Maintaining accurate financial records is crucial for any successful accounting team. Remittance advice is an essential document that plays a significant role in ensuring incoming payments are correctly matched to the appropriate invoices.
The main challenge lies in efficiently sourcing and accurately interpreting remittance advice, primarily because there is no universally standardized format across all companies. This often leads to accounts receivable (AR) staff having to manually process and match these documents.
This guide provides a detailed explanation of what remittance advice is, the common challenges associated with its processing, and explores how specialized software solutions can significantly aid your AR team in overcoming these obstacles.
Remittance Advice Explained: Definitions and Key Questions
1. Defining “What is Remittance Advice?”
Following the issuance of an invoice, sellers anticipate receiving payment from their customers. Remittance advice acts as a notification sent by the customer alongside their payment, detailing which specific invoice(s) the payment is intended for. The term “remittance” generally refers to a payment made for goods or services and implies “sending back” information related to the payment. Providing remittance advice essentially means offering supplementary details about a recent payment transaction.
Remittance advice can also serve as an advance notification that a payment is on its way. Businesses sometimes refer to this document as a remittance slip or a payment voucher.
2. Exploring the Different Types of Remittance Advice
Remittance advice can take various forms and be delivered through different channels. It can be a physical document delivered via mail or a digital file sent electronically. Here’s a breakdown of common types:
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Basic Remittance Advice: This straightforward form of remittance indicates the invoice number the payment corresponds to and the total amount paid.
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Removable Invoice Advice: This type is attached to the initial invoice sent to the customer. The customer completes the remittance slip and returns it with their payment.
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Scannable Remittance Advice: As the name suggests, this slip is designed to be scanned, facilitating digital record-keeping.
Alternatively, remittance advice may be categorized based on its delivery method:
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Email Remittance Advice: Sent via email, either within the body of the email or as an attachment, this format is increasingly popular due to its efficiency and reduced reliance on paper.
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Paper-Based Remittance Advice: Typically handwritten or printed, this traditional form is mailed and includes all essential payment details.
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EDI-Based Remittance Advice: Transmitted through Electronic Data Interchange (EDI) systems, these remittances are composed of alphanumeric characters and are well-suited for businesses processing large payment volumes with automated AR processes.
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Web-Based Remittance Advice: This digital type is sent to sellers through web- or cloud-based accounts receivable payment portals, offering a streamlined approach to payment notification.
3. The Importance of Sending Remittance Advice
While not mandatory, providing remittance advice with payments is considered a standard business practice. Accounts receivable departments rely on this information for efficient cash application, the process of accurately recording revenue after payment receipt. By providing a remittance slip, customers assist suppliers in correctly matching payments to invoices, ensuring timely settlement of outstanding balances.
With the prevalence of digital payments, remittance advice is less frequently issued than in the past when it routinely accompanied checks. Today, advanced cash application tools and accounts receivable automation software, leveraging AI and machine learning, can automatically reconcile incoming payments with open invoices, often eliminating the need for manual remittance advice processing.
4. Creating Remittance Slips: Methods and Tools
Accounts payable (AP) departments are responsible for generating and sending remittance advice to their suppliers along with payments. Common methods include:
- Email (as text in the body or as an attachment)
- Physical paper documents (sent via postal mail)
- Excel spreadsheets
- Electronic Data Interchange (EDI)
- Inclusion on the check itself (typically in the memo line)
- Accounts payable portals
As businesses increasingly adopt accounts payable software, AR professionals can expect to receive remittance advice more frequently through these AP systems. These systems facilitate seamless integration into existing workflows, such as automated email notifications triggered by payment approval, payment dispatch, and invoice payment confirmation.
5. Remittance Advice as Proof of Payment
It is important to remember that remittance advice serves as a confirmation that payment was sent but not definitive proof of payment receipt. Events like data entry errors or insufficient funds can prevent an electronic transfer from completing successfully.
Therefore, auditors generally do not accept remittance slips as confirmation of payment receipt; they rely on official bank statements. However, for internal accounting purposes, remittance advice offers valuable documentation of payment dates and the corresponding receivables.
