The key to success for many businesses lies within their finance departments. And the key to success within many finance departments is the embrace of efficient cash application processes.
Traditionally, cash application — the process of matching incoming payments to outstanding invoices — was relatively straightforward.
“Fifteen years ago, most payments in the U.S. were made by check, which would be sent to lockboxes or directly to offices,” Aaron LeHew, director of invoice-to-cash at Esker, told PYMNTS.
However, organizations face a complex landscape filled with challenges that can hinder financial efficiency.
“Over the years, cash application has become more and more complex, more labor intensive, and more prone to error,” LeHew explained, noting that organizations are transitioning to more diverse payment methods, including ACH transfers, wires, credit cards and virtual cards, and that this shift has added layers of complexity to the cash application process.
Payments now come from multiple sources in various formats and are often decoupled from remittance details.
As a result, businesses must deal with data scattered across bank portals, payment platforms and email inboxes, making it difficult to reconcile payments accurately and promptly. This complexity can lead to several issues, including unapplied cash, delayed payment posting, and reduced customer satisfaction due to improper credit holds and faulty collection calls, LeHew said.
The inefficiencies in cash application have a direct impact on finance teams and their key performance indicators, such as days sales outstanding (DSO). LeHew explained that if payments are not posted the same day or by the next business day, it can artificially extend DSO, affecting the company’s financial metrics and cash flow management.
At the same time, delayed or incorrect payment postings can strain customer relationships.
“Customers expect their payments to be applied correctly and on time,” LeHew said.
When this doesn’t happen, it can result in disputes, short payments, and other complications that affect the finance team and the customer experience.
Given these challenges, businesses are turning to cloud-based applications to streamline their cash application processes. According to LeHew, Esker’s own platform aggregates data from various sources, including enterprise resource planning software, banks and remittance platforms, to create a unified view of payment information. This consolidation enables straight-through processing, where payments are posted quickly and accurately, reducing the need for manual intervention.
“Organizations are seeing better [key performance indicators (KPIs)] and overall results by automating cash application,” he added.
One of the key benefits of turning to an automated cash application solution is the ability for firms to minimize unapplied cash. By automating the matching process and handling exceptions more efficiently, businesses can reduce unapplied cash by 70% to 80% within six months, LeHew said. This not only improves financial metrics like DSO but also enhances overall workflow efficiency.
Artificial intelligence is another component in modernizing the cash application process. Esker’s platform, which LeHew cited as an example, uses AI to predict and resolve payment discrepancies. In scenarios where remittance details are missing, AI algorithms can analyze customer payment behaviors to suggest likely matches, which can then be validated by the finance team. This reduces the manual effort required to reconcile payments and allows teams to focus on more strategic tasks, such as analyzing disputes and identifying upstream issues that may be causing payment discrepancies.
LeHew added that unlike older template-based systems that require manual coding, AI systems can adapt to changing document layouts, ensuring that payment data is captured accurately even when formats change. This flexibility speeds up the onboarding process for new customers and reduces the time and effort required to maintain the system.
For finance teams, the key to success lies in adopting a proactive approach to cash application, using technology to handle routine tasks and focusing their efforts on strategic analysis and decision-making.
For businesses looking to assess the effectiveness of their cash application processes, LeHew suggested focusing on key metrics such as the speed of payment posting and the amount of unapplied cash. If payments are not being applied on the same day or next day, or if unapplied cash levels are consistently high, it may be a sign that a firm’s system is not working efficiently.
Another area to examine is how the company handles disputes and short payments, he added. By coding these issues correctly and analyzing their root causes, businesses can identify upstream problems, such as pricing or delivery issues, and make necessary corrections to prevent future discrepancies.
Finally, LeHew highlighted the importance of flexibility in payment acceptance. Some companies resist accepting certain payment methods, such as virtual cards, due to the perceived complexity. However, embracing a wider range of payment options can improve working capital and increase customer wallet share by allowing businesses to operate on terms that are more favorable to their clients.
For all PYMNTS B2B coverage, subscribe to the daily B2B Newsletter.