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Payment is on the way: Remittance advice explained

Payment is on the way: Remittance advice explained
Are you required to notify a vendor of payment? Communication is an important part of building long-term engagements. Remittance advice keeps your vendors in the loop, creating visibility and building trust. Learn what remittance advice is, how it is used, and when to send it.

Communication and visibility are two of the most important aspects of long-term buyer-to-supplier engagement. When exchanges of goods or services occur between these two parties, the accuracy and timely supply of information make the difference between simply completing an AP/AR cycle and fostering sustainable vendor relationships.

What is a remittance?

Payments made from a buyer to a supplier or contractor are known as remittance. This term is generally reserved for electronic or online payments, and most specifically payments made internationally. Whether the payment is made by a US-based company to an overseas contractor or the money is sent by a migrant farmer to their family in their country of origin, it is considered remittance.

The common denominator is that these payments are generally electronic funds transfer (EFT), utilizing the Automated Clearing House (ACH) and wire transfers. Remittance payments are initiated by a payer, processed by a third party, and received by a payee in their local currency. Remittance payments are subject to fees at various steps in the process and include variable timelines depending on which method is used. Because of this lag in time from when an invoice is sent and when a payee actually sees the funds in their account, any communication that occurs during this time provides visibility to both parties.

What is remittance advice?

A common practice of communication while a payment is processing is known as remittance advice: documentation that provides detailed information about the payment. This information is sent by accounts payable employees to a payee to notify that a payment has been initiated. The accounts receivable department relies on this information to track incoming payments as well as to correctly apply payments. A check stub is a familiar form of remittance advice: it is not the payment itself, but does provide the payee with data about the payment including applicable tax, if the payment was subject to deduction, and payer contact information.

Why is remittance advice used

In the medical field, there are specific HIPAA legal guidelines for electronic remittance advice (ERA) as it relates to the coding used to describe coverage and benefits to protect the privacy of a beneficiary. Medical billers will include remittance advice remark codes (RARC) , claim adjustment reason codes (CARC), and any patient responsibility (PR) that relates to a specific claim. However, in other business settings, there is nothing so formal. Remittance advice is not a required document. The information is considered a courtesy from payer to payee.

Payment processing can take anywhere from a few days up to weeks depending on the payment method. Rather than leaving suppliers guessing if (or when) a payment has been processed, remittance advice provides an assurance that the payment is coming. While remittance advice is not to be considered confirmation of the payment itself, the information it provides helps both parties keep track of the payment in process. Further, remittance advice provides a vital document in a paper trail should an audit occur. Accounting departments can use this information to correct bookkeeping errors and to determine if a payer has an outstanding balance.

What to include on a remittance advice slip

  1. Payer’s name and address. AR will need to be able to determine what account to apply the payment to. Subsidiaries and subcontractors should know ahead of time if they need to identify the name of a parent or umbrella company.
  2. Payee’s name and address. Ensuring that the legal business name of a recipient is accurate helps to prevent delays in payments, confusion, and even fraud. It is very critical to have the correct address if remittance advice is being sent via email. If the information gets sent to a general company email address, the AR team may not receive the information they need.
  3. Payment method. Identify to the payee the method of payment that was used and make sure the method aligns with contractual obligation.
  4. Payment amount. State the amount of the payment and include information on whether the payment is a partial payment or if discounts or deductions were applied.
  5. Invoice number. This will help the AR team match up the payment to a specific invoice. Knowing the applicable invoice number is imperative for buyers who use the same vendor frequently.
  6. Payment date. This is the date that the payment was initiated, and it helps the AR team know when to begin to keep an eye out for the payment to arrive or be deposited.
  7. Estimated payment processing window. Payments have a processing window, and providing payees with an estimated time they will receive their payment can help to flag both parties if the payment isn’t received by the anticipated date.

Types of remittance advice

Formatting of remittance advice will be different based on payment method and business practices. Here are some common examples.

  1. Basic remittance advice. Simply put, remittance advice is any document that communicates to a payee that the invoice they submitted has been approved and that the payment has been initiated. Some businesses may choose to send a paper remittance, or literal letter, to a payee stating the invoice is in good order, the amount that will be paid, and to which invoice it should be applied.
  2. Removable invoice advice. Some companies’ invoices include a removable document included as a portion of the invoice. This is known as removable remittance advice. The vendor is indicating preferences for communication when they receive a payment. AP teams can remove this document from the invoice, fill in the information, and send the document with their payment.
  3. Scannable remittance advice. Some businesses will provide remittance advice that is formatted for digital capture providing ease to payees in their data entry.

How to send remittance advice

How remittance advice is sent will depend on the payment method used and it is best practice to align the two. Paper remittance advice is sometimes included with a check payment when sending through the mail. This choice is slow and may still leave payee’s in the dark as to where their payment is since the notification itself is accompanying the payment. Email remittance advice is a direct and fast choice for communicating to payees about EFT payments with information included in the body or attached to an email.

Conclusion

It may feel like this kind of communication is falling out of favor in a digital landscape of dashboards and real-time data. Communication, however, is never a waste of time or resources. Remittance advice is a great option for creating visibility in the AR and AP cycle. Vendors that don’t have to guess at when a payment is on the way will appreciate the touch point, helping to foster long-term engagements.

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