Cash Application: What It Is, Why It Matters & How to Secure Revenue Faster with AI-Powered Automation

In times of great change and uncertainty, Accounts Receivable (AR) departments play an instrumental role in helping the business remain proactive, resilient and competitive. This blog aims to shed light on one crucial AR process — cash application — and provide a clearer understanding of how technologies such as AI and automation play a key role in transitioning away from tedious, labor-intensive tasks, improving employee productivity and retention, and accelerating payment processing.

Here's what you’ll take away:

• What the cash application process is and why it’s important
• Challenges associated with manual cash application processes
• How AI and automation add value to the process, AR team and business
• Esker’s role in AI-powered cash application and successful use cases

Cash Application process overview

When a B2B transaction takes place, goods are commonly purchased on credit. An invoice is provided for the credit purchase, acting as the original bill for the payment. Once the company who made the purchase on credit receives the invoice and submits the actual payment and remittance, the cash application process begins.

Cash application is the process of matching of an incoming customer payment to the correct customer account and the corresponding invoice(s). This task is performed by AR team members — typically a Cash Application Specialist — who rely on the remittance advice to determine which invoices are being paid using the incoming funds being transferred.

This critical AR process of verifying payment details (e.g., amount and customer account information), recording the information and allocating the payment enables businesses to keep their financial records as current and precise as possible while optimizing cashflow management. Only once a payment is verified can it be used to fund the business — payroll, investments, profit disbursement, etc. The faster the cash is applied, the better.  

Let’s now explore the cash application process in greater detail, exploring each step and some of the more problematic areas that affect AR teams.

Cash application: a critical 3-step process

Every cash application process differs from company to company, often dictated by internal controls established by leaders within the AR team. However, the following three steps are fundamental to every cash application workflow:

1. Aggregating remittances. A remittance advice is a document that notifies the Cash Application Specialist which AR invoice or invoices the incoming payment is for. A remittance document typically includes dates, invoice numbers, the amount paid per invoice and any other information that may be relevant (customer discounts, etc.). Remittances are typically sent via email, EDI or through an accounts payable (AP) portal, while payments are made by check, ach, credit cards or via direct debit methods (SEPA, etc.).
   While remittances accompany most payments, they are not always submitted through the same channels as the payment. A Cash Application Specialist must aggregate all the remittances from various channels and match them with the payment once the payment is funded. This can be a tedious process as it is not always straightforward.
2. Matching invoices & investigating deductions. Once payment is received, Cash Application Specialist goes through the process of matching payments to outstanding invoices and credits — an often tedious and time-consuming process even when the remittance advice is included. For example, a single payment can involve multiple invoices. What’s more, certain variables (e.g. short pays, customer discounts, order-related inconsistencies) can mean the payment amount is mismatched against the open amount of the invoices. Consequently, the AR team is on the hook to inspect the matter and facilitate accurate allocation and timely resolution.
3. Posting cash to the ERP system. A soon as all the “t’s” are crossed and “i’s” are dotted with invoice matching, the cash can be applied to the company’s ERP system, officially closing the open AR. Conducting this process manually — a common occurrence in many AR teams — is a slippery slope, as human error and other inefficiencies are nearly unavoidable.

Common issues preventing cash application efficiency

The process outlined above seems simple in theory. In practice, however, it frequently requires large amounts of time and effort on behalf of Cash Application Specialists. Without a centralized and integrated solution, daily cash application entries are carried out manually, making speed, efficiency and visibility hard to come by and increasing the overall cost of the AR function. Some of the most common issues preventing the optimization of cash application, include:

• Manually matching remittances to payments. Because remittances are typically sent via emails, EDI or hosted in AP portals, matching them to electronic payments can be a complex process rife with inaccuracies and inefficiencies. Such a variance of sources and file formats requires large amounts of manual effort on behalf of Cash Application Specialists — reducing their daily productivity and, ultimately, impacting overall AR performance.
• Manually matching invoices & handling exceptions. Once the payment has been matched with the correct remittance advice (invoice numbers, POs, shipping details, etc.), Cash Application Specialists must then match the invoices and credits listed in the remittance advice with current Open AR. Once again, this can be difficult for team members to accomplish without manual effort or error — especially in circumstances when the remittance information is incorrect or incomplete — and often results in payments being applied at an account level instead of individually by invoice. Complicating matters further is the fact that many customers fail to provide a remittance. Here too, Cash Application Specialists have even more manual work in front of them in the form of contacting the customer to request and validate the omitted information.
• Identifying short payments & posting cash to the ERP. Short payments (i.e., payments made for a lesser amount than is owed) occur for a variety of reasons, including error on behalf of the payer, deductions related to early payment discounts or trade promotions, disputes over the amount owed, and even payment processing issues. Identifying these short payments and harmonizing the customer-provided reason for the short pay with the specific reason codes used in the company’s ERP system(s) is … yet again … a manual task reserved for Cash Application Specialists.
• Costs & effort related to lockbox services. Lockbox services are provided by banks as a means of managing incoming payments (i.e., checks) securely and efficiently. The bank processes these payments, which are sent to an electronic file that’s shared with the AR team to be used for cash application. Unfortunately, lockbox teams process these checks by keying in the data, charging $.01 per keystroke. Not only is this an added expense to the cash application process, but Cash Application Specialists are also often required to amend data that was entered into incorrectly or incompletely by inspecting the scanned check and remittance images. 

