Cash Application - Credit or Accounting?

A key component of efficient credit management is accurate posting of receipts to the customers’ accounts. When money is unapplied or misapplied the account balance is distorted and it becomes indefensible. A collector must be able to state clearly the amount owed and have ready the invoices and credits that support the balance. When checks that are received are posted in a manner that differs from the intent of the customer, the collection process comes to a halt until the account is unraveled.

For this reason, the function of cash application should be the responsibility of the credit manager since the accuracy and timeliness of the function directly impacts the efficiency of the credit area. Yet, many companies make cash application a function of accounting; it is after all an accounting function. Auditors seem to prefer cash application under accounting as well for reason of security. The reasoning is cash application cannot be manipulated by unscrupulous credit personnel attempting to make their collections look better than they are. The trade off become making the accounts receivable look worse than they really are.

As with so many credit related functions, cash application appears, on the surface, to be a simple matter that should be easily mastered by entry level clerks. A check arrives and is applied to the customer’s account. It is simple as that. However, there are almost as many variables and oddities of payable methods and logic as there are customers. Each seems to have their own unique system for identifying how their check should be posted and many of them assume the cash posting clerk has extra sensory perception.

Typically, cash posting, when supervised by accounting, has as its primary criteria, speed. Hurry up and apply the cash is the mantra. Rather, it should be, “Don’t guess.” Apply accurately. Accounts receivable cash application clerks have neither the time nor the inclination to inquire of the customers how payments should be applied. They tend to assume or guess as to the application or they leave the payment as an unapplied credit. Worse, some will apply some and leave the rest as unapplied, leaving for some collector the task of reconciliation. For every hour of reconciliation a collector is required to do, an hour less is spent on collections.

When the account balance becomes indecipherable, the customer will have no confidence in the statement of account they receive from their vendor. Until it is figured out, they may delay payment. Even though the fault may be with the customer’s own payment method, if what the customer gets as a result is confusing or inaccurate, the result well certainly be to hold up payment.

If you are having cash application nightmares, contact CreditPowers. We’ve have years of experience with cash application. We know how to do it right and we know the importance of doing it quickly and accurately.

Your comments are appreciated. Contact us at patrickpowers@sbcglobal.net and see us on the web, soon, at strategiccreditmanagementsolutions.com.