The sales cycle includes four steps: selling, billing, collecting and applying. The last step, applying, is often the most overlooked. Applying simply means the ability to apply payments to invoices correctly. Most companies never make it to 100% but that doesn’t mean you can’t greatly improve the percentage. 

It is difficult to achieve a 100 percent for many reasons.  Payments are received in various forms, such as checks, ACH, wire transfers, credit, debit and procurement cards, from multiple channels that include mail, lockbox, EBPP, mobile devices, phone, web portals and even in-person visits.

Multiple Payment Types and Multiple Payment Channels

The problems associated with receiving payments from multiple channels are primarily related to the tangled web of payment streams and document formats that require the end user to comply with each channel’s specific data structure and format. This can lead to issues such as:

  • Customers’ remittance instructions are missing or unclear 
  • ACH payments’ remittance information is sent separately, by mail or electronically 
  • Customers short pay and do not explain why 
  • Customers take unearned discounts offered for early payment 
  • Customers deduct freight charges 
  • Payments are applied to the oldest, outstanding invoices 
  • The customer cannot be identified (because of a name change or use of a legal name instead of the name the company does business under)
  • The customer has multiple accounts and it is unclear where to apply the payment 
  • The customer sends a single payment to cover several invoices 
  • The processing staff cannot manage the volume of payments

A growing unapplied cash balance may be symptomatic of underlying problems and could indicate additional training is needed for a company’s accounts receivable department or that customers need clearer instructions about what information to provide, so their payments can be properly applied.

Unapplied cash, as well as misapplied cash, creates a myriad of problems that can negatively impact cash flow.  When cash is unapplied or misapplied, collectors may make unnecessary calls to customers who have paid, or billing might issue additional invoices on accounts that are actually up-to-date. The calls and invoices could irritate customers who sent their payments in a timely manner.

Misapplied Payments

Misapplied payments not only take a considerable amount of time and effort to resolve, but can also damage customer relationships. At a minimum, fixing a misapplied payment requires reversing an error and applying the payment correctly. But, if the mistake happened some time ago, you may have to reverse and reapply every payment since the problem occurred.

The main cause of misapplied payments is staff members who are not committed to their jobs.  Thus, it is imperative to follow customers’ payment instructions and document their requirements.  To manage and improve your cash application processes can involve taking some 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.  Also, 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 nightmarish problems for applying cash. When a customer has multiple accounts, it’s often difficult to know where to apply a payment. So, if at all possible, maintain a single account for each customer.

Establish a Deduction Write-Off Policy

It can be costly and time consuming to resolve deduction disputes and 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

Cash application issues can often be resolved with a quick call to the customer and a little research. For example, if a customer sends a payment to cover several invoices, contact them and ask how to apply the payment. Or if a customer short pays, call and learn the reason. If you have questions about missing or unclear remittance information, again, it is best to call the customer.

Strive for Accuracy
Above all, strive for accuracy. Reward staff that apply the cash correctly the first time.  

Cash application is far from a perfect science. But, adopting some of the policies above can go a long way to moving you closer to the illusive 100 percent correct.