While finance departments are using IT to automate processes and cut inefficient manual effort in many areas, there’s one task that has stubbornly resisted: cash allocation (also known as invoice matching).
Cash allocation is the process in which accounts receivable staff ‘grind out’ long days manually sifting through payments received via cheques, credit/debit cards, BACS, the Faster Payments Service (FPS) and so on and then trying to match them to the corresponding invoices.
In large organisations with many incoming payments and invoices to match, lack of automation has a variety of negative and embarrassing knock-on effects. Here are five that most FDs would prefer the outside world not to know about:
1. Customers get chased for payment even though they’ve already paid
Delays in allocating customer payments can mean it is often unclear which invoices are still outstanding, forcing credit controllers to waste valuable time chasing people who have already paid. This leads to not only lower productivity but also considerable annoyance (“Stop bugging me unnecessarily!”) and potentially lost confidence amongst customers (“If you keep getting this wrong, maybe you are also getting my invoices wrong.”).
2. Faster Payments actually make things slower
Absurdly, even though banks’ Faster Payments can arrive in accounts within hours, most businesses still don’t get the full cash flow benefit because they can’t work out how to allocate the payments without the paper remittance notes – which are usually delivered by post several 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.
3. Debt recovery takes a hit when cash allocation falls behind
At month end and year end the pressure can intensify, with staff often having to be temporarily re-assigned from credit control to cash allocation to ensure all customer payments are allocated in order to meet key financial performance targets. This will have a knock-on impact on collections as credit controllers are unable to spend the time they need to chase payments.
4. Staff turnover puts profitability at risk
Cash allocation has become an expensive ‘dark art’, reliant on detailed historical knowledge that is difficult to pass on to colleagues. Which company division does a payment relate to? Is a third party paying on behalf of an end customer? Are they paying multiple invoices? If so, which ones? With so much accumulated ‘inside knowledge’ involved, cash allocation staff are hard to replace. This can throw the finance team into disarray should one of their resident experts decide to move on. Ultimately, if cash cannot be allocated in time it can’t be included in the profit and loss statement – so the company will look less profitable than it really is.
5. Manual processes stifle business growth
With the manual cash allocation task soaking up so much time, it requires a relatively high headcount, compared with other parts of the finance department – and usually has limited capacity to take on additional work as the company grows – which does nothing for the FD’s reputation.
At the end of the day, the inefficiency of too many people taking too long chasing too much cash negatively impacts the company’s financial statements and key performance indicators.
So why the slow pace of change?
It is only relatively recently that software has become available to streamline the cash allocation process and cope with the complexities and individual needs of different companies within a range of different industries. And for some FDs it still seems too good to be true.
Cash allocation software captures relevant information from electronic payment notifications, as well as cheques, and automatically matches payments with one or many invoices and credit notes. The clever part is that this kind of system uses invoice matching rules that can be ‘learned’ by the system itself, so even seemingly esoteric matching processes can be automated easily. Information can also be scanned and extracted from remittance advices, but these are only needed for handling exceptions, which speeds up the whole process.
Typically the job of allocating payments to invoices can be completed within a few minutes, at the start of the day – instead of taking days on end. So the accounts team can focus their efforts on getting new payments in, while cash allocation more or less looks after itself. And the FD is finally freed from the shackles of outmoded manual processes.