Challenges With Traditional A/R - Part 1

The single most important step in Accounts Receivables life cycle is to apply the cash you have been receiving accurately and efficiently.  Inaccurate cash postings will have direct impact on your liquid cash reserves, outstanding receipts, dispute management and above all, customer satisfaction. Even a very efficient accounting department can not apply the cash on the same day if they were to do it manually, as there are lots of challenges (which will be discussed later) and manual work is always error prone and time consuming. The more lag between payment receipt and cash application you have the more unaccounted money and the more mysteries to solve

As it may sound, the cash application problem is not trivial. It involves fair amount of intelligence to seamlessly orchestrate cash flow from customer’s bank accounts to properly apply them on open receivables. It involves aggregating data from lockboxes and/or direct payments, remittance advices from different sources, matching PO numbers in remittance advice to invoice numbers, transforming data coming from customers to the format acceptable to your system, reason code mappings in case of deductions, credit memo/debit memo matching, et cetera. Traditional A/R systems are not designed to handle all these scenarios. The maximum they could offer you is to identify invoice numbers being paid when there is an exact match with the remittance data and determine whether a cash discount is for the correct amount and within terms. However, over 75 percent of cash receipts may still end up with manual intervention because only few customers provide correct invoice numbers with their payments and on top of it, there are always invoice short pays to deal with. 

Figure 1Traditional A/R systems combined with manual cash application

Let’s examine few challenges with Traditional A/R systems combined with manual application in the following sections:

Hybrid Remittance Environment:

When you are dealing with multiple customers, there is a huge possibility that the remittance advices could come from a myriad of different sources in a variety of forms based on the software systems your customers using and payment methods they have chosen.  Collecting and deciphering data coming from different forms and sources is a huge manual task as your traditional A/R systems are not equipped to do that.  As a result, the cash application process involves significant manual processing with manual workflows and data entry thus reducing the efficiency and eventually increasing days sales outstanding for wrong reasons.

Lower Hit Rates:

As we discussed earlier, the traditional A/R systems could definitely apply cash to some extent. Typically, most cash receipts include some data that exactly matches open receivables without requiring any further processing. The remaining remittances, which are more difficult to match, involve some sort of intelligence to clear them off, like checking against credit memos, to see if discounts taken are as per terms in case of short payment or the verify against purchase order numbers, et cetera. What this means is even the A/R software is able to achieve a 65% hit rate, it would have just cleared the cream off the top and left the hardest tasks to be processed manually. The bulk of the remittances can be processed quickly, whether that is done manually or automatically. Whether it’s traditional bulky software or a specialised auto cash application product, if it is not processing more difficult and time consuming remittances, it’s not adding much value to your cash application process.  Bottom line is, if the software is not promising 100% hit rate, there is no point in using the software.

Customer Specific Rules:

As you grow with your customer base, the more complex and challenging your cash application process becomes. Different customers behave differently with their data and you might have to employ customer specific rules to transform data.  There are two options to deal with this situation using your traditional A/R systems, either asks your customers to change their behaviour so that it fits in your eco system or expand your system so that you handle the new behaviour in house. Obviously, you cannot ask your customer to change their behaviour because he might be dealing with multiple vendors and why would he incur IT costs just because he is doing business with you? So you left with expanding your accounting team to handle new customers. The third option could be employ a new system which could handle any new customer seamlessly within your eco system and transparent to your customer.

Infrastructure:

Last but not the least; infrastructure is a significant challenge when you are using traditional A/R systems combined with accounting teams to apply cash. By infrastructure, I just don’t mean hardware, but the costs incurred towards on-premise installations, ramping up for any system changes, implementing for new customers, expanding accounting teams to scale for larger customer base, et cetera.

All these challenges can be solved in much better and elegant fashion using few accelerators in tandem with your existing A/R system. In my next post, I will discuss how HighRadius’ ReceivablesRadius Cash Application Automation helps businesses significantly improve on-invoice hit rate by automatically matching open payments to invoices. How it solves hybrid remittance environment issues and above all how it employs intelligent rules engine to solve more and more complex customer specific and transformation rules to eliminate human intervention from your cash application process. I am also going to discuss how it is different from existing products in this space and offers more value to your business. Stay Tuned!

About the Author:

Seshadri Sastry is java team lead currently leading the development efforts for On-Demand Cash App in HighRadius Technologies with solid business rules background using Drools and SAP NetWeaver BRM