Cash application is the process of matching incoming payments to outstanding invoices and to the proper account where they can be entered.
It’s an essential way for businesses to track cash flow and capital so that funds can be utilized efficiently, accurately, and quickly.
Cash application is part of the accounts receivable (AR) process that applies incoming payments to the correct customer accounts and receivable invoices.
Incoming cash can’t be utilized by the company until it has been properly assigned. The sooner a business can utilize its cash, the sooner it can pay salaries and bills, fill purchase orders, invest in other opportunities, and pay dividends to investors.
Cash application is highly visible in the digital age because customers now have many different ways to pay for purchases. This presents new challenges for organizations.
You may encounter the following terms when considering cash application.
Accounts Receivable, or AR, refers to money that is owed to the business.
This is for goods and services that have been provided, but for which the customer has not yet paid.
Cash application is an integral function in the AR process because it allows the business to identify and assign incoming payments to the appropriate receivable, or unpaid invoices.
The cash application specialist manages the cash application process, and is responsible for making the proper assignments for incoming cash to its corresponding invoice.
Days Sales Outstanding (DSO) refers to the average number of days it takes a business to collect payment for products and services provided.
Cash application is relevant to DSO because it helps keep the average number of days to a minimum.
The lower the DSO, the more efficiently the business is operating.
All products and services that are provided by the business come with an invoice. The invoice tells the customer what is owed and what product or service was provided that requires payment.
The invoice will provide the customer with other important information, like payee, where payment should be sent, and when it is due.
The invoice is important to cash application because it helps the business identify the source of incoming cash.
Remittance refers to the payment that a customer pays to the business for the product or service received. Cash application helps the business assign remittances to their corresponding invoices and to the proper account(s) in the general ledger.
Incoming cash cannot be utilized by the business until it is properly assigned.
The sooner cash is assigned to an invoice and an account, the sooner the business can utilize the cash for its ongoing needs. Many functions of the business rely on the efficient utilization of cash for normal operation.
Vital functions like payroll, rent and utilities, purchasing, investing, and capital outlays require cash. A business with a quick and efficient cash application process can run smoothly without delays, and it can grow more quickly.
Cash application poses a myriad of challenges in the digital world. Payments can come in many forms, such as credit card, electronic debit, ACH, wire transfers, and old-fashioned checks.
Many of these transactions are transmitted separately from the information that details the transaction.
Customers may also pay for multiple invoices in one lump sum, and the amount will not match any one transaction in your company’s accounts receivable journal entries. The growing use of web portals to process online transactions also adds another layer of complexity to cash application.
On the other hand, automation has made it easier to match incoming payments. Cash application software is capable of digitally capturing payments from a variety of sources, matching them to the corresponding invoice, and entering this information in your general ledger without the need of a human, or a team of humans, to do the same.