Is your cash application process a time and money-drain?

It is one of the most basic activities we have, buried deep in the back-office of Finance & Accounting teams around the world. The steps are simple: you have delivered goods or services to your customer; you have raised an invoice; and your customer has dutifully paid you (either electronically or by cheque). Easy. All …

by | October 20, 2014 | Bottomline

It is one of the most basic activities we have, buried deep in the back-office of Finance & Accounting teams around the world. The steps are simple: you have delivered goods or services to your customer; you have raised an invoice; and your customer has dutifully paid you (either electronically or by cheque). Easy. All that remains is to allocate the cash receipt on the bank statement against an open invoice on your sales ledger.  It is such a well understood and universal task that, more often than not, it is left to quietly continue in the background as it always has, irrespective of any other change in systems, scale, or complexity of the underlying invoices & receipts that are being matched. Needless to say, it doesn’t receive too much attention from the FD, CFO or MD, unless it includes a request for more headcount. 

But should it? The process of cash application is typically one of the most time-consuming, manual, and error-prone processes within the back office. Often performed by conscientious employees with a deep knowledge of the customer base, their history and specific quirks, who glue various facts, data and correspondence together to (hopefully) match the right cash receipt to the right invoice. The tools of their trade? Generally, these include highlighter pens, rulers and print-outs of bank statements and remittance advices.  Perhaps it also involves an Excel workbook to help crank-through simple, high volume, items?  The good news is that, typically, this approach does work. Cash does get applied.  The bank account will get reconciled. The not so good news is that it all works by virtue of long hours of hard-work, determination and individually-held knowledge, in a process that can span many days impacting other activities.

Typically, it’s only when the pressure starts to build that the cracks in this process appear: your key person is off-sick; your spreadsheet has developed a corruption; your business is growing faster than you can print and highlight; or you make an acquisition and have a net-new customer base to deal with. It is usually at this point that under-investment in this process starts to strain busy teams, application of cash is delayed and the confidence in, and control over, the numbers is undermined.

Here are some key implications of a broken or poor cash application process:

  • Very time intensive, trapping team members in low-value activities
  • High reliance on individual knowledge and skills, creating a fragile, risky process
  • Reduced visibility over which customers have paid and who to chase for outstanding debt
  • Upset or agitated customer on receiving avoidable chaser-calls for amounts already paid
  • The ability to collect cash is reduced, impacting key metrics such as DSO
  • Accounting for aged or doubtful debt becomes less reliable

So what does a “good” cash application process look like? It’s really all about ControlControl is what allows us to feel confident in the numbers we report, and could be said to comprise of the following qualities: Automation, Integrity and Visibility. Systems that allow Automated matching of two sets of data, in this instance cash receipts to open invoices, based on intelligent rules-based engines drive a standard, consistent approach that is not only far quicker than any manual approach, but removes manual error and reliance on individual knowledge or skills. It should also provide a scalable platform that can grow with business demands. Integrity means that the information provided to, generated by, and exported from, the system is complete, accurate, and completely reliable. Visibility allows team members, supervisors and managers to understand the status of the matching process at whatever level of detail is important to them in their role, and access that information in a quick, reportable and auditable format. 

With employees freed to focus on more valuable activities and credit control teams provided with the visibility they need to drive cash collection, the dark-days of high-lighter pens and Excel based matching fading away all becomes simple. Only two hundred other reconciliations to go….! 
 

Please join our open discussion expanding upon topics mentioned in this article
 

By James Wright-Wastell, UK Financial Controller, Bottomline Technologies

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