Everything You Need to Know About Order to Cash

What is Order to Cash ?

Order to Cash (O2C or OTC) is a crucial finance process that encompasses all the steps involved in receiving and fulfilling customer orders, from the initial purchase order to the payment collection.

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.

Why is O2C important for your business?

Order to Cash is critical for any business as it helps improve cash flow, reduce operational costs, and enhance customer satisfaction. Managing the process efficiently ensures that invoices are sent out promptly, payments are collected on time, and orders are fulfilled accurately. The more efficient a company’s operational Order to Cash processes are, the higher its chances of spending less time on collections. It enables the analysts to shift their focus from undue payments and invoices towards reducing and controlling risks and optimizing commercial growth, which ultimately leads to improved cash flow.

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The Order to Cash Process Flow Explained

The Order to Cash process map 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 seven essential steps that make up the Order to Cash cycle:

• 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 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.

• 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 them 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 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.

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• Cash Reconciliation and Ledger Management

  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.

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

• Order Diversity

  Orders can be received via email, 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, and SEPA. Accepting international payments also involves forex charges.

• Reactive, Inefficient Collections Process

  Collections teams manually prioritize which customers 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.

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How Automation is Transforming the Order to Cash Process

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 A/R leaders for their digital transformation initiatives:

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

  Automation of specific O2C processes such as cash application is no longer enough. An integrated receivables process is the future of automated Order to Cash systems, connecting various A/R processes and ensuring real-time data flow to drive data-driven decisions.

• Real-Time Data for Improved Decision-Making:

  For a finance executive of a large enterprise, it is crucial to have real-time visibility on critical metrics such as DSO, bad debt, and risk exposure. With macroeconomic fluctuations, finance leaders need to monitor global receivable health in real-time to make informed decisions.

• Optimizing Cash Flow:

  In uncertain economies, organizations focus on improving working capital by reducing DSO and bad debt reserves. AI-powered Order to Cash solutions can increase cash inflows and optimize 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 allows for faster analysis of ROI.

FAQs on Order to Cash

What is the first step in the order-to-cash process?

The first of the Order to Cash process steps is receiving a customer order. This initiates the cycle that encompasses all activities, from order placement to payment processing, ensuring the timely delivery of goods or services to the customer.

What is O2C transformation?

O2C transformation is the process of optimizing and automating the order-to-cash cycle to improve efficiency and customer experience. It involves integrating various systems and processes into a single, end-to-end solution, reducing manual effort and errors, and improving cash flow management.

What is an order-to-cash example ?

An example of an order-to-cash process is a customer placing an order online, the order being fulfilled and shipped by the seller, and the payment being processed through an automated payment gateway.