Everything You Need to Know About Order to Cash

What is Meant by Order to Cash?

Order to cash is an essential function in finance; the entire cycle of events happens after a customer places an order until the customer pays for the order; that is, the order is converted to cash. Across industries, order to cash is also known by various other names such as quote to cash, bill to cash, etc.

Order to cash teams work in various business models – some of them choose a shared service model while others might outsource certain parts of the accounts receivable process.

Let us dive deeper into the order to cash cycle to understand the various sub-processes of it.

What Comes Under Order to Cash: Understanding the
Step-By-Step Process

• Order Placement and Management

The first step in the O2C cycle involves the customer or buyer placing the order through sales. Next, the supplier organization should ensure no delays in accepting the order or having order re-entries.

• 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.

• Order Fulfilment

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 towards 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.

• 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 O2C 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 after, these bills are considered for the resolution process.

• 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 it to the customers via emails, postal mail, EDI, fax and other channels. Once the customer makes payment and the O2C team receives it, the O2C team marks their open invoice as closed.

• Payment Collections

Organizations have dedicated collections teams who 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.

• Cash Reconciliation and Ledger Management

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

Why is O2C Important?

In finance, accounts receivable or order to cash is a necessary process that influences the company’s revenue growth and customer relationships—improving an organization’s order to cash process steadily affects the company’s business growth and revenue. The more efficient a company’s operational Order to Cash processes are, the chances are that the less time they will spend on collections, and instead of focusing on undue payments and invoices, analysts can focus on how to enable commercial growth by reducing and controlling risks.

Challenges Faced by the Order to Cash Teams

The biggest challenge faced by the accounts receivable teams 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 us observe a few common problems faced by the O2C teams:

• Order Diversity

Orders can be received via emails, telephone, fax, or directly from the supplier’s website. If there is a lapse in the order processing system, the whole O2C process faces a downstream impact. Orders are taken manually, which further slows down the process. Additionally, incorrect order processing can hamper the customer experience and lead to non-payment from the customer’s end.

• Manual Invoicing

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. Catering to everyone’s needs, A/R teams manually create and send invoices that are time-consuming and error-prone.

• Accepting Multiple Payment Formats

Accounts receivable teams often face a difficult time accepting various payment formats from their global customers. For example, some customers pay through checks, while some use electronic forms such as ACH, credit cards, BACS, SEPA. Accepting international payments also involves forex charges.

• Reactive, Inefficient Collections Process

Collections teams manually prioritize which customer they have to reach out to every day. Then, they make this decision and define their dunning strategy without real-time visibility over the customer’s credit risk and payment posting status. So, sometimes, they end up missing the at-risk customers and contacting the low-risk customer who would have paid on time.

• Slow Dispute Resolution

When customers raise disputes, the deductions management team manually aggregates claim documents, proof of deliveries, bill of lading, conducts deductions research, and tries to resolve the dispute. This makes the process time-consuming, but A/R teams lose out on opportunities such as collecting back from invalid 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 Cost

For large enterprises, the resource cost is higher. Additionally, the order to cash process cycle also involves other costs such as bank lockbox expenses, billing & invoicing costs, and many more. The higher cost of doing business and the slow recovery of receivables often impact the working capital.

Latest Trends in the O2C Process Cycle: Automation is the Future

The finance world is constantly changing, giving birth to specific trends or patterns with one question being repeatedly asked, ‘how can the order to cash process be improved?’ As a result, A/R leaders worldwide have recognized the importance of automation in order to cash processes. According to an EY report, 92% of senior finance leaders have started their digital transformation initiatives, while 11% believe they have optimized their O2C processes digitally. 

Let us understand the various parameters and focus areas of these CFOs and senior AR leaders for their digital transformation initiatives:

• End-To-End Automation of Order to Cash:

Over the years, A/R leaders have focused on automating specific O2C processes such as cash application. However, with time, they have realized the importance of an “end-to-end” process automation. An integrated receivables process is the future of automated order to cash systems. An end-to-end automation platform not only connects the various A/R processes but ensures real-time data flow across the processes to drive data-driven decisions. Therefore, an integrated receivables process is the future of automated order to cash systems.

• The Need for Real-Time Data:

For a finance executive of a large enterprise, it is crucial to have real-time visibility on their critical metrics such as DSO, bad debt, risk exposure. With the onset of the pandemic and macroeconomic fluctuations, the finance leaders have identified the importance of real-time A/R data. They are looking forward to monitoring their global receivables health in real-time to get actionable insights from reports and dashboards.

• Increased Focus on Cash Flow Optimization:

With the uncertainty and volatility of the economy, the organizations are focusing on improving their working capital by reducing DSO and bad debt reserves. Cash flow is essentially the lifeblood of any organization, and organizations can increase their cash inflows by leveraging AI-powered order to cash solutions.

• Faster Implementation Across the Globe:

Faster implementation, lesser IT costs are the top requirements for any digital transformation initiative. This is because the CFOs and finance leaders want to analyze their ROI faster. They focus on implementing automated order to cash solutions that can be easily plugged in with their ERP systems.