AR-08CashApp.REV
- 1. Cash Application How to Achieve Consistent, Accurate, and Timely Cash Application By Bob Sefton, Financial Director, Nomacorc LLC Accurate, timely cash application fosters good working capital management practices with a resulting positive cash flow. If cash application is not carried out properly and consistently, the consequences can be: cash flow errors problems with customer account balances; internal workflow problems; and excess administrative costs caused by repeated failed attempts to reconcile cash and accounts receivable balances. Ultimately, if left uncorrected, these issues could result in poor cash flow, deteriorating customer relations, and loss of business. Dealing with Common Cash Application Challenges Common cash application errors include delays in processing cash payments, posting cash payments to the wrong customer accounts, and posting the wrong amounts. All of these errors could lead to cash reconciliation problems and cause inaccuracies in financial statement reporting. In the worst-case scenario, cash application “errors” could also be symptoms of internal fraud resulting from poor internal controls in AR. AR managers need to be aware of the things that can commonly go wrong in cash application and take steps to avoid these issues. For example, discrepancies typically occur when customers short-pay an invoice due to non- receipt of all goods ordered or when there is a dispute about pricing, sales taxes, or service fees. Another common situation occurs when customers pay the wrong amount or take unauthorized deductions (unearned discounts) when they dispute a situation related to their business transactions. In addition, it is common to have differences for sales taxes charged on an invoice where the customer believes that he or she has a special exemption from sales tax for certain items. In other cases, customers pay the wrong invoice or neglect to define which invoices they are paying. For each of these situations, AR should follow specific protocols that include approval for exceptions based on deviations in value. Keeping Good Records It is critical for the AR manager to keep good records, track errors, analyze trend reports on the numbers of errors detected in cash application, and troubleshoot the reasons for reoccurring errors. Certain errors may be common to a particular customer. This could indicate some systemic problem with the customer or issues within internal departments (such as sales). The systemic
- 2. problem can then be evaluated to determine the root cause analysis which can ultimately lead to improvements and cost reductions. AR managers must also assess whether cash application problems are centered on specific employees within accounts receivable. An AR employee may: require additional training; have performance issues or, in the worst-case scenario; be perpetrating acts of fraud. One can't be too careful in overseeing cash applications, since stealing cash can be a huge problem for those companies that have internal control weaknesses. Avoiding Cash Application Woes It is highly recommended that organizations implement an effective cash application process that includes the following steps and controls: 1. Develop clear, written policies and procedures for cash applications. 2. Post cash receipts to a cash journal within one business day and promptly deposit into controlled bank accounts. 3. Enforce separation of duties among the people who handle the cash receipts and those who create invoices and influence billing decisions. 4. Reconcile immediately any discrepancies between cash received and supporting documents such as invoice numbers, cash shortages to invoice amounts, and cash overages. Also reconcile discrepancies that may be communicated via the customer. 5. Train and cross-train accounts receivable employees to ensure the proper handling of all cash application activities. 6. Institute and track metrics and key performance indicators (KPIs) for daily cash trends and AR balances. Training AR Employees in Cash Application A good, comprehensive training program is another key to eliminating cash application problems–particularly those that are due to human error and not fraud. Here are some things to keep in mind in regard to training: First, have cash application policies and procedures in place and clearly documented. These policies and procedures need to define the work flow, provide clear steps in the process, explain methods of operation, and set standards of performance. Include in this training a description of the organization's overall expectations, an overview of company culture, admonitions against fraud, and a description of actions that will be taken if fraud is determined.
- 3. Assign each AR employee working in cash application a mentor to ensure the trainee’s complete understanding. Explain achievement expectations within first 30 days, 60 days, and 90 days. Hold regular follow-up meetings with trainees to apprise them of their progress and offer corrections and coaching. Provide instructions on what to do as situational deviations arise. Explain to trainees why separation of duties is an important control in accounts receivable and assign trainees accordingly. Periodically rotate tasks and account assignments to ensure cross training. (Job rotation can also serve as a good control for detecting fraud; employees may spot suspicious discrepancies left by their coworkers.) Assess skills after training and, if appropriate, assign specialists who only handle deviations and others who only receive cash. Ways to Secure and Expedite Cash Application There are technologies and software solutions available to secure as well as facilitate/speed up the cash application process. Some recommendations include the following: Set up lockbox of cash receipts with your organization’s bank so customer payments are deposited into a secure account immediately. Some companies use lockboxes to remediate cash application errors. In this scenario, funds are sent directly to the bank. The bank sets up auto deposit and relays documentation back to the organization. The cash is applied to the organization’s bank accounts. Accept third-party payment systems such as credit cards or PayPal. Allow for electronic deposit of wires or ACH payments. Integrate internal automation systems to ensure smooth data flow regarding payments and cash applications and provide for full-circle reporting of this data flow. Implement automation systems that are capable of providing for redundant checks and balances with designated approval protocols, and with the capability to interact with third-party lockboxes or credit card systems. Stay on Top of Danger Signals Even with a full array of safeguards, the cash application process can still go awry. AR managers need to remain ever vigilant of the danger signals. AR mangers must audit all cash application systems daily and set up system flags that identify off-standard situations and trends. Warning signs include the following: Abnormal increases in customer days outstanding; Increases in customer complaints about account errors; and High numbers of deviations that are occurring based on trends. Also, AR managers should be on the lookout for employees who do not take vacation, which could be symptom of fraud concealment, as well as watch for trends showing a decrease in cash collections. Finally, AR managers must review financial records of invoicing totals versus cash collections total by customer on a regular basis to pinpoint potentially fraudulent discrepancies.
- 4. Editor’s Note: Nomacorc LLC (Zebulon, NC), is a leading global supplier of synthetic closures. Bob Sefton has a broad range of financial management experience, including multi-plant controllership and consulting in domestic and international manufacturing and service organizations at both corporate and division levels in industries including automotive, pharmaceutical, chemical, high-tech, food and beverage, and consumer products.