Cash application is the process of matching and applying payments with their corresponding invoices. Also known as cash receipt processing, it involves recording a customer’s payment, reconciling that payment with the customer’s account information and updating the account balances to reflect the payment. The goal is to ensure all cash transactions are properly recorded and reconciled with the sales ledger.

Steps of the Cash Application Process

The cash application process typically unfolds in the following manner:

1. Receive payment: The customer makes a payment, and the payment information is received by the accounting team. This information usually includes date, amount and method of payment.
2. Match the payment to the corresponding invoice: After receiving the payment information, the accounting team matches the payment to the relevant invoice and the relevant customer account.
3. Update the accounting system: After matching the payment received to the correct invoice the accounting team records the payment and updates account receivable records.
4. Update the customer’s account: The next step is for the team to reconcile the customer’s account and make sure the payment has been applied to the correct invoice.
5. Bank reconciliation: The team reconciles the relevant bank statement to the updated accounting records.

The Importance of Cash Application

Cash application enables businesses to accurately track and record payments in order to:

• Improve cash flow tracking: Cash application enables businesses to reconcile all cash transactions with the accounting records, which leads to more reliable and accurate cash flow management.
• Ensure good customer relations: Cash application ensures customer payments are recorded in a timely and accurate manner, which helps maintain good customer relations.
• Uncover fraud: Ensuring the authenticity of payments is a crucial part of cash application and helps detect potentially fraudulent transactions.

Challenges Posed by Cash Application

While an essential element of the accounting process that helps maintain accurate books and good customer relations, cash application is not without its challenges. Those include:

• Information overload: Depending on the size of the company the cash application process can entail high volumes of data and produce significant backlogs.
• Human error: Cash application involves a lot of manual data entry. Manually updating records always brings with it the risk of typos, human error and incorrect entries which can have a cascading effect.
• Antiquated systems: Companies that have been slow to embrace automation of various accounting practices often experience incomplete integration between business systems. This can create delays which, in turn, can result in mistakes in reconciliation.

The Benefits of Automating Cash Application

The manual cash application process is labor intensive and error prone. For that reason, businesses should seriously consider automating this important process. The potential benefits of automating cash application are many and include:

• Less time wasted: Automating cash application will save you a lot of time and reduce the administrative burden typically associated with the cash application process.
• More accurate books: Even the most experienced accounting professional is going to make a mistake now and then. Automating the cash application process virtually eliminates human error.
• Scalability: Automating the cash application process will make it much easier to scale should your business experience sudden growth and a surge in cash payments.
• Optimize cash flow management: Faster application of cash to the company books will enable a company to pay their own bills on time or use that cash to invest in growth opportunities.
• Improved customer relations: Speeding up the cash application process for customer payments will help bolster trust with those customers and improve overall customer relations.
• Analytics: An advanced invoice-to-cash A/R management system will provide access to advanced analytics that will enable you to improve accounting metrics such as customer risk and payment history.

Summary

Cash application is the process of matching customer payments with the appropriate invoice and updating company books to reflect that payment. It is absolutely essential if companies are to maintain good relations with their customers and have a realistic idea of their overall cash flow situation.

While many companies still perform manual cash application, a compelling case can be made that they would save time, reduce errors, optimize cash flow management and benefit from advanced analytics by adopting an advanced financial close management system, such as Trintech’s Cadency or Adra solutions, that can help them track invoice-to-cash accounts receivable.