Cash application process: What is and how it works

Have you ever wondered how companies keep a clear and accurate record of all their transactions? They achieve this through a correct payment reconciliation process, also known as the ¨cash application process¨.

In this article I will explain exactly what the “cash application process” is, its importance in the financial administration of a company, its impact, and all its key aspects.

If you want to learn what’s behind business operational efficiency, keep reading.

What the cash application process?

The cash application process, also known as the payment reconciliation process, is a set of procedures that a business follows to accurately identify, record, and apply payments received from its customers to its accounts receivable. In essence, this process ensures that overdue payments made by customers are properly allocated to the corresponding invoices or outstanding accounts in the company’s accounting records.

This process is vitally important to ensure accurate accounting and maintain the financial health of the company. It involves reconciling internal company records with actual transactions, such as bank transfers, checks, or electronic payments, to ensure that all are properly recorded and accounted for.

Key process components?

A correct procedure and control are key to a strong and stable financial health. Keeping track of payment reconciliation processes is crucial to being able to make informed decisions, maintain a favorable balance, and also ensures a beneficial cash flow. To understand what this process integrates, we will discuss its components here:

Receive the information

The payment reconciliation process begins when the company receives information about payments made by customers. Such information may come from various sources, such as bank statements, online payment platforms or internal billing systems.

Identify payments

Once the information is received, the next step is to identify the payments corresponding to the specific invoices or transactions. What does this imply? Compare the details of the payments received with the company’s internal records to ensure that they are assigned correctly.

Reconcile data

In this stage, the received payment data is compared with the company’s internal records to ensure that they match. Details such as payment amount, date, and any references or invoice numbers are verified. If there are discrepancies, they are investigated and resolved.

Payment application

Once the coincidence between the data has been verified, the payments are applied to the corresponding invoices in the accounting systems. This involves recording in the accounting books that payments have been received and applied, allowing accurate tracking of cash flows.

Dispute resolution

If differences or inconsistencies are found between payments received and internal records, further investigation should be carried out.

Bank reconciliation

Once the payments have been applied to the corresponding invoices in the internal records, a bank reconciliation is performed. This involves comparing the payment data recorded in the ledgers with the data on the bank statements to make sure everything balances and nothing is left unrecorded.

Reports

Finally, reports are generated showing the status of payments received, outstanding balances, and resolved discrepancies. These reports are valuable for future decision-making and for maintaining a clear, as well as up-to-date, view of the company’s financial health.

Cash Request Process Steps

The cash application process is essential to ensure that customer payments are managed accurately and efficiently, therefore it is a vital part of business financial management, as it also helps internal records accurately reflect the transactions. The steps involved are as follows:

Step 1: Receive payments

When customers make payments, they can be in cash, checks, electronic transfers or credit cards, and are received by the company.

Step 2: Identification of transactions

Each payment must be identified and related to the corresponding invoice or account. For this, it is necessary to use details such as invoice numbers or other relevant data.

Step 3: Registration in the accounting system

Payments are recorded in the company’s accounting system, ensuring that the amount and date of payment are accurately recorded.

Step 4: Payment reconciliation

Accounting records are compared with bank statements to make sure that the recorded payments match the actual transactions made at the bank.

Step 5: Cash Allocation

It is vital to correctly allocate received payments to the corresponding invoices or outstanding accounts.

Step 6: Update account statements

Customer statements are updated to reflect payments made and accounts that have been successfully settled.

Step 7: Resolution of discrepancies

Any discrepancy between accounting records and actual payments is investigated and resolved. This may involve communicating with customers to clarify any issues and ensure accuracy.

Step 8: Reports and analysis

Reports and analyzes are generated to evaluate the efficiency of the process, thus it is possible to identify trends, detect patterns and evaluate the general financial health of the company.

Challenges you can face

Facing challenges, whatever the field, requires a combination of meticulous attention, appropriate technology and good management practices. The first step is to identify what are the possible scenarios that you could encounter, in order to have some contingency plans so that no situation catches you completely off guard. When we talk about cash recovery, some of the challenges you might encounter are:

Data difference

The data that appears in your database and bank statements often present differences, either due to human errors or data transmission problems.

Unidentified payments

When customers do not provide clear information about which invoice a payment corresponds to, additional follow-up and investigation is necessary.

Transactional volume

In companies with high transactional volume, the reconciliation process can become complex, time consuming and open to more errors.

Changes in payments

Partial payments, refunds or adjustments can make reconciliation difficult, since identifying the exact amount paid and properly allocating it to the corresponding invoice is difficult.

Lack of documentation

If clear records of transactions and payments are not kept, it can be difficult to track and verify payments received.

Lack of collaboration

If clients do not provide accurate information or do not respond to requests, it will be very difficult to resolve discrepancies and difficulties.

Data matching errors

Details in the records, such as invoice numbers or reference codes, can be entered incorrectly, causing errors when payments are allocated.

Lack of Automation

If the reconciliation process is done manually without the support of tools or software, it will be more susceptible to errors and will take longer.

Cash App Automation: Tools

When it comes to the cash application process, automation is an invaluable resource because in the world of finance, efficiency is key. Thanks to a variety of technological tools specifically designed to optimize the cash application process, companies can drastically simplify processes, minimize errors and free up resources for other tasks. Some examples of tools are:

HighRadius Cash Application Cloud

HighRadius is a cloud-based solution that uses artificial intelligence and machine learning to automate payment reconciliation. You can automatically identify payments and assign them to the corresponding invoices.

SAP Receivables Management

SAP’s accounts receivable management platform offers a variety of automation tools, for example, through the use of customizable rules and algorithms, it streamlines the identification and allocation of payments, it also integrates into existing accounting systems.

QuickBooks Payments

QuickBooks, a popular platform for small businesses, offers the feature that payments made through QuickBooks are automatically posted to the ledger, saving time on manual data entry.

Microsoft Dynamics 365 Finance

Dynamics 365 Finance can automatically apply payments to invoices and generate detailed reports on payment status and trends.

Benefits of an efficient process

An efficient cash application process is not only a goal for businesses, but also a strategic investment that carries a number of significant benefits. As organizations seek to optimize their cash application process, new advantages are being developed. Here are some of the key benefits that arise from it:

Normative compliance

An efficient cash application process can help ensure that transactions are accurately recorded and accounting and regulatory requirements are met.

Cash flow optimization

By making sure payments are applied correctly and accounts are kept current, businesses optimize their cash flows.

Fast answer

The speed in confirming payments and updating account statements improves customer satisfaction and strengthens business relationships.

Error reduction

Automation drastically decreases the possibility of human errors in the process.

Saving

It frees up time for finance teams, allowing professionals to focus on higher-value, strategic tasks, and reduces the costs of, for example, physical storage.

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Conclusion

The cash application process, if not done correctly, can become a significant obstacle in the financial management of any business. From manual reconciliation to human errors to a lack of real-time visibility, the challenges can definitely be numerous. Embracing the technological innovation available will help you overcome obstacles and optimize your cash flows and strengthen the relationship with your customers. Efficiency in payment management translates into greater liquidity and more accurate decisions, paving the way for growth and success.

In an ever-evolving business world, Oddcoll stands out as a beacon of financial optimization, guiding companies toward efficiency and goal achievement. If you are looking to increase efficiency in international  debt collection and open the door to a brighter financial future, Oddcoll is your greatest ally for the bad debts collection

Read more: What is debt collection to understand a little more.