One of the last parts of the finance function to embrace automation has been cash allocation. Traditionally a highly labour-intensive task, cash allocation usually involves accounts receivable staff spending endless hours manually ploughing through payments - received via cheques, credit/debit cards, BACS, the Faster Payments Service (FPS) and so on - and matching them to the corresponding sales invoices.
In organisations with a large number of payments and invoices to match, the manual cash allocation workload can have a variety of negative and embarrassing consequences. Here are five of these common cash allocation headaches:
1. Customers get chased for payment when they’ve already paid
Delays in allocating customer payments can make it difficult to know which invoices have been paid and which are still outstanding. This uncertainty leads to credit controllers wasting valuable time chasing customers who have already paid. Not only is productivity impacted but there’s also a big risk of annoying customers and losing their confidence (if you can’t correctly answer such an apparently simple question as ‘Have I been paid?’, then customers must wonder what else you are also getting wrong).
2. Credit control suffers at the hands of cash allocation
At month end and year end, the pressure on the cash allocation process can intensify as the finance department aims for a ‘clean’ ledger in order to meet key financial performance targets. Accounts receivable personnel often have to be temporarily re-assigned from credit control to cash allocation to help. This obviously has a knock-on effect on collections as credit controllers are not able to devote the time they need to chase payments.
3. Banks’ Faster Payments have a negative impact on cash allocation
Cash allocation suffers a surprising negative impact if a company uses the banks’ Faster Payments systems. Absurdly, even though Faster Payments can arrive in accounts within hours, many businesses are unable to enjoy the full cash flow benefit - because most cash can’t be allocated until the paper remittance notes arrive, days later. In fact, Faster Payments can actually make matters worse because the finance department ends up with a backlog of unallocated payments sitting on their books, waiting for remittance advices to arrive.
4. Finance departments rely too heavily on the ‘inside knowledge’ of key cash allocation staff
Cash allocation relies on knowledge accumulated by experienced team members - locked in their heads or written in ‘little black books’ - which can be difficult to pass on to colleagues. Which company division does a payment relate to? Does a third party usually paying on behalf of this customer? and so on. Because of the detailed ‘inside knowledge’ and experience that go with the job, cash allocation staff can be tough to replace. It’s a big disruption when a cash allocation specialist decides to move on.
5. Manual processes inhibit growth
As long as cash allocation continues to rely so heavily on paper and manual effort it will continue to require more manpower, compared with other finance processes. As a result the cash allocation team will have a limited capacity to take on additional work as the business and workload increases.
The good news is that software is now available to simplify the process of cash allocation and eliminate the vast majority of the manual effort and need for ‘insider knowledge’. Cash allocation software extracts relevant information from electronic payment notifications and cheques, and automatically matches payments with any invoices and credit notes using invoice matching rules. These rules can be defined quickly by the finance team, or even ‘learned’ by the system itself.
Using this new technology, the job of allocating payments to invoices can be completed within minutes, at the start of each working day. All allocated customer payments are automatically uploaded to the sales ledger, with any adjustments such as discounts for early payments applied, leaving a ‘clean’ ledger for credit controllers to work from.
So, if your cash allocation process has been giving you headaches, now could be the right time to take a fresh look at automation: it might well offer the pain relief you need.
I’m Lynda Kershaw, marketing manager at software and services company Macro 4. We help finance departments control their running costs and improve performance against key measures such as day sales outstanding (DSO), aged debt and unallocated cash. At the same time we help them meet rising customer service expectations and increased demand for paperless invoicing.
We do this by streamlining document management, minimizing paper handling and easing the transition to electronic delivery throughout the order to cash process. We offer a suite of integrated software modules to do this.