In business transactions, speed matters. But the important process of cash application—the matching and processing of payments in B2B exchanges—often faces delays and complexities. While these hurdles are a reality, solutions exist to streamline the process and make it more efficient.

Consider two businesses in good standing with each other. Their accounts cover regular exchanges of services, but this creates a more complex accounting process than B2C transactions. Delays in transaction periods, manually closing open invoices, and matching payments with their respective invoices are some of the challenges that arise. These tasks often fall on the shoulders of a cash application specialist or an accounts receivable professional.

To address these challenges, we need to understand the cash application process and the role of payments in this setup.

What is Cash Application?

Cash application is the process of accurately matching B2B customer payments to their orders or open invoices and then processing these payments. For each B2B transaction, controllers and accountants initially performed this manually.

Typically, a cash application team tracks three types of data:

• Invoices or orders

• Payments

• Remittances, especially for partial payments

However, this method has become impractical for modern billing. Manual processes often result in errors, according to 78% of finance professionals. Given the increasing volume and complexity of transactions, manual cash application is no longer efficient.

Steps Involved in the Cash Application Process

Cash application, while crucial, isn't a simple task. It involves a series of steps that could become time-consuming and challenging, especially for manual operations. Below, we've dissected each phase involved, from receiving the incoming payments to completing the accounts.

• Receiving incoming payments and related remittances. If there's no remittance, it involves reaching out to the customer.

• Matching the remittance data with the payment.

• Associating the payment with the right invoice.

• Ascertain if the payment is partial or complete.

• Determining if the customer has made multiple payments.

• Applying any discounts.

• Creating a journal entry for the payment in the company's ERP account or spreadsheet.

• Posting the payment.

• Recording and processing more customer payments.

To illustrate these steps, let's consider a hypothetical company. An incoming payment comes in with a remittance. The cash application specialist matches the data, associates the payment with an invoice, and finds that the customer has made a complete payment. They apply discounts, create a journal entry, post the payment, and move on to the next one.

Understanding the Objectives of the Cash Application Process

A successful cash application process pursues certain objectives that contribute to the company's overall financial health and reputation. These include improving cash flow, enhancing the customer experience, and maintaining accurate records.

1. Improving Cash Flow: Cash application helps to optimize cash flow, making funds readily available for use. This aids financial forecasting and planning, enabling companies to invest in growth initiatives and maintain a stable operating environment.

2. Enhancing Customer Experience: Prompt and accurate cash application reassures customers, helping to maintain trust in the business relationship. Delays in cash application can lead to customer dissatisfaction, potential inaccuracies in their financial records, and strained business relationships.

3. Maintaining Accurate Records: Accurate records are the backbone of any financial operation. Cash application plays a pivotal role in ensuring that payments and invoices are correctly matched, allowing for accurate financial reporting and audits.

Why is Cash Application Challenging?

Although critical, cash application presents its fair share of challenges. A primary concern is the amount of time and labor involved in this manual process. The traditional workflow of verifying, reconciling, and posting payments to open invoices is susceptible to human error, given the intricate details that need to be checked, double-checked, and matched.

For instance, consider a business that receives hundreds of invoices daily and applies an equal number of payments. The human workforce handling this volume of transactions is bound to make mistakes, which can result in misapplied payments, skewed financial reports, and potential financial losses.

Moreover, the growing popularity of electronic payments and credit cards presents a unique set of challenges for cash application teams. Electronic payments often arrive separately from their associated remittance information, making it difficult to determine which invoice a payment relates to. This situation is further complicated if a customer makes a single payment for multiple invoices or uses different payment methods for different invoices.

Now, consider a scenario where a company is dealing with customers who have specific payment preferences; some favor credit cards, while others prefer electronic fund transfers. This diversity adds another layer of complexity to the cash application process, as the company needs to manage multiple payment gateways and ensure secure and compliant processing for each.

Anecdote: Consider the case of a mid-size manufacturing company that deals with a multitude of vendors and clients. Each day, the cash application team handles a mountain of paper invoices, checks, credit card statements, and electronic payments. Amid this chaos, a $10,000 payment is wrongly applied to a client's account, leading to a hefty financial discrepancy. This situation causes frustration on the customer's side and potential reputational damage for the company, highlighting the potential pitfalls of manual cash application processes.

Ways to Improve the Cash Application Process

There are a few proven ways to speed up and improve the cash application process. Among the main tips are: a) Automation b) Streamlining Payment Processing; and c) Team Training.

If you’re still matching payments manually, the biggest opportunity to improve the process is probably automation through a tool like Tesorio. Automated cash application solutions can significantly reduce the time spent on matching payments and remittances, enhancing accuracy, and eliminating manual errors.

Further, streamlining payment processing can help too. By consolidating multiple payment gateways into a single platform, companies can speed up the payment application process. ensure faster, more efficient payment applications. In the long run, this strategy can reduce the time and effort spent handling different payment methods and invoices, thereby improving productivity.

Improving training for cash application specialists is another crucial step. Providing them with a comprehensive understanding of cash application processes and tools can equip them to handle challenges more efficiently.

These improvements can significantly impact the bottom line by ensuring accurate invoice numbers, reducing time spent on tasks, and improving customer satisfaction.

Selecting a Cash Application Solution

When it comes to selecting a cash application solution, you may want to consider a few factors, such as compatibility with existing systems, ease of use, cost, and customer support. It's also worth noting the importance of a solution that supports both manual and automated cash application processes for flexibility and efficiency.

There are a myriad of new solutions every day, but a main challenge for adoption with many of them is that they often don’t integrate with existing ERP systems, making it hard to convince higher-ups of the purchasing decision.

Tesorio, on the other hand, is trusted by the great finance teams at Box, Smartsheet, Couchbase, and many more and was built by finance veterans who know what it takes for a tool to work with the suite of other existing solutions. Tesorio's Cash Application is a comprehensive solution designed to streamline your reconciliation process, freeing up your time from the often laborious task of reconciling payments. With Tesorio's Cash App, everything you need is consolidated on one page: you can record payments, match them against invoices, and post directly to your ERP like Netsuite, all from a single screen.

Here’s a quick sneak peek at some of Tesorio’s cash application features:

1. Live, Automated Bank Imports: Gain real-time visibility into incoming transactions with an immediate connection to your bank account. Even BAI files are supported.

2. Smart Recommendations: Decrease errors and DSO using Tesorio's smart recommendations to match payments to customers and invoices promptly.

3. Touchless Posting for Portal Payments: Tesorio's Financial Care Center automatically posts all payments to your ERP, ensuring it remains your financial data's source of truth.

4. Complete Integration: Reconciliation work in Tesorio updates forecasts and collection data in real-time, keeping reports accurate and communication clear.

For a more comprehensive overview, you can find more information here.

In summary, whichever tool you choose, it is clear that a well-managed and effective cash application process can significantly impact a company's bottom line. Automation, as we've discussed, plays a key role in this, helping to reduce time-consuming tasks and enhance accuracy.

At Tesorio, we've crafted our solution with these key elements in mind. Tesorio's Cash Application is an efficient, user-friendly, and robust tool that enhances your cash application efforts, delivering an improved financial management experience.

Curious how Tesorio can help you streamline your A/R processes? See for yourself!