Cash allocation is the lifeblood of a business.
August 28, 2019
by Tim Ray
Businesses depend on cash for:
- The purchase of raw materials
- Sales and marketing
- The manufacturing and delivery of goods
- Payroll and administration
But allocating customer payments is easier said than done for most businesses.
The root of the problem is the manual processes on which most businesses rely. While many businesses have invested in automated accounts payable solutions (which impact suppliers), most businesses have not automated accounts receivable (which impacts customers). And few legacy enterprise resource planning (ERP) allocations are set up to easily receive remittance data.
As a result, 57 percent of businesses manually allocate most of the payments that they receive, Aite Group reports. Worse, 30 percent of businesses cannot allocate any of the payments they receive without human operator intervention. Aite Group research finds that only 13 percent of remittance data arrives in a format that can be automatically ingested by legacy accounts receivable systems. The result is lots of keying. Moreover, allocating customer payments is so complex that 20 percent of businesses lose more than $250,000 annually to unauthorised deductions that cannot be resolved.
The growth of electronic payments is making things worse for businesses that manually allocate cash:
- Businesses frequently receive electronic payments that are decoupled from their remittance advice, which are typically e-mailed as a PDF attachment, Word document or an Excel spreadsheet, or embedded in the body of an email.
- The lack of U.S. remittance standards means that billers can never be sure what format they will receive remittance data in from customers – or if they will receive any data at all.
- Even in cases where customers are willing to pay an extra fee to transmit remittance data as part of an ACH payment record, the lack of U.S. remittance standards requires a biller’s time-strapped IT department to map the data for import.
- Bank lockbox providers use different file formats for transmitting remittance data to billers, requiring a biller’s IT department to map the data for import.
Receivables departments have better things to do than spend all their time on low-value tasks such as manual data entry, hunting down remittances, resolving exceptions and posting receivables. This is especially true in today’s expanding economy, where receivable departments must compete for talent, and where senior management is looking for ways to redeploy staff to focus on strategic activities such as data analysis, working capital optimization and customer management.
Does your cash allocation need automation?
Here are five tell-tale signs that it’s time to automate your cash allocation process:
- You have lots of manual processes: In most businesses, matching payments with remittance advices is a manual and increasingly complex affair. The root of the problem is that there are no standards for remittance advices in the United States. The data on remittance advices is frequently inaccurate, incomplete and hard to find – if the customer sends it all. Businesses also receive multiple remittance file formats from bank lockbox providers. And most accounts receivable departments cannot access the IT resources that they need to map the remittance data in bank files and ACH payment records for import into their legacy systems.
- Your costs are high: Businesses spend more than $100 billion annually on their receivables processes, studies show. Much of that money is wrapped up in the human labor required to process and match payments and remittance advices. Some businesses pay bank lockbox providers enormous fees (as much as $50,000 a month in some cases) to process their customer payments, and to capture or key the data from remittance advices. Unfortunately, the data provided by banks is so unreliable that most businesses allocate a puny percentage of their electronic payments straight through to their ERP allocation or system of record.
- You have lots of unallocated cash: Ineffective posting of payments and remittance advices results in a high amount of unallocated cash (money that’s held in a general account while the business tries to determine how the funds should be allocated to customer invoices). Beyond the potential customer service implications of not allocating a payment correctly or in a timely manner, unallocated cash can also create complex escheatment issues in many states.
- You have customer service issues: Poor cash allocation opens the door to customer issues, such as lots of inquiries regarding payment status, erroneous collections activity, delayed shipments (think: just-in-time deliveries) and unnecessary credit holds (which can result in customers taking their business elsewhere while you determine how to allocate their payment).
- You do business internationally: Global businesses – which may have financial shared services facilities across several continents – must manage numerous banks and currencies, multiple enterprise resource planning (ERP) allocation and divisions (with potentially complex parent/child relationships), and various file formats and payment methods (e.g., EDI 820, MT 940 and MT 942, BACS, RIBA and SEPA). Making matters worse, it is not customary to send a remittance advice in the United Kingdom and other countries in Europe.
If your business is experiencing any of these issues, you have no time to waste in automating.
Most accounts payable departments plan to make most of their payments to suppliers electronically within the next three years, per the Institute of Finance and Management’s (IOFM) 2018 Future of AP Study. But that doesn’t mean that paper checks will disappear anytime soon. Accounts payable leaders anticipate that paper checks will still represent roughly 20 percent of all payments they make to suppliers (some businesses find it comforting to put a check in the mail; others like to capture float on check payments). Allocating electronic payments is clearly not getting any easier for businesses.
Ready to get started with automating your cash allocation process? Click here to listen to our recent webinar, “Conquering the Chaos of Applying Electronic Payments through Artificial Intelligence.”