In the past, account reconciliation (A/R) and cash application has often been viewed as a necessary administrative task and not as a key function within a strategic process. The recent financial crisis has forced companies to reassess this point of view. While banks were cutting down credits, the insolvency risk and payment behaviour of clients further challenged organisations. In this context, companies were getting back to solutions that would unlock tied-up cash potential within their own accounts. This potential is much larger than many companies realise today.
To unlock this optimisation potential, companies need to adopt best practices for automatic cash application. By implementing these improvements companies benefit from higher levels of efficiency, an auditable process and faster and more reliable source of information about its cash situation. You will have the tools available to actively drive down days sales outstanding (DSO). High-risk customers can be earlier identified and chased more rapidly, further contributing to better credit and collection management.
The advantages of best practicesin automatic cash application are numerous:
- Reduce DSO.
- Optimise credit and collection management.
- Auditable and compliant process (Sarbanes-Oxley (SOX)).
- Improve customer service.
- Standardise order-to-cash (O2C) process.
- Align with shared services concept.
- Capitalise and optimise enterprise resource planning (ERP) investments.
Cash Application Process Faces Numerous Challenges
When performing the cash application process, many issues challenge companies. Key contributors for these challenges are: the payers, the organisation’s internal systems and various process and market variables.
The payers’ practices is a very critical element when searching for optimisation: partial payments, combining invoices, transfer of no or little invoice details on the bank statement and the usage of multiple local payment types are all factors that complicate today’s cash application process. The magnitude of these examples is also driven by the business you are in: business-to-business (B2B) or business-to-consumer (B2C).
Further, the systems and processes that are in place are often hinder an optimised O2C cycle. Processes are often locally organised with varying degrees of automation and different formats: for example the retrieval and posting of bank statements is done manually. Accounting and credit and collection teams each work locally in a non-standard way. When the ERP system is implemented, organisations realise that the standard deployment does not provide optimal value for cash application.
A third major component is the market dynamics and practices. Most organisations receive multiple types of information: bank statements, remittance advices, lock box (cheque) information and/or cash and credit card collections. Day-to-day receivables information, such as bank statements, is often received in many different formats. Besides the formats, local banking practices also limit the amount of information transferred in the statements. In some countries the amount of free text (‘note to payee’) is very limited.
How to Implement Best Practices in Cash Application
Generally, there are two main areas for improving the cash application process. Improving organisational processes helps to shorten the straight-through reconciliation (STR). This includes streamlined and standardised procedures: a company needs to define standard processes for dispute management, to clarify co-operation between accounting and credit management, to set a timetable for regular management reports, and key performance indicators (KPIs) to drive down DSO on an on-going basis.
In particular, when there are plans to centralise the accounting activities in a shared service centre, standardisation is a fundamental element. Just bringing everything together and deploying ERP will not automatically deliver magic.
Straight-through processing (STP) is key
Part of the STP strategy should be to carefully look at how information from banks and clients/trading partners is received and integrated into the ERP system. Companies can often improve the manual steps in the retrieval and manual entry of bank statement items into the ERP systems. Focusing on STP should eliminate redundant manual activities that can be automated. It is not uncommon that a particular item is manually touched two or three times in the entire cycle. This does not only lead to inefficiencies but is also more error-prone and introduces operational risk.
The same applies to paper-based remittance advices that are sent by clients. Quite often these remittance advices can be sent via email instead of normal mail, which makes it faster but also allows companies to automatically integrate this information in the reconciliation process. For accounts payable (A/P) optical character recognition (OCR) technology, combined with comprehensive workflow, can bring significant benefits as well in the procure-to-pay (P2P) cycle.
Look for solutions to increases cash application efficiency
Specialised cash application technologies are proven solutions to increase automatic matching rates significantly higher that standard ERP functions. The flexible and more comprehensive matching logic increases the auto-matching efficiency, while the key users are empowered to update matching rules to improve cash application on an on-going basis.
Besides the auto-matching capabilities, companies need to carefully look at the manual processing of items that could not be cleared automatically. Many studies have indicated that a lot of efficiency can be gained here, as the standard ERP tools do not unlock this optimisation potential. Specialised cash application solutions can drive down post-processing time by another 50%.
Empowerment: visibility and control
The business environment where companies operate in is a dynamic one. New products are launched, banks are changed, new markets entered and clients’ payment behaviour is changing. To anticipate these changes, the management and accounting staff should have the possibility to get full visibility on what the effects are of these changes on the cash application process. By having this instant visibility coupled with drill-down capabilities and trend analysis companies can quickly respond to changes. This also requires tools that allow these changes to be made by the ‘key’ users, instead of having to rely on IT to make these changes in the relevant systems.
Specialised cash application software can provide a lot of added value in the O2C cycle when the right solution is acquired. Companies looking for a software solution should consider the following functions and benefits:
- Ability to handle all relevant financial information: bank statements, remittance advices, lockboxes, credit card and cash collections.
- Should bring immediate quantifiable benefits for automatic matching and related to the manual post processing.
- Ability to handle complex B2B transactions in an international environment.
- Empower the company’s key users in terms of visibility and control.
- Availability of performance metrics and guidance to maintain and optimise results (with no or limited dependency on IT).
- Support auditable and compliant process.
- Management reporting facilities (e.g. number of accounts not reconciled, age of items not reconciled and total amounts of unreconciled items).
- Leverage the investment in ERP: seamless integration between general ledger and potential subledgers.
- Moreover ask potential vendors to help build the business case for your company. Cash application technology should bring immediate benefits to organisations and vendors should be able to provide guidance and support in building the business case for your company based on your situation and peer group comparisons.
As described in this article, there are many challenges complicating the A/R reconciliation process. However, companies can take measures to unlock the inefficiencies in the cash application process that will drive significant and immediate benefits.
These benefits are not only related to efficiency gains but also empower credit and collection teams with faster and more accurate information. This will allow organisations to further reduce DSO and risk: factors that are critically important in today’s business environment.
Tim de Knegt, treasurer for the Port of Rotterdam, discusses how he is looking to bring more value to the Port's clients using blockchain.
Regulation technology is fast gaining currency by transforming how financial institutions can tackle compliance in a swift, comprehensive and less expensive manner.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.