Better Payment Application Improves Cash Flow: Simple steps can make significant difference.
When a payment is received by a customer or client, businesses often consider the transaction to be complete, overlooking the last step of the sales cycle — applying. The ability to apply payments to invoices correctly can be difficult for most companies for a variety of reasons.
Although it’s tough for most companies to reach 100 percent accuracy, there are some steps to take that can significantly improve your cash application percentage.
Dealing with multiple payment types and multiple payment channels
While it is extremely convenient to be able to receive payments via Automated Clearing House (ACH), wire transfers and credit and debit card payments, lockboxes, electronic bill presentment and payment (EBPP), mobile devices, Web portals and even by phone or in-person visits, these options create multiple ways for payments to get lost in the shuffle.
When dealing with the multiple channels and their individual requirements, customers can provide incomplete remittance information, payments that don’t match the invoice, or even take unapproved or unearned discounts. Accounts receivable employees can also get confused and inaccurately apply payments to the wrong invoice, have difficulty identifying the customer or company, and find they are unable to manage the volume of payments. Together, these two things lead to a growing amount of unapplied or misapplied cash for businesses.
How to prevent unapplied and misapplied payments
Unapplied and misapplied cash creates a myriad of problems that can negatively impact cash flow by taking a considerable amount of time and effort to resolve. It can also damage customer relationships when up-to-date customers begin receiving calls from collectors and invoices for accounts that have already been paid.
Business owners can avoid this from happening by managing and improving the cash application processes by taking just a few or all of the following steps:
- Create, monitor and staff an unapplied cash account
Some companies manage unapplied cash by depositing the payments into an unapplied cash account. If an unapplied cash account is created, it is important to monitor the account and to clear the balance on a frequent basis. - Establish internal controls
Develop and implement internal controls to ensure cash is applied on a daily basis and the amount of cash received matches the amount applied. Bank accounts should be reconciled on a daily basis to make sure payments are applied on the right day and to the right account. - Assign each customer a single account
Sales and other departments within your organization may want to open several accounts for a single customer, but this creates problems when it comes to applying cash. Multiple accounts make it difficult to know where to apply a payment. - Establish a deduction write-off policy
It can be costly and time consuming to resolve deduction disputes. In many cases, it is more efficient to establish a deduction write-off policy. The threshold limit should be determined based on historical information and can be based on a percentage or dollar amount of billed criteria. - Communicate with customers
If you have questions about missing or unclear remittance information, again, it is best to call the customer. For example, if a customer sends a payment to cover several invoices, contact them and ask how to apply the payment. - Strive for accuracy
Above all, strive for accuracy. Reward staff members who apply the cash correctly the first time.
Although cash application is far from a perfect science, even the slightest improvement will increase the cash flow and the organization of your business’ finances making it easier for both your employees and your customers. Change may not happen overnight, but each improvement will bring your organization closer to the elusive 100 percent accuracy.
