An AR team's guide to Invoice Remittance Advice
Yes, getting paid is essential - but it's not as straightforward as getting paid on time. Maintaining accurate records is a critical part of the AR cycle for accounts receivable teams.
Cue remittance advice - an invaluable process to help your team match incoming payments with the right invoices.
In this piece, we're looking at how technology reshapes invoice remittance for accounts receivable teams. We'll touch on the basics of remittance processes, their importance, and how automation and specialized software solutions streamline processes and accelerate payment cycles.
But first, let's recap the basics.
Remittance advice explained
In brief, remittance advice encapsulates the true value of transparency for both AR teams and paying customers. It enables AR teams to better establish which payments correspond with which invoices to prevent the consequences of matching received payments with incorrect invoices or dealing with unallocated payments.
In more literal terms, 'remittance advice' is the clarification or additional details about payments that determine which invoices suppliers must allocate the payment to. Traditionally, AR teams receive these details either via email, paper documents, Excel sheets, Electronic data interchange (EDI), or on a check itself (I.e., the memo line) or even AP automation platforms.
Ultimately, these documents serve as a crucial reference point for corporates to reconcile their accounts receivable collection.
However, it doesn't come without its fair share of trouble. But before we look at the challenges of traditional remittance advice processes, let's look at why they're still important in today's modern payment landscape.
The importance of basic remittance advice
Who knew a simple remittance advice slip could carry so much weight? Your AR team, most likely! In many ways, remittance advice carries payment-specific data and information required for an effective payment process. But as many AR folk know, it's a notoriously challenging process.
This information includes everything from details of records paid, additional information such as discounts or credit notes applied, deductions made (with or without reasoning), and other essential information related to the payment.
Naturally, obtaining this information and easily accessing it is especially important from the perspective of working capital optimization.
Although customers aren't obliged to send their remittance advice with their payment, it is strongly advised as a common courtesy within accounting. Why? AR teams and departments rely heavily on remittance advice to complete cash applications.
By providing a remittance slip, customers help suppliers (and AR teams) match their payment to the correct invoice(s), ensuring their open balances get settled. But ensuring that the correct information is received (and applied) is as time-consuming as it is complex, often causing a significant order-to-cash bottleneck - here's why.
The challenges of traditional invoice remittance advice and the invoicing process
The payment remittance process has quite a few unique challenges, especially when it involves lengthy paper remittance advice, often incapacitating the AR team and hindering healthy cash flow. The most significant challenge revolves around sending remittance advice and having to source and interpret remittance advice with an archaic accounting system.
Did someone say snail mail? Unfortunately, it's still common practice in some countries when sending remittance slips.
For most teams, there is no standardized format that all companies use for remittances. AR teams are tasked with manually matching remittances, often leading to unallocated payments and error-prone cash applications.
Here's a closer look at the most common challenges and how they impact business.
Remittance details: Navigating diverse sources and formats
As mentioned above, remittance advice often entails navigating and dealing with various formats or remittance advice from multiple customers. Depending on the company and payment method used, there are different types of remittance advice. This is because the types of remittance advice or payment advice are often shared in the customer's format, making it difficult (and time-consuming) for the Corporate's AR team to read.
In addition to having to gather and apply the different types of remittances, it's also very likely that customers fail to send remittances entirely. If this is the case, AR teams must contact customers for clarification via email or phone calls, further dragging out the payment processing cycle.
Complex remittance data
Sure, you may have the data stored somewhere in your ERP system, but extracting relevant information for client-specific remittance advice is nearly impossible without the right tool. This is because the remittance data structure and discounts/deduction codes are extremely customer-specific.
It's also important to keep in mind that these challenges aren't simply part and parcel of the remittance process. In fact, most of them stem from common errors made within the AR management system. Some of these mistakes include:
- Waiting too long to request a remittance
- Allowing timing of incomplete remittances to coincide with collections cycles (Teams may start trying to collect on invoices that the target customer has already paid)
- Evaluating health of age analysis based on total net AR balances (these are often net of unallocated payments and can distort teams' view of the level of attention that needs to be given to a particular account)
- Making remittance processes is hard work for customers. (i.e., by asking vague questions on what invoices the payment relates to, without giving a list of possible invoices, etc.)
