What is cash application?
Cash application is the process of identifying an incoming customer payment, matching it with the correct invoices or other open receivables, and updating the customer’s account. It includes payment allocation, clearing, and the handling of differences such as short payments, deductions, overpayments, and missing remittance information.
Also known as: cash allocation or payment allocation, although usage varies between organisations.
Accurate cash application keeps accounts receivable records current and gives finance teams a clearer view of which invoices have been paid. Delays can leave cash unapplied, customer balances overstated and collections teams chasing invoices that have already been settled.
What information is used during cash application?
Finance teams usually combine information from several sources:
- The payment received through the bank
- Customer and payer details
- Invoice references
- Payment or remittance advice
- Open receivables held in SAP
- Deductions, discounts and payment differences
A clear invoice reference and complete remittance advice can make the match straightforward. The work becomes more difficult when one payment covers many invoices, the payer name differs from the customer account, references are missing, or the amount does not exactly match the open items.
What are the main steps in cash application?
A typical cash application process involves:
- Identifying the incoming payment.
- Finding the correct customer account.
- Reading the payment or remittance details.
- Matching the payment with one or more open invoices.
- Handling discounts, deductions, residuals, or partial payments.
- Posting and clearing the matched items.
- Sending unresolved exceptions for review.
Standard SAP supports bank statement processing and customer clearing. For low payment volumes with consistent references, standard processing may be sufficient. Higher volumes and complex remittance formats can create more manual investigation and exception work.
Example: A customer sends one payment covering 14 invoices and provides a PDF payment advice. Cash application involves identifying the customer, matching the payment advice lines with those invoices, and clearing the corresponding open items. Any deduction or unidentified line is held for review.
What causes delays in cash application?
Common causes include:
- Missing or incomplete remittance advice
- Payments covering many invoices
- Consolidated payments across customer accounts
- Differences caused by discounts or deductions
- Incorrect invoice references
- Unidentified payer information
- Remittance details arriving separately from the payment
These problems do not always mean the payment is incorrect. They mean the finance team needs enough evidence to connect it with the right open items.
How does cash application work in SAP?
The initial bank statement import and matching are handled by standard SAP. Cash application then focuses on allocating customer payments to the correct receivables and clearing the relevant open items.
Customer clearing can be performed manually in SAP, including through transaction F-32. This may suit simpler environments. At scale, finance teams may need additional matching logic, remittance capture and structured exception handling to reduce the number of payments requiring manual work.
How can cash application be automated in SAP?
Cash application automation can read remittance information, apply matching rules, identify candidate invoices and clear matched items. Exceptions remain available for review when the information is incomplete or a finance decision is required.
The BEST Customer Clearing module supports cash application directly within SAP. It can process customer payment advices, match remittance lines with open receivables, and support clearing, residuals, and exception handling without moving the process into a separate finance platform.
Ardagh Glass achieved a 99.9% remittance clearing rate and reduced month-end close time after implementing the module. Read the Ardagh Glass customer clearing case study.
Frequently asked questions
What is the difference between cash application and customer clearing?
Cash application is the wider process of identifying, allocating and recording incoming payments. Customer clearing is the SAP accounting action that clears the payment against the relevant open customer items.
What is unapplied cash?
Unapplied cash is money received from a customer that has not yet been allocated to the correct invoices or open items.
Does cash application include bank statement import?
Bank statement import is an upstream SAP process. Cash application uses payment and remittance information to allocate and clear customer receivables after or alongside that import process.