Everything You Need to Know About Order to Cash (O2C) Process

11 December, 2019
15 min
Crystal Crawford, Associate Director, Talent Acquisition

Table of Content

Key Takeaways
Chapter 1: What is Order to Cash?
Chapter 2: Challenges Faced by the O2C Teams
Chapter 3: Revamping Your Order To Cash Process With Technology

Key Takeaways

  • The 7 major O2C process steps and how they help increase a company’s revenue growth and build customer relationships
  • Automation in O2C and how it plays a pivotal role in resolving challenges such as order diversity, manual invoicing, and siloed workflows
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Chapter 1: What is Order to Cash?

Order to cash cycle, commonly abbreviated as OTC or O2C, refers to all the steps involved in processing customer orders from the moment a customer places the order to when payment is received and applied to accounts receivable.

The Order to Cash process involves several stages, including entering the order, fulfilling it, invoicing the customer, collecting payment, managing accounts receivable, and reconciling payments.

By managing this process effectively, a business can ensure that customers receive their orders on time and that payments are collected promptly.

Different businesses adopt different Order to Cash models. Some businesses choose a shared service model, while others might outsource certain parts of the accounts receivable process. Regardless of the approach, the goal is always the same: to manage the process efficiently and effectively to ensure customer satisfaction and timely payment collection.

What Are the Steps Involved in the Order to Cash Process?

The Order to Cash process flow outlines the end-to-end journey, starting with obtaining an order from a customer and concluding with payment received for the order. Listed below are the eight essential steps that make up the Order to Cash cycle:

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  1. Order Placement and Management

    The O2C cycle begins with order management. This usually happens when a customer makes an order. Businesses that use automation let different departments start their tasks right away. These departments get notified automatically, which helps in completing orders on time.

  2. Credit Management

    Once an order is placed, the supplier credit department evaluates the credit risk of the customers. A proper credit management process involves a thorough review of the customer’s credit portfolio and having a credit policy. This ensures that the suppliers are accepting orders from customers who will be able to pay them back.

  3. Order Fulfillment

    During order fulfillment, the inventory is constantly checked and updated to avoid any orders that cannot be fulfilled. However, suppose a situation arises where the order is processed, but the product is out-of-stock/not in service anymore. In that case, the customer must be immediately informed, and the order should be canceled immediately to avoid any untoward issues regarding billing and payment. 

    Fulfilling the order within the said period prevents unnecessary hassle for the company and solidifies the customer’s trust in the company, which is vital.

  4. Order Shipping

    As a next step, the order gets prepared for shipment, and it is handed over to the carrier services, who deliver it to the customer. After the delivery, the order to the cash team collects the following documents from the carrier service:

    • Proof of delivery – The document includes the list of goods sent and their quantity, signed by the customer’s warehouse representative.
    • Bill of lading – The detailed list of truck cargo in the form of a receipt that the shipper of the cargo gives to the person consigning the goods.

    In case of any dispute resolution, these bills are considered for the resolution process.

  5. Customer Billing or Invoicing

    Invoicing is important post-delivery to ensure a smooth and hassle-free payment from the customer. The billing & invoicing team generates invoices and delivers them to the customers via emails, postal mail, EDI, fax, and other channels. 

    Once the customer makes payment and the order to cash team receives it, the order to cash team marks their open invoice as closed.

  6. Payment Collections

    Organizations have dedicated collections teams that are responsible for recovering outstanding invoices. Collections or dunning can be done via calls or emails. This process is vital, primarily when a company trades in its goods on credit. 

    However, if there is a lapse in the payment and the invoice remains unpaid, the customer must be flagged, and their credit must be put on hold. The organization should review this periodically to keep themselves updated with bad debt forecasts and proceed accordingly.

  7. Cash Application

    Once the payment is received, it is then matched with the open invoice to reconcile cash. It is then added to the general ledger for the record. If a dispute arises, it should be resolved instantly to avoid any further workload on the collections department.

  8. Deductions Management

    The last step of an order-to-cash cycle typically involves resolving disputes. The customers might raise some disputes like short payments, trade promotions, pricing disputes, or returns disputes. This is then handled by a specific deductions team that thoroughly researches the validity of the dispute. Based on the validity of the dispute, the customer is notified about the same.

Why is O2C Important for Your Business?

The Order to Cash process is critical for every business as it helps improve cash flow by reducing bad debt, and operational costs, and enhancing customer satisfaction. Efficiently managing the process ensures prompt invoice delivery, on-time payment collection, and accurate order fulfillment.

Chapter 2: Challenges Faced by the O2C Teams

The biggest challenge the accounts receivable teams face is that they work in a siloed fashion. This means that credit teams have no clue about the ongoing collection activities. This siloed culture results in poor customer experience and higher DSO, which leads to increased write-offs.