All the challenges outlined above impact more than just Cash Application Specialists — they have a negative downstream effect on other critical AR processes, including credit management and collections management. For example, let’s say a customer makes a payment but the company receiving it is unable to apply the cash on the same day. In a traditional AR environment, Collections Specialists often don’t have the visibility or knowledge into if a payment has been made and may send a dunning notice to the customer erroneously. This is a big “yikes” for AR teams in terms of wasted time and potentially negative effects on the customer experience and satisfaction.

Optimizing cash application with AI-powered automation

Automating the cash application process streamlines the work involved in matching incoming payments from customers. By reducing and even eliminating the manual-intensive tasks involved in the process, AR teams benefit from:

• Centralized payment information for easier access and management
• Faster, more accurate cash application to secure revenue
• Increased receivables visibility (cashflow, treasury, etc.)
• Improved productivity and job satisfaction for Cash Application Specialists
• Simplified audit and tracking process
• Optimized credit and collections process
• Ability to automatically approve discounts with pre-defined tolerance levels
• Better collaboration with both customers and other AR team members

How it works: Esker Cash Application

Esker offers a comprehensive solution to automate every step of the cash application process — from capture of the remittance to the reconciliation of matched invoices into the ERP — not only optimizing the allocation of the incoming cash, but also downstream processes such as credit, collections and dispute management. Let’s dig deeper into how the solution works and its impact on cash application efficiency.

Simplified remittance management

• For emails: Esker Synergy AI combines a set of advanced AI technologies (deep learning, machine learning, natural language processing) to automatically extract remittance data information from email bodies and attachments—supporting multiple file types (Excel, PDF, CSV, etc.) and languages. For example, when paying invoices for the prior month, customers can attach a PDF of the entire statement and Esker Cash Application quickly and accurately analyzes the invoice and payment information.
• For checks: Information from the check and remittance are automatically extracted — helping to instantly identify key details such as invoice numbers, and deduction\claim references. For example, a large customer can include a multi-page remittance that identifies both a large number of invoices being paid along with a list of multiple deductions. Esker Synergy AI can automatically detect the invoices and match them to the appropriate AR and identify the deductions and route them to the appropriate team for resolution.
• For websites & customer portals: Esker Cash Application can also retrieve remittance information that’s hosted on portals. Once retrieved, Esker Synergy AI ensures that all relevant data or deductions are identified and extracted for automatic payment posting.

AI-powered invoice matching

Pre-built algorithms within Esker Cash Application enable invoices to be matched to payments based on invoice number, PO number and more. The AI capabilities working behind the scenes can even identify situations where only part of the invoice number was provided by the customer and populate the complete invoice in the ERP — something ERP systems are ill-equipped to do on their own. Esker also has algorithms that leverage past payment experiences to apply cash when there is no remittance. Our algorithms suggest possible invoice combinations that total the amount of the payment.[DR1] 

Integrated & collaborative tools

Esker Cash Application is part of a larger AR solution suite, meaning it benefits from integration capabilities like real-time invoice status updates, deductions\claims creation, shared promise-to-pay data. Built-in communication tools facilitate customer contact when a remittance is missing or incomplete. This communication is tied to the payment so if the customer responds with a remit, it is associated to the payment and used for cash application.

Other features include:

• An intuitive user interface that features payment recycling (temporarily placing the payment on account until a remittance is received), easy navigation through suggested allocations, advanced search options and invoice allocation by oldest due dates
• Seamless ERP integration that enables real-time reconciliation of allocated payments with ERPs
• Dashboard and reporting features that are customizable by user, providing valuable insights into performance and automation trends that enable AR teams to identify opportunities for continuous improvement

Case study: Fletcher Steel

About Fletcher Steel

Fletcher Building is a leading player in building products and distribution, with operations across New Zealand, Australia and the Pacific Islands. Fletcher Steel is Fletcher Building’s steel distribution division and encompasses the Easysteel, Fletcher Reinforcing, Fletcher Wire Products, ColorCote, Dimond Roofing, Dimond Structural and CSP Pacific businesses, operating distribution and manufacturing sites across New Zealand.

Challenges

Needing to process between 200-1,000 transactions a day, Fletcher Steel struggled with missing remittances that resulted in large amounts of unapplied payments. Increased volumes and time-consuming manual processing of complex remittance advices with hundreds of lines meant a 5:00 a.m. start for the team at month-end closing.

This highly manual cash application process not only impacted team productivity, efficiency and morale, but also resulted in inaccurate customer accounts. This motivated Fletcher Steel to seek out a solution that could simplify and speed up the labor-intensive cash allocation process.

Solution

Esker Cash Application eliminated Fletcher Steel’s need for manually matching payments received from multiple sources and provided increased efficiency. Automation has significantly reduced processing time for large remittances with 800+ line items from 2+ hours to mere minutes. From remittance capture to reconciliation of matched invoices into the ERP system, the cash application solution not only optimized the allocation of incoming cash but also downstream processes such as collections by centralizing all the payment information.

Fletcher Steel’s results after automation:

• Decreased unallocated payments by 30%
• Accelerated remittance processing time by 95%
• Reduced processing time by 40%
• Freed up team members for other tasks
• Increased staff well-being

To wrap things up, using AI to automate cash application makes the process faster and more accurate, which helps you get paid quicker. When companies use this technology, they can keep better track of their money, help their teams work more efficiently and make their financial situation stronger overall. Just like Fletcher Steel saw a 95% acceleration in remittance processing time, imagine what an AI-powered automation could do for your company.

See what Esker's Cash Application solution can do for you.