Top 5 actions to help improve cash application and forecasting

Accurate cash forecasting is essential for effective treasury management, and particularly valuable in a rising rate environment. In fact, 7 in 10 finance professionals today want real-time or same-day visibility to cash flow forecasting.¹

However, most corporate accounts receivable (AR) teams lack the time and staffing resources necessary to streamline cash application and make stronger forecasting a reality.

Survey notes 1 in 10 finance professionals want real-time or same-day visibiltiy to cash flow forecasting.¹

The good news is that making progress is possible, even for organizations with limited budgets. The key lies in knowing where change will create the greatest advantages, and assembling the right team of professionals. Together, you can move your AR automation efforts forward with the least possible amount of disruption to your business.

“Lean on your vendors and your bank; invite these experts in AR technology and cash flow strategy to support you,” says Nathan Dixon, Senior Product Manager, Receivables, at Deluxe. “When it comes to AR transformation, there’s no need to go it alone.”

One in three cite cash forecasting as 'top AR pain point' 

A survey conducted by Strategic Treasurer dug into challenges facing AR teams, noting that less than 20 percent of businesses report being “highly automated” in AR.¹ Cash forecasting, in particular, is rapidly becoming one of treasury management’s biggest pain points. One-third of companies cite it as a top pain point in their AR processes—more than double its ranking from the previous year. ¹

Cash application automation software that can consolidate and match all payment data, automate AR workflows and deliver timely insights is a vital part of achieving more efficient, accurate and timely cash flow forecasts.  

More companies are building the business case for change. Prompting the push are these drivers:

• Improving efficiency, cycle time and costs
• Greater accuracy in forecasting
• Reducing errors, exceptions and defects
• Strengthening control and security¹

Finding ways to improve your overall collection cycle, apply AR automation technology strategically, and inject efficiencies into the cash application process will help strengthen forecasting and reduce AR’s workload.

You can start with these five actions:

1. Reduce defects and exceptions in cash application

One way to improve cash flow forecasting is by eliminating upstream issues that cause errors, inaccuracies and delays in reporting. These can occur at any stage, from billing and invoicing through posting and cash application.

"The more you understand your defects, your processing and your liquidity—and all the steps in between—the more you can create better predictions in your cash forecasting.”

– Nathan Dixon, Senior Product Manager of Receivables, Deluxe

Receivables processing can be one of the most unpredictable areas. For example, customers may choose to pay with a different method from month-to-month, transpose invoice or account numbers, or pay only partial amounts due. These can have a downstream impact on forecasting, particularly if large dollar amounts are involved.

“The more you understand your defects, your processing and your liquidity—and all the steps in between—the more you can create better predictions in your cash forecasting,” Dixon says. 

2. Increase automation and digital sharing of information

Next, consider the impact of greater access to AR data. Too often, siloed systems and legacy platforms make it difficult for stakeholders to view even basic information. Creating a forecast, for example, can require pulling and manipulating data manually in spreadsheets and across multiple systems and portals. Addressing customer service inquiries related to payments can be equally challenging when there’s little integration between AR data and customer service systems.

An end-to-end mindset across the entire cash application process can alleviate these issues. The more organizations automate, the greater your ability to share information digitally. Start by looking at the entire cash application process rather than individual pieces of it. This helps AR teams identify defects and increase payment visibility.

“Greater transparency to payment status, to what’s occurring in the AR pipeline, not only helps reduce defects, but strengthens forecasting,” says Dixon. 

3. Auto-balance with cash application automation software

When AR errors occur during invoicing, posting or other parts of the cash application cycle, their impact continues downstream. Often, it requires manual review to balance accounts, which further impedes timely, accurate cash forecasting. Staff need to pull data from various areas, such as bank accounts, ERP systems and remittance sources, then sort out the puzzle.

By contrast, integrating data and leveraging automation tools for tasks like remittance matching will dramatically reduce the amount of manual work needed to reconcile and balance accounts.

Cash application automation software not only allows for accurate forecasting, but also automates and streamlines account balancing. The benefits for stakeholders are numerous.

“You shouldn’t have to wait for days for a monthly report or do tedious manual reconciliation simply to know your bank accounts are balanced,” Dixon notes.

4. Scale cash application process thoughtfully 

Automation remains a hot topic for treasury management, but with limited budgets and the constant need to demonstrate ROI, companies should approach new technology thoughtfully. “Scale gracefully” can be a smart motto for AR as you evolve your platforms and processes.

Be strategic and set realistic goals. Ask questions that allow you to measure progress and demonstrate results, such as:

• What defects do we need to eliminate?
• Which AR processes should we automate?
• Where will automation make the biggest impact?

Moving forward with a plan will ensure the time, energy and resources applied to improving cash application and cash flow forecasting pay off with tangible improvements. This approach can resonate with companies of all sizes and help AR avoid continuous requests for investment.

5. Adopt an end-to-end mindset for accounts receivable

According to a Strategic Treasurer and Deluxe webinar on cash application, the consequences of inefficiency within the cash conversion cycle can be numerous.

Realizing the “big picture” across AR can help companies focus on your greatest opportunity areas in the cash application and cash flow forecasting processes.

“Collaboration and a holistic view of your AR cycle are really key to bringing automation efforts to life."

– Nathan Dixon, Senior Product Manager of Receivables, Deluxe

Too often, companies unintentionally create issues for themselves. For example, a business may add new payment methods to address customer demand, but neglect to understand the impact on payment processing timeframes. Likewise, companies may automate a portion of the cash application process without recognizing how it ties into other areas of the AR cycle. One improvement upstream then triggers other issues downstream.

A better solution is to look at the beginning and end of your cash application cycle, along with the steps in between, to create a balanced view. Bringing in many participants usually generates the biggest “aha” moments, giving organizations a clear picture of where to automate and any ramifications to your systems, customers or staff.

“Collaboration and a holistic view of your AR cycle are really key to bringing automation efforts to life,” Dixon says. 

Ground AR automation efforts in solid understanding of current processes 

What’s Dixon’s biggest guidance for those looking to automate? Make sure you understand your current processes.

“It’s too easy to focus only on what’s next—the advantages of automation, the various tools and solutions you’re exploring—however, it’s still critical to review your existing processes and apply cash application automation software in the right places,” Dixon says.

Make sure you understand your current process, invite the right partners to support you, and create realistic goals; this will keep your all-important AR initiatives on track. 

Key takeaways to improve cash application and forecasting

As your organization works to improve efficiency, accuracy, and speed in your cash application and forecasting process, use these takeaways as a reference:

• Identify your goals and Key Performance Indicators (KPI) first, then review your data.
• Look beyond symptoms to address the root causes of errors, defects and exceptions in your AR processes.
• Know that a successful end requires a good process, and manual processes scale poorly; assess where automation can solve challenges.
• Understand the links between liquidity, cash forecasting and cash application.
• Plan for complexity by considering the impact that additional payment rails and payment types will have on cash application and forecasting.
• Deploy strategies designed to scale and simplify.

*Source: Strategic Treasurer, “Modernizing Accounts Receivable Processing," 2022.