Cash application: more information + more automation = unparalleled efficiency

As they seek out opportunities for greater efficiency, many companies are looking for ways to improve their order-to-cash cycle. One area that is often ripe for optimisation is the cash application process, whereby incoming payments are allocated against open items in the company’s enterprise resource planning (ERP) system.

While cash application is often highly manual, there may be opportunities to automate this process and thereby reduce the associated costs. In practice, many companies fail to achieve a meaningful level of automation, but various solutions are available to companies wishing to address this area. Among the most important of these is to assess – and where necessary improve – the quality of information available to the company.

Information matters – Strategies for enhancing information quality and optimising the processing of that information

Where companies do not have access to complete and accurate information about incoming payments, it is likely that receivables will be allocated incorrectly, or that manual processes and time-consuming phone calls will be required in order to obtain the necessary details from customers.

The information needed to allocate payments varies from company to company, but is likely to include the following:
• Reference number.
• Customer number.
• Customer name.
• Customer bank details.
• Additional remittance information sent separately.

Companies may not need all these details in order to allocate payments to the correct open items, but it is not uncommon for different sources of information to be combined – particularly where the information received is incomplete. As such, companies should aim to obtain as much information as possible about the payments they receive.

While this involves making sure that customers are providing the right information, it is also important to understand that the incorrect information sometimes originates from the company receiving the payment. Should the information included in an invoice be incorrect, this will have a knock-on effect on the information transmitted with the payment. Companies should therefore assess their own processes, as well as the behaviour of their customers, when identifying areas for improvement.

Using the right formats

One important consideration is the formats in which information is provided. Many companies take steps to harmonise the formats of their bank statements, for example by opting to receive all of their bank statements as MT 940 or ISO20022 XML messages. However, while this approach has its benefits, it may not result in the best information from a cash application point of view.

In some cases, country specific or bank specific formats may carry key information which is not available in other formats. In the UK, for example, companies using the Bankers’ Automated Clearing Services (BACS) format can receive the customer’s bank details, which can be used to automate cash allocation. However, this information is not available when using MT 940 messages.

Similarly, companies in the US may choose between electronic lockbox files or bank statement files in order to obtain details of their incoming automated clearing house (ACH) and wire payments. However, there are important differences between the two types of file structures and many companies choose to focus their attention on lockbox files and electronic data interchange (EDI)-structures – not considering the differences in payment methods, payment types and reporting structures provided by banks.

Working with banks to obtain the information you need

A further consideration is that banks can vary in terms of the quality and quantity of information they provide. While this is not typically seen as a differentiator by organisations during the bank selection process, it arguably should be.

Companies could assess this in several ways; for example, by asking banks under consideration to provide example files, or by talking to industry peers or experts to gain insights into how different banks compare. There are also major differences even within banking groups and regions covered. For example, global cash management banks work with regional servers and standards mainly aiming to provide useful structures to corporate treasury departments. These lack, however, the degree of detail typically required to support an efficient cash application process.

How best to access the information and make the processing as fast and easy as possible

While having accurate information is certainly important, companies also need to be able to access the relevant information quickly and easily in order to achieve automatic cash application. In reality, this is an area that many companies struggle with: information may be received manually, or may be sent to different people or locations across the organisation.

In order to automate the cash application process, companies need to ensure that the relevant information is all sent to a central location – namely the cash application team. This may be facilitated by tools, which can automatically retrieve payment information from an email inbox and forward it to the company’s financial system. It may also be possible to download information automatically from a customer’s web portals. Once received, the information should be stored in such a way that people can retrieve it quickly and easily.

Furthermore, having the right information is only valuable if companies are able to use it effectively. Companies therefore need to have a cash application system in place which supports all the relevant formats and is capable of combining all of the information available, such as receipts, remittance details and bank statements.

Best practice

In the light of these considerations, companies looking to automate the cash application process should take the following three steps:

1. Evaluate your cash application process. This should include analysing customers’ payment behaviour and identifying any missing information. As part of this process, companies should gain a clear understanding of why information is missing, as well as analysing the formats and structures currently used for remittance advices. As part of this process, companies should find out the cost to the business of missing or incomplete information by quantifying the number of transactions that have to be allocated manually.

2. Evaluate opportunities for improvement. The next stage is to identify improvements that can be made, in order to achieve higher levels of automation. Companies can approach this task by seeking input from experts and by gaining a clearer understanding of best practice in the relevant countries and industries. At the same time, companies should consider whether there are solutions available that are capable of handling the relevant information more effectively.

3. Put best practice into action. After carrying out the first two steps, companies will be in a better position to take action by changing their processes and testing out new formats or systems. The results of any changes should be tracked in order to quantify any concrete improvements achieved.

Benefits of better information and more automation

In conclusion, obtaining accurate and complete information – and being able to use that information effectively – is essential, if companies are to automate the cash application process. While the task is not without its obstacles, various practical steps are available for companies seeking to overcome these issues and achieve higher levels of automation.

Cash application is an area in the order-to-cash cycle where companies can quickly realise significant efficiency gains. By applying best practices and automating the processing of the information, for example, it is typically possible to reduce manual workload by up to 75%.

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