Despite the challenges that manual remittance processes bring, the timely and accurate processing of these documents is a key factor in unlocking working capital, reducing the amount in suspense accounts, and ultimately decreasing DSOs. So, what's the solution?
How to optimize remittance advice through AR automation software
We'll cut straight to the chase: yes, there are numerous (and advantageous) strategies that can help optimize the remittance process. Some of them include the following:
- Making the invoice allocation process easy for customers to complete (take out the thinking work by providing a list of all outstanding invoices and balances so that customers can easily tick off the relevant invoices relating to the payment)
- Allow sufficient flexibility in filling out remittance forms (i.e., allow for partial payments/allocations against invoices, etc.)
- Incorporate online smart checks to avoid errors (e.g. track the running total of invoices selected to ensure that this does not exceed the total payment amount)
But ultimately, the key that turns the lock will be leveraging automated AR software solutions. Here's why.
Apart from the significant benefits automation software holds for business growth opportunities, it significantly reduces the time and effort that AR teams need to spend on extracting payment advice from customers.
By leveraging AR software, companies can manage the entire remittance process on auto-pilot and read and interpret client-specific requirements with zero manual intervention.
The benefits of leveraging automation software for business remittance advice
Companies can't afford to play catch-up in a fast-paced environment, especially regarding their revenue stream and cash flow. Fortunately, leveraging AR automation software has become the saving grace and secret sauce during collection.
Speed up the processing power:
AR automation technology helps facilitate payments at lightning speed. Automating matching payments to the corresponding invoices minimizes manual effort and the chances of errors that often occur in manual data entry, meaning your AR teams can focus on additional business-critical tasks. Yay!
AR software reconciles payments against invoices in real-time, enabling quicker identification of discrepancies or unpaid invoices. They provide a clear overview of outstanding payments and reduce the time needed to track missing payments. Now that's the dream!
No risky moves or errors
Automation also significantly reduces the likelihood of human errors in data entry and matching invoices with payments. This accuracy ensures that the right amounts are credited to the correct invoices paid, preventing customer misunderstandings or disputes.
Improved visibility, record keeping and reporting:
AR automation software also often offers comprehensive additional reporting and analytics functionalities. They provide insights into payment trends, outstanding invoices, and collection timelines, empowering teams to make informed decisions and optimize collection strategies.
In addition, AR automation holds significant power when it comes to reducing labor, costs, and growth opportunities, empowering AR teams to focus on strategic initiatives, customer relationships, and proactive measures rather than getting bogged down by manual, time-consuming tasks.
System1A and Remittance Advice: Let the software do it for you
Turn unallocated payments into something of the past with System1A's online business remittance advice and AR automation tool. By supporting and integrating with your ERP, System1A automatically collects and aligns client-specific remittance information with the correct invoices and payments, ensuring an optimized and streamlined order-to-cash cycle: zero bottlenecks included. How? Here's a glimpse:
Analytical and Insightful Reporting:
With System1A in your arsenal, AR teams can leverage real-time, on-demand reports, providing information in a multi-indexed format to view statuses, monitor activity, and make decisions. It also provides teams with high-level and graphical views that can be drilled down into the required targeted details to confirm remittance advice details.
Effective Collection of Accounts Due:
Never miss a beat with System1A, as it automatically links PODs and invoices together with any other supporting documents. It also identifies incomplete documents and information necessary to ensure payment, such as areas where clients have failed to provide adequate information regarding remittance.
Complete Customer and Supplier Document Management
Nothing hurts customer trust and business reports quite as much as being misaligned regarding payments and remittance advices. Customers want to feel rest assured that their payments are accurately tracked and archived. However, that often means paperwork and lots of it.
With System1A, AR teams can search, view, and send documents whenever needed and immediately find and download documents to meet audit, customer, and supplier requirements.
Reduce administrative tasks and costs by having a digital archive that is secure, centralized, and user profile-based
Ready to tap into the all-in-one application to manage all your company's accounts, communications, deliveries, interactions, payments, receipts, and reporting?
Explore Financial Information Symmetry at its finest and request your free trial here with South Africa's leading AR automation software.