Let’s learn a few major problems faced by the O2C teams:

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  • Manual Invoicing
    In most organizations, making invoices is often done by hand because customers have various invoicing preferences. For instance, large customers prefer their invoices to be uploaded to their A/P portals, while SMBs prefer paper-based invoices. To accommodate everyone’s preferences, A/R teams manually create invoices. This process is time-consuming and prone to mistakes.
  • Accepting Multiple Payment Formats
    As businesses operate on a global scale these days, accounts receivable teams face the challenge of managing diverse payment methods. For instance, some customers use checks, while others opt for electronic forms like ACH, credit cards, BACS, and SEPA. Dealing with international payments also brings about the complication of forex charges, making the task more intricate.
  • Reactive, Inefficient Collections Process
    Every day, collections teams manually prioritize which customers they have to reach out to first. But they do this without real-time visibility over the customer’s credit risk and payment posting status. So, sometimes, they miss the at-risk customers and contact the low-risk customers who would have paid on time.
  • Slow Dispute Resolution
    When customers raise disputes, the deductions management team collects claim documents, proof of deliveries, and bills of lading by hand. They then investigate and work on fixing the issue. This takes a lot of time, and A/R teams miss chances to get money back from wrong deductions.
  • Siloed O2C Operations and Lack of Data-Driven Decisions
    The lack of integrated operations in Order to cash can lead to accidents. For instance, a collector reaching out to a customer doesn’t have visibility on the payment posting status. So, the collector might reach out to a customer who has already paid – leading to a poor customer experience and delayed recovery.
  • Higher Operating Costs
    In big companies, operating costs are normally higher. The order-to-cash process cycle also includes extra expenses like bank lockbox fees, billing, and invoicing costs, among others. These higher expenses and the slow recovery of money owed can affect the available working capital.

Chapter 3: Revamping Your Order To Cash Process With Technology

The Benefits of Revamping Your O2C Process

Now that we know that the order to cash process can make or break a business, it becomes essential to optimize its flow. By revamping the Order to Cash process using cutting-edge technologies, businesses can enhance their cash flow and achieve greater success. 

In this section, we’ll delve into the advantages of Order to Cash optimization through the use of advanced technologies: 

  • Optimizing Cash Flow

    In this uncertain economy, most organizations strive to enhance their working capital by reducing DSO and bad debt reserves. AI-powered Order to Cash solutions can help in optimizing cash flow. 

  • Faster Implementation with Lower IT Costs

    CFOs and finance leaders prioritize faster implementation and lower IT costs for digital transformation initiatives. Automated Order to cash solutions that integrate easily with ERP systems allow for faster analysis of ROI.

  • Real-time data availability leads to improved decision-making

    The centralized data repository allows employees to access the required data at any given time. On top of that, a notification system to trigger data updates ensures that the records are maintained correctly. You can also integrate multiple systems to ensure data consistency. For example, your order management system can be easily integrated with the inventory management system via ERPs to ensure that all the data is accurate in real-time.

    Additionally, businesses can automate their invoicing system to enable it to pull in order details, check the credit limits, set optimal payment terms, and send invoices.

  • Standardized systems

    Seamless system integrations for companies where the teams work on different CRMs allow easy data migration and eliminate siloed workflows. All the actions and data can be readily accessed for grouping and analyzing as reports or audit trails at the click of a button.

    Given how complex the entire Order to Cash process is, a standardized working model can optimize all sub—processes: invoice creation and delivery, receivables collection, payment processing, and reconciliation.

  • Customer satisfaction

    Meeting customer requests effectively is vital for building loyalty and ensuring timely payments. Businesses adopting a ‘customer first’ approach are overhauling their Order to Cash process. They’re doing this to make customers happier with features such as multiple digital payment options, self-service portals, e-invoices, etc.

  • Better tracking and visibility

    With a standardized process and an automated dashboard set in place, your analysts can identify high-risk accounts and do the needful to close the accounts before they become overdue. Since everything is tracked and recorded, the key stakeholders can easily view the status of their receivables and other process dynamics.

How Can HighRadius Help?

Implementing automation in Order to Cash process can help businesses streamline their operations, reduce errors, and improve overall efficiency. Below are some use cases on how Highradius can help with automating your Order to cash process.

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1. Credit Management

With the HighRadius Credit Risk Management system, you can reduce bad debt and improve analyst productivity. Below are some of our benefits of the same.

  • 100% Real-Time Credit Risk Monitoring to Ensure Lower Bad Debt

    Track changes in customer credit risk and payment behavior, and access unlimited customer credit reports to get 360° visibility. Revise credit limits and rescore your customers based on real-time credit risk alerts

  • Lower Blocked Order Volume with AI-Based Predictions

    Predict blocked orders using historical order volumes and payment patterns. Enhance credit decisions with AI-powered order release recommendations. Automatically release blocked orders using data gathered from EIPP and Cash Application.