6. Key Information Included in Remittance Advice
The information contained in remittance advice can vary based on the payment method used. For example, paper checks often come with detailed remittance advice, while automated clearing house (ACH) payments might not include any remittance information.
Typically, basic remittance advice includes:
- Payee (seller) and payer (customer) names
- Contact details for both parties
- Email address (for digital remittances)
- Invoice date
- Invoice number
- Related purchase order number
- Payment method and currency
- Description of goods or services
- Payment amount and date
More detailed remittance advice may also contain:
- Payment reference number
- Paper document number
- Gross and net amounts
- Discounts taken
- Deductions
- Amounts withheld
- Amounts paid by invoice number
- Credit amounts with reference numbers
- Expected receipt date (if funds transfer is not immediate)
Understanding What Remittance Advice Looks Like
Remittance slips generally provide details about the invoices being paid and the amount allocated to each. They may also show any adjustments made to the total payment, such as deductions or credits.
The AR department uses this information to update records and apply payments to the correct invoices.
Remittance advice typically lists all the invoices being covered with a payment, along with the invoice numbers, dates, and other relevant information such as purchase order numbers. In the above remittance example, the customer has also noted the discounts they have taken.
Common Challenges with Managing and Processing Remittance Advice
Accounts receivable teams often face challenges when manually matching remittance advice with invoices. The main difficulties include:
- Dealing with varying sources and formats
- Illegible remittance data
- Complex cash application
1. Managing Disparate Sources and Formats
Obtaining remittance advice from multiple customers often involves handling different sources and formats. There is no universal standard for remittance advice, meaning it varies by company and payment method.
Checks may include remittance information in the memo line or in an accompanying document. For ACH, wire transfers, and virtual cards, the remittance advice usually arrives separately via email in various formats.
Customers are not legally required to send remittance advice; therefore, it is possible you might not receive any. When payments arrive without remittance advice, AR staff must contact customers to obtain clarification, often involving emails or phone calls.
Retrieving remittance advice, whether it arrives by mail, email, Excel, or an AP portal, can be a time-consuming task. This is particularly challenging if customers use AP automation platforms to send remittance advice because your staff will need to access multiple online portals, each requiring a unique login. As your customer base expands, this process becomes increasingly difficult to manage.
2. Dealing with Illegible Remittance Data
Remittances can sometimes be difficult to read due to blurred images, missing characters, or even handwriting. This can significantly complicate matching remittances with open receivables.
Because companies can have varying approaches to how they format remittance slips, this can make it difficult for AR staff to be sure they’re applying payments correctly.
3. Navigating Complex Cash Application Processes
The process of matching remittances with open invoices is inherently complex. A single payment could cover dozens of invoices, an invoice could be short-paid, or there could be no remittance advice at all. In some cases, payments might be accompanied by lengthy remittance advice documents spanning many pages, requiring hours to process.
Consider situations with a combination of challenges: a payment covering multiple invoices with deductions, and without any remittance advice. Complex scenarios like this can consume entire workdays as AR staff engage in extensive fact-finding, troubleshooting, and communication with customers.
Streamlining Remittance Advice Processing with Automation
Previously, companies were resigned to spending significant human hours manually resolving individual cases during cash application. Solutions like Versapay offer accounts receivable teams a streamlined approach to retrieve and match remittance advice with open invoices. Their cash application solution captures and normalizes data from diverse remittance advice sources and intelligently matches them to open invoices using artificial intelligence.
Payments made through Versapay’s accounts receivable automation software automatically provide context about the payment’s purpose, minimizing the need for separate remittance slips. When clarification from customers is needed, AR teams can leverage Versapay’s cloud-based collaboration tools for seamless communication.
Conclusion
Remittance advice, while sometimes challenging to manage, is a crucial component of the accounts receivable process. Understanding what remittance advice is, the forms it takes, and the difficulties associated with it can empower businesses to optimize their AR processes. Embracing automation and collaborative tools is the key to streamlining remittance processing and ensuring accurate cash application, ultimately saving time and improving efficiency.
