Cash application process: steps to apply customer payments

The cash application process is: get the payment and its remittance, match each remittance line to an open invoice, decide what to do with any difference, record the payment against each invoice, and clear the exceptions. Done well, nothing is left sitting as unapplied cash and no paying customer gets a past-due notice.

This guide walks the six steps as an AR specialist does them at a distributor or light manufacturer, with a worked example. Where Remit Match does a step, it says so. Where your accounting system does it, it says that too.

What are the steps in the cash application process?

1. Collect the payment and the remittance. The payment arrives by ACH, wire or check. The remittance advice arrives separately: a PDF, an emailed table or a scan.
2. Read the remittance. Pull out each line: invoice number, PO number, amount paid, and any discount or deduction.
3. Match each line to an open invoice. By invoice number first, then PO number, then amount.
4. Classify the difference. Paid equals open, less, more, nothing found, or already applied.
5. Apply the payment. Record it against each invoice in your accounting system.
6. Work the exceptions. Chase short pays, hold overpays, find the missing references, and note each resolution.

How do you match a remittance line to an invoice?

Match on the invoice number first, after cleaning it up. "INV-10418", "inv 10418", "#10418" and "0010418" are usually the same invoice. If the line has no invoice number, match on the PO number against the POs on your open invoices. As a last resort, match on amount, and only when exactly one open invoice for that customer has that amount. If two do, stop: that is a guess.

Remit Match runs exactly these three passes in this order and shows which one matched each line, so you can see why.

What is a worked example?

A customer sends a remittance for $5,154.60 covering four lines. All figures here are illustrative. Your open invoices for that customer:

The remittance lines read: 10418 paid 865.20 with a 46.80 deduction noted "Damaged carton"; INV-10421 paid 2,104.00; 10422 paid 455.00; and a line with only a PO number paid 1,730.40.

• INV-10421 and 10422 match exactly (leading text and spacing ignored).
• 10418 is a short pay: paid 865.20 against 912.00 open, 46.80 short, and the remittance shows it as a deduction.
• The PO-only line is matched through the PO number to an invoice that carries that PO.

The three results are matched, short pay and matched-by-PO. The short pay is the one that needs a person: decide whether the damaged-carton deduction is valid, then credit or chase it.

What differences do you need to handle?

• Short pay. The customer paid less than the open amount. Check whether a deduction is shown, then approve a credit or chase the difference.
• Overpay. Paid more than open. Hold the excess as a credit or send it back, per your policy.
• Unmatched. No open invoice found. The reference may be mistyped, the invoice may belong to another entity, or it may not be open yet.
• Duplicate. The invoice was already applied by an earlier remittance, or is repeated on this one.

How do you speed up the process?

Most of the time goes to steps 2 and 3 on multi-invoice remittances. Reading and matching can be done by software; deciding what to do about a difference cannot. Remit Match handles steps 2 to 4: upload the remittance and your open-invoice export, review the extracted lines, and download a CSV of the matches with the amount off. Step 5 is yours: Remit Match does not post cash or connect to your ERP.

Before you do any of that, check the remittance total. If the lines do not add up to the printed total, a line was missed. Remit Match makes that check when a total is printed. Related guides: cash application software and unapplied cash.

What should you check before you apply the payment?

A short checklist keeps mistakes out of the ledger:

• The payer on the remittance is the customer on the invoice. Parent companies often pay for several entities, so confirm which one each line belongs to.
• The remittance total equals the payment you received. If it does not, a line is missing, or a deduction was taken at the bank.
• No invoice appears twice, on this remittance or on an earlier one you already applied.
• Each short pay or overpay has a reason or a note.
• Anything you could not match is on the exceptions list with the amount and an owner.

Work this list on every remittance, including the clean ones. Clean remittances take a minute and the check proves they were clean.

FAQ

What is the difference between cash application and cash receipts?

Cash receipts is recording that money arrived. Cash application is assigning that money to specific invoices. A payment can be received but still unapplied.

How long should cash application take?

It depends on the remittances. A clean single-invoice remittance takes minutes; a multi-invoice one with deductions, PO-only lines and no invoice numbers can take far longer, because each line has to be traced by hand. Measure your own before and after any change.

Who does cash application?

Usually an AR or cash application specialist, or the controller in a small company.