showed that AR executives foresee the decline of checks to 34 percent at the end of the decade. More firms are experiencing their clients’ shift from remittances and check payments to electronic payments and disassociated remittances sources, resulting in severe cash application challenges. Some forms of payments these companies received include online payment platforms, ACH transfer, electronic fund transfer, and credit cards.

The rising number of electronic payments also comes with more concerns on their processing as they result in more complexities in the cash application.

Lockbox Key-In

Lockboxes were primarily designed to let the bank collect and deposit payments for their clients. Pertinent data on those transactions are then sent electronically to the customer for account reconciliation.

The lockbox key-in method comes with many benefits, mainly the acceleration of cashflow and account receivable processing improvements. However, lockbox key-in also has its downside as it requires doubling the workload. Those with a high volume of checks will require costly key-in services, forcing the firm to pay a high price for these. Banks, after all, charge for keystrokes, capture, and transmission costs.

Remote Deposit Capture and Mobile Payments

The checks and remittances are usually separately scanned, resulting in more efforts and increased overall hit rate to 30 to 40 percent.

Remote Deposit capture, or RDC in short, is a technology-based way of allowing banks to accept checks for deposit electronically rather than the original paper and physical versions. Using remote deposit capture requires the bank’s client to submit the check electronically to the bank using a mobile device or computer and the internet. Newer versions of the RDC also enable the scanning of check and remittance together in a single batch while the information is captured with high accuracy.

Short Payment and ERP Posting

Clients usually make short payments because of various reasons such as early payment discounts, trade promotions, or disputed goods or services. Deduction analysts sort through the client data, followed by client documentation like Bill of Lading, Proof of Delivery, and later on reach out to the customer service department to verify the short-payment.

Analysts will need to map the pertinent reason code when the customer is eligible for discount before applying it to the ERP. All these processes take up so much time, and in many cases, even force the analyst to write-off or discount without researching properly to avoid spending many hours going through a pile of paperwork.

How to Improve the Cash Application Process

Businesses have different ways of handling account receivables and payables. The processes are usually similar, but companies are facing various challenges in their internal processing. Having a seasoned team to post payment accurately and quickly is not enough. There must be a cash application solution that can adapt to all kinds of customer payment behavior and use data from emails and other platforms to post. The solution must also learn posting rules according to either how the team posts cash or how the clients pay.


The cash application process’s primary challenge is the ton of manual paper work and the many labor hours required to process the massive paperwork. The cash application process, after all, includes repetitive steps. The emergence of new payment methods and changing payment behavior adds another layer of complexity to the cash application process.

Standardizing and systematizing the cash application process and automating the process with a cash application solution are necessary.

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