Cash Application: Better Efficiencies, Better Customer Service

cash applicationIn theory, the cash application function comprises a very simple process: apply customer payments to open receivables. The quicker this cash is applied, the better visibility A/R managers have into a customer’s past-due status. The cash application process should:

  • Ensure accuracy and quick turnaround;
  • Minimise cycle times from receipt of cash to applying against invoices;
  • Have a direct positive impact on customer satisfaction.

Unfortunately, the cash application process is often neglected, with a subsequent impact on downstream collections practices.

Two Key Challenges

Efficient cash application processes are key to reducing the time to resolution and increasing recovery rates. Typically, the two main challenges are: customer payment practices and internal application processes.

Customer Payment Practices – B2B customers can accidently complicate and slow down the cash application process when they submit partial payments, combine invoices and do not include any reference numbers or P.O. numbers.

Internal Application Processes – Inconsistent application processes (at both the local and central level), manual processes and a lack of visibility cause customer service/collection problems and use up valuable resources (time, money, labour costs) that could better used elsewhere.

What is Needed?

Whether you choose to keep the cash application function in-house or outsource it, reducing inefficiencies and improving customer service comes down to three foundational building blocks:

  • People – Often seen as an entry-level position or remedial task, cash applications training is frequently spotty, or worse, lacking altogether. A clear understanding of and ability to perform the task at hand is vital in this role. Better training reduces staff turnover and improves performance. As well, as my colleague Brindusa pointed out, communication skills are essential in an accounts receivable position. Staff may have to work with their client-side accounts payable counterpart to gently help change or shape behaviours.
  • Process – Improving organisational processes helps to shorten straight-through reconciliation (STR). You need to ensure early detection, accurate identification, effective coding and continuous tracking of all cash application exceptions from unidentified cash receipts to unapplied receipts where customers fail to provide sufficient remittance information.
  • Technology – Workflow solutions and integrated systems can be used to improve cash flow with faster, more effective processing through document imaging, auto-matching of invoices, managing of receipt exceptions to resolution and automation of the deduction management process. Additionally, real-time access and reporting on KPIs and exceptions provides the collection department (as well as teams across the organisation) with the more encompassing decision-making information they need.

Cash Applications Transformation in Action

When one client approached us to help improve their Accounts Receivable Management processes, it was clear the cash application process was not standardised or optimised. The firm’s lack of clear cash application process produced thousands of unidentified and unapplied payments each week, resulting in countless customer complaints and unnecessary collection calls – or worse still, no collection calls as the account level detail could not be trusted by either party.

There was a high volume of employee turnover, with half the department staffed by temporary labour. Staff training was not consistent and the lack of a cohesive, highly skilled team furthered the decline of the overall process. Lastly, no meaningful metrics were gathered, tracked or reported.

Sutherland completely re-engineered the cash application process. An enhanced workflow automation for exceptions was implemented, daily metrics were gathered, monitored and reported. With everyone on the same page, communications between cash applications and other departments was dramatically improved.

Other results included:

  • Previously delivered on a unreliable “fingers crossed” basis for timeliness of batch quality and release schedule – same day processing of all batches was quickly achieved
  • The centralisation of exception management caused an instant 50% reduction of batches released with unapplied receipts within same day
  • The company realised an immediate cost savings of 40%, with year-on-year savings up to 8%.

In all, with the improvements in place, the collectors are now able to call customers, relying on the available data to make decisions with their customers about what and when to pay.  A well run cash application process and team has now meant, for this client of Sutherland, the achievement of a near theoretical best on DSO.

How do your cash application processes, reports and KPIs measure up? We’d be happy to offer a free assessment of your current practices. Comments? Questions? I’d be happy to answer.

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Simon Speirs (29 Posts)

Simon is a member of the Association of Chartered Management Accountants (ACMA) with 18 years of experience in improving business and finance team performance. He has worked in a number of blue-chip companies including ABB, Accenture, PricewaterhouseCoopers and Hewlett Packard. Simon leads the design and implementation of back-office solutions across the European Region for Sutherland. He has a proven track record of designing and delivering shared service solutions and managing complex global projects. Simon’s experience spans across continuous improvement, finance & accounting, procurement, sourcing and IT management. The depth and breadth of his experience enables him to combine People, Process and Technology to design optimized and customized outsourcing solutions.


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About Simon Speirs

Simon is a member of the Association of Chartered Management Accountants (ACMA) with 18 years of experience in improving business and finance team performance. He has worked in a number of blue-chip companies including ABB, Accenture, PricewaterhouseCoopers and Hewlett Packard. Simon leads the design and implementation of back-office solutions across the European Region for Sutherland. He has a proven track record of designing and delivering shared service solutions and managing complex global projects. Simon’s experience spans across continuous improvement, finance & accounting, procurement, sourcing and IT management. The depth and breadth of his experience enables him to combine People, Process and Technology to design optimized and customized outsourcing solutions.

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