Cash is oxygen. It seems a bit juvenile to stress the importance of cash in a business context, but having liquid assets on-hand to move around and make strategic decisions with is critical to a business’s function, and you can’t do that unless you’ve collected the cash owed to you and applied it to the correct accounts.
Otherwise, it’s just this big, convoluted batch of miscellaneous payments in accounts receivable. It’s like a closet full of presents — you have to check the names of the presents to know who to give them to before opening them.
Today, we’re going to talk about what cash application is and how you can improve your own AR cash application process.
Back in the world of physical ledgers and checks, cash application would be a pile of checks on a desk, a ledger of account balances, and a receipt book on the other end. The accountant would see who sent a check, apply that amount to their outstanding balance, and issue a receipt if one hadn’t already been given.
In other words, cash application is a matching mechanism. It’s filing payments in the right places.
Cash application has always been a laborious process, but before the internet, it was simpler.
Now, there are so many sources and types of payments that without a good cash application system, your accounts receivable apartment could be drowning in a flood of payments without much detail and be stuck guessing where to apply them.
Cash application usually goes like this:
Systems are faster or slower depending on how efficiently they can do the above steps. Great systems remove most of the work for the accountants, and all that’s left is reviewing the suggestions & taking care of particularly complex invoices.
Because cash application fulfills to main components that are important for businesses:
If you don’t know which clients are the most profitable, how can you accurately determine who to target in your marketing efforts? Or if you run a service-based business and are behind on your cash application process, you could have clients who have stopped paying you but you’re still delivering service!
Without cash application, your business is swimming with blurry goggles.
It’s a pain for your customers too if your cash application is late. When funds aren’t withdrawn from their accounts in a timely fashion or they don’t receive a receipt, their accounting gets more difficult & their forecasting suffers as a result.
There are many ways your cash application process could be slowed down, but here are a few of the most common ones:
If you’ve noticed any of these symptoms from your system or have had conversations with your accountants about these topics, it may be time to better your cash application process:
#1 Lots of cash laying around that hasn’t been applied.
#2 Lots of payments that haven’t been filed.
#3 Many customers asking for receipts.
#4 No way to get high-level reporting on your cash application efforts
#5 The customer service of your existing system is unavailable and not helpful.
These days, your best bet for improving your cash application system is to either buy new software or develop your own system. But unless you’re running a specific type of multi-million dollar business, you’ll probably have to pick up some outside software.
Here’s what to look for when shopping around:
Many cash application services will offer similar services, but their efficiency and ability to fit your business is what counts. Here’s what to look for:
And apart from the system, here’s what to look for in a partner. This goes for any service you bring into your business, including things like merchant services & marketing partners.
Make sure they are or offer:
And there you go! We hope this helps you understand the world of cash application. It’s simple in theory, but the complex nature of modern payments can make it feel overwhelming.
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