Order to Cash(O2C) and Procure to Pay(P2P) are two complementary business processes that are almost identical in execution. While the P2P function deals with a business’s procurement cycle, the O2C process deals with the entire customer ordering and fulfillment process.
Both these functions help optimize business activities and allow organizations to improve customer and vendor relationships. Therefore, understanding the distinctions between these processes is critical for cash flow management and working capital optimization.
In this article, we will look at the differences between P2P and O2C and why they’re important to businesses.
The order to cash cycle, often known as the O2C or OTC cycle, describes how your company receives, processes, manages, and completes customer orders. This includes handling all aspects of the transaction, such as shipping the merchandise, receiving money, making invoices, and reporting. Optimizing the O2C process is crucial as they influence your bottom line and shape your customer relationships. These, in turn, impact your revenue, business growth, and customer retention rates.
The customer places an order
The O2C cycle starts the moment a customer places an order for any products or services.
The business fulfills the order
After the order is placed, the business either prepares the goods for shipment or organizes a service appointment with the customer.
The business ships the order
The goods are then shipped to the customers or the service is provided on the specified date and time.
The business sends the invoice(s) to the customer
Once the product is received by the customer or the service delivered, the business generates and sends the invoice to the customer for payment.
Receive and record the payment
Lastly, the accounts receivable team of the company will record the customer’s payment in the ledger.
Requisitioning, purchasing, receiving, invoicing, and paying for the products and services that your business procures are all part of the procure to pay (P2P) process. P2P, as the name implies, entails all the stages involved in obtaining and paying for commodities or services.
The advantages of establishing an efficient P2P process are many. Some of the advantages include eliminating manual data input, avoiding late fines (and sometimes even earning early payment discounts!), minimizing data inaccuracies and compliance difficulties, and lowering total costs.
Identify your requirements
The first step before your business places an order with a supplier is to identify your requirements—item type, quantity, quality, etc. This step helps prepare the purchase orders, evaluate potential vendors, and estimate the cost of the goods or services required.
Create a purchase requirement
After identifying your needs, the purchasing department must create a purchase requisition, which is an internal purchase request document that the accounting team must validate. If the accounting department accepts the purchase requisition, the procurement and purchase team sends the vendor a document known as the purchase order (PO). Purchase orders are the formal, outward-facing purchase requests.
Receive approval for the purchase orders
Purchase order approval can be time-consuming since they require multiple iterations from both the supplier and the customer to ensure the authenticity and accuracy of the specifications. It often requires numerous rounds of internal and external adjustments before both the parties involved in the deal accept the PO.
Receive the invoice from the vendor
Once the purchased products or services are collected by the customer, the vendor will issue an invoice to the client, who will then initiate the payment process through their accounts payable(AP) staff.
Make the payment
The customer’s finance team must ensure that the invoice is received and entered into the company’s accounting system. Some businesses perform this task manually, making the process tedious, time-consuming, and prone to errors.
The order to cash function can be considered as a mirror image to the procure to pay process. The P2P function deals mainly with the vendor or supplier side for procuring raw materials and inventory while the O2C function takes care of sales orders and cash inflow.
|PROCESS TYPES||WHAT IS ITS PURPOSE?||WHO MANAGES THE PROCESS?|
|PROCURE-TO-PAY (P2P)||Sourcing and paying for the products and services||The procurement and purchase team, accounts payable department|
|ORDER-TO-CASH (O2C)||Processing orders from clients||The sales, accounts receivable, and product shipping or inventory management teams|
Automating the P2P cycle saves your procurement personnel much time, improves expenditure management, and minimizes supply chain constraints. Here are some of the key benefits of automating P2P.
Streamline procurement processes
Procurement software improves collaboration between teams, thus allowing requisitions to be sought and authorized quickly. It helps complete all P2P workflows electronically and improves transparency and reporting.
Reduce invoice processing costs
Going paperless saves time and money. P2P software allows employees to focus on more strategic objectives instead of the tedious monotonous activities that can be done more efficiently with automation tools.
Obtain complete visibility
An automated P2P software enhances visibility throughout the supply chain, allowing buyers and suppliers to check invoice progress and shipment in real-time.
Manual and paper-based operations can be reduced or eliminated via automation. The following are some of the advantages of automating the O2C process:
Improved cash flow
Automation not only reduces the overall time to complete the processes but also helps eliminate the bottlenecks in invoice fulfillment, payment processing, and cash reconciliation. These features lower the friction associated with bringing capital into the firm, resulting in improved cash flow.
Get real-time visibility
Automating order-to-cash workflows makes it easy to track metrics using real-time dashboards. You can also share this data with the relevant stakeholders and set the necessary access controls.
Automation improves accuracy throughout the O2C process. The probability of errors occurring when machine systems communicate with one another via direct data transfer is very low. This gives businesses an edge in the competitive world with more accurate data in hand.
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