Unapplied Cash: Challenges, Risks, and Solutions
Anne E. Terwilliger – Senior Associate
In the security alarm and personal emergency response (PERS) industries, trust, accuracy, and operational reliability are fundamental. One recurring, but often underestimated, issue is the accumulation of unapplied cash on customer accounts. While unapplied cash may seem like a harmless accounting artifact, excessive balances can create operational, financial and, in some cases, regulatory challenges. Many organizations do not even realize that they have an unapplied cash balance growing each month.
Unapplied cash typically arises when customer payments are received but not correctly matched to invoices. This can occur due to partial payments, missing references, payment timing differences, or system limitations. In small volumes, these discrepancies are manageable. However, when unapplied cash accumulates across hundreds of accounts, it becomes a systemic problem.
One major issue is distorted financial reporting. Large unapplied cash balances can overstate liabilities. That can push debt ratios out of compliance with loan covenants triggering higher interest rates and reduced borrowing capacity.
From a compliance and governance standpoint, holding significant amounts of unapplied cash may attract regulatory attention. Consumer protection standards increasingly emphasize transparency and fair treatment particularly, in the case of PERS customers, for a vulnerable population. Some companies may only send out statements when a customer owes them money, making unapplied cash credits on a customer’s account unnoticed by the account owner. Regulators may view this as an unfair retention of customer funds. They may further view growing unapplied cash balances as masking deeper system or process problems.
Unapplied cash must be reconciled in a customer’s account before it can be closed and any refunds issued if due. This gets more complicated when the company is notified of an account holder’s death. These notifications may not happen until monthly auto-payments have continued past the date of death. Companies must confirm that the customer passed away through a death certificate or other means and then verify who is legally entitled to any refunds (executor, spouse, power of attorney). If refunds are not issued properly or on time, the funds may need to be turned over to the state under unclaimed property laws creating extra administrative cost.
If a company maintains a policy of not closing accounts or issuing refunds until equipment is returned, and of continuing to bill customers until that time, this policy should be clearly disclosed and prominently displayed in the customer agreement. Customers who believe they are entitled to a refund due to unapplied funds may otherwise be surprised to discover that ongoing billing has offset or eliminated that balance.
Another significant customer concern associated with unapplied cash is the erosion of a customer’s sense of security and confidence in their life safety service provider. When cash remains unapplied, customer accounts may appear past due even though sufficient payments have been received. As a result, organizations may initiate outbound collection efforts focused on individual overdue invoices rather than the customer’s true open balance. In reality, the account is current once unapplied cash is correctly applied to outstanding invoices. Such unwarranted collection activity can create an uncomfortable and confusing customer experience.
So – how do you tame the unapplied cash beast? The first step is to get an accounting of all unapplied cash on customer accounts. Hold daily or weekly unapplied cash reviews between the billing and finance teams. Contact customers to understand which invoice(s) they intended the payment to be posted. Provide customer incentives to pay by credit card or ACH where payment posting is automatically tied to a specific invoice. Send statements to all customers that have either a credit or debit balance on their account. Develop a thorough understanding of how your financial software manages EFT disputes and chargebacks. Determine whether funds are automatically removed from an invoice when a dispute is initiated and, if the dispute is resolved in your favor, whether those funds are automatically reapplied to the original invoice. If the system does not reapply the funds, they may be recorded as unapplied cash and will require manual reapplication to ensure accurate cash posting.
Addressing unapplied cash proactively helps prevent it from becoming a significant administrative burden over time. If your company would like assistance in managing unapplied cash, please contact TRG Associates at 850-395-0548.