The cash application process is essential for fueling your company’s financial future. The more efficient your cash application system is, the more accurate your financial records will be. This can lead to better cash forecasting and better financial outcomes.

Why cash application is important

Real-time visibility into your company’s cash flow requires an accurate view of invoice payment status and type, plus the location of funds for every transaction. This up-to-date, detailed payment information can help your organization make well-informed decisions and prepare for future opportunities and challenges.

7 steps of the cash application process

The cash application process follows seven key steps:

1. Collect your payments: Funds will typically come from multiple sources, such as checks, ACH, wire transfers and credit cards.
2. Batch the payments: Group all incoming payments by method or date to help streamline the process.
3. Capture your payment data: Add all payment details into your accounting system. This includes the customer name, the remittance advice, payment method and any other pertinent information.
4. Match the payment to the customer: Make sure payments align with the correct customer account and invoice. Identifying details, including invoice number and customer name, are essential.
5. Handle any payment exceptions: Investigate and resolve payments that can’t be automatically matched due to missing or inaccurate information.
6. Apply the payments: Post any payments to the corresponding customer accounts to update outstanding invoice balances and keep your payment info up to date.
7. Reconcile and report payments: Compare and match applied payments with bank records to ensure internal and external data properly tracks. Use this information to generate reports on cash flow to keep your accounts receivable status current.

Common problems in the cash application process

Most problems in the cash application process involve bad or confusing payment details, such as:

• Payment format problems: Not every accounting system has every option needed (for example, partial payment) to ensure varying payment formats can be seamlessly added.
• Missing information: From incomplete invoice numbers to unclear payment references, when details go missing, matching payments to invoices becomes problematic.
• Timing issues: Payment processing and reconciliation can run into delays when payment details arrive separately from the funds.

Manual, paper-based processes are more time-consuming, costly and prone to human error than digital solutions—and can exacerbate common cash application challenges.

Best practices for cash application

Accounting teams can increase efficiency by following cash application best practices, including: 

• Standardizing payment submission forms: Maintaining accurate records is easier when customers submit the same payment and remittance information every time. Require customers use standardized electronic forms when submitting payments.
• Establishing exception procedures: Every unique process you have reduces efficiency. By quickly flagging and resolving exceptions, your company can improve cash flow and prevent payment delays.
• Integrating with accounting systems: By fully integrating your cash application process with your accounting and treasury management systems, you can see real-time updates to your accounts receivable. This can improve reporting accuracy, increasing visibility into your company’s financial position.

Automating the cash application process

Shifting from a manual, paper-based cash application process to an automated, digital one can help minimize errors and shorten payment cycles, giving your team more time to focus on complex issues.

With an automated solution such as Cashflow360, your company can quickly capture, standardize and match payment data from multiple sources to accelerate reconciliation. Automation can also find discrepancies faster and fill in missing details.