  • 67% Reduction in Customer Onboarding Time

    With a customizable online credit application, you can capture complete and accurate credit data. Additionally, you can leverage pre-filled applications from sales or auto-extracted customer data from CRM tools and receive real-time alerts whenever your customer submits the application to begin the credit evaluation.

2. EIPP

With the HighRadius EIPP, you can enable frictionless billing and payments globally. Below are some benefits of the same.

  • 150+ Global Payment Support for Your Buyers

    Let your buyers make payments through 150+ payment methods, including ACH, Credit Cards, PAD, PayPal, NACH, SEPA Direct Debit, GiroPay, iDEAL, Bancontact, Trustly, POLi.

  • 70% Lower Invoicing Costs with Automated Invoice Delivery

    Auto-generate invoices and customize them based on your branding requirements. Automated integration with A/P portals(SAP Ariba, Coupa) and accounting systems(QuickBooks, Sage) to deliver invoices through emails, postal mail, fax, etc.

  • Improved Customer Experience with a Self-Service Portal

    Enable a low-touch buyer onboarding through email invites, self-registration, and single sign-on(SSO). Let your customers schedule payments, pay in installments, make partial payments, and support complex customer hierarchies, including parent-child scenarios.

  • Frictionless Payments with Integrated Payment Links in Dunning Emails

    Enable businesses to accept payments on the go by setting up guest payment pages and including embedded payment links in Dunning emails and websites.

3. Collections Management

With HighRadius Collections Management , you can lower bad debt and improve analyst productivity. Below are some of our benefits.

  • 30%+ Improvement in Collector Efficiency

    Make data-driven prioritization and allocation of customer accounts with automated email correspondence, automated invoice status tracking, and in-app dialing to utilize collector bandwidth efficiently

  • 20%+ Reduction in Past Due

    Increase the number of calls by 2X, touch-base 10X customers through automated emails, and enable immediate action with payment links in email correspondence leading to the reduction in past due.

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4. Cash Application

With the HighRadius Cash Application, you can apply cash faster, eliminate bank lockbox fees, and improve analyst productivity. Below are some of our benefits.

  • 80% Automation Rate for Cash Application

    Automatically match payments, and remittances to the open invoices and apply cash accurately even with an incomplete or inaccurate invoice number

  • 100% Elimination of Bank Key in Fees

    Save 100% lockbox key-in fees by applying AI-based, multi-OCR engine to capture noise-free and accurate check remittance.

  • 100% Automated Remittance Aggregation

    Auto-extract remittances from email bodies and attachments (checks, customer websites, and AP portals) across all file formats and languages with automated remittance software and web bots.

  • Automated Deduction Coding

    Auto-identify short payments, capture reason codes and map them to the ERP-specific deduction codes.

  • Faster Exception Resolution

    Resolve deductions faster in no/missing remittance scenarios, where the system predicts invoices as potential remittances. Reduce manual customer master data maintenance

  • 30-40% improvement in Analyst Productivity

    Improve analyst productivity by leveraging automated remittance capture across all sources, which helps reduce the time spent on repetitive non-value-added tasks.

5. Deductions Management

With the HighRadius Deductions Management, you can improve analyst productivity by automating the research time and getting AI-based validity predictions.. Below are some of our benefits.

  • 40%+ Improvement in Analysts’ Productivity

    Automatically aggregate backup documents, capture details, and use auto-match algorithms that help significantly improve the analysts’ efficiency.

  • 20%+ Reduction in Deductions Days Outstanding

    Quickly identify the deductions by deduction auto coding and automated research with matching algorithms, resulting in lower resolution time.

  • Up to 60% Net Recovery Rate(NRR) Improvement

    Leverage validity predictor to identify invalid deductions and send denial letters or automatically populate web forms. This enables the team to look at invalid deductions below the current auto write-off threshold, thereby increasing the NRR.

  • Automate Correspondence for Faster Deductions Resolution

    Automatically send credit memos and denials to your customers’ A/P portals, email, fax, or office address. Ready-to-use, multi-language templates ensure effective communication and better customer experience.

With HighRadius’ AI-powered solutions, businesses can optimize their Order to Cash process and achieve faster, more accurate results. Also, this can help businesses streamline their operations and improve their bottom line by fast-tracking collections, achieving zero-touch cash posting, onboarding customers faster, monitoring credit risk in real-time, auto-aggregating claims, and seamlessly integrating with popular ERPs.

If you want to learn more about how HighRadius can help your business achieve these benefits, talk to our experts today.

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