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Order to Cash Process – All You Need to Know

14 Oct, 2021 | Business Tips

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Whenever I run out of any of my favorite products, I simply order them on Amazon. I search for the item required, add them to my cart, and head to Check out. Once that’s done, I need to fill out the shipping address, billing address, and payment information.

And voila, the order is placed! I now simply wait for its delivery.

What is the Order to Cash Process

The order to cash (O2C or OTC) process is a set of business procedures for the whole order management cycle. It includes each step, from the sales order receipt, to depositing the customer payment in its bank account.

The order to cash process consists of many processes, including order management, credit management, customer payments, invoicing/ billing, and cash application. After-sales reporting offers the necessary accounting and performance metrics.

Streamlining and automating the whole order to cash process, including all the steps, can help businesses optimize procedures for better overall efficiency. Recognizing bottlenecks and areas of inefficiency are vital factors to achieving optimal productivity.

Importance of O2C Process

There are various reasons companies must strive for a significant O2C process. It has a cascading effect across your organization and offers direct links to your inventory management, supply chain management, and workforce. 

The process during the order to cash process determines the company’s cash flows. Invoicing and accounts receivable must function appropriately for the cash cycle to flow smoothly. 

Reducing the cycle time between ‘when accounts payables are due, and payment for goods and services are made’ helps the business maintain a positive cash flow.

Optimizing the process would eliminate inefficiencies within the business processes. It eventually results in having more working capital, higher customer satisfaction, and fewer bottlenecks. It also reduces order fulfillment time. 

Read about: How Closely Should you Monitor Your Inventory?

The O2C Process

The order to cash process possesses the following key steps. You can add sub-steps and additional procedures to suit the specific needs of different businesses.

Order Management

It is the first step to the cash process. Here, the businesses receive, track, and fulfill sales orders. The process begins when the order is placed and ends with customers receiving their goods or services. It is commonly used to track sales, inventory, orders, and fulfillment.

Credit Management

It’s a process that analyzes a customer’s financial health and determines if you can extend business credit. The Credit management process begins with ensuring prospective customers that they are financially sound and creditworthy to help reduce the risk of late payment or default.

Credit professionals interpret and analyze multiple data points to arrive at a logical decision of credit terms and limits to provide their customers. 

At times, even customers paying upfront are assessed for credit by vendors for several reasons, like vendors wanting to evaluate the potential for up-selling with additional products or services.

Invoicing/ Billing

Once you provide a product or service to the customer, the invoice is received. It captures the order details like billing and shipping contacts, description of the services or goods provided, and itemized costs, including taxes and fees.

A lot of organizations have order management systems that would capture these details. The OMS would process customer orders and generate invoices later. Usually, paper invoices are printed and mailed by an internal department or a third-party vendor. You can also send them via email.

Payments

When the customers make payments on invoices, they are presented either a paper check or an online billing portal. 

Customers use EIPP (Electronic Invoice Presentation and Payment systems) to access invoices and make payments online. It helps them increase the efficiency of the payments process.

Cash Application

It’s the final step in order to cash process. Applying the payment to the company’s books and reconciling your customer’s outstanding balance signals the end of a successful sale.

Reporting

Do not forget about reporting post-sales. It provides insight into an organization’s accounts receivable and helps you reveal if a company is collecting payments as expected or has impediments. 

They could be disputed invoices or late-paying customers that impact positive cash flow. Reporting lets accounts receivable teams make more informed business decisions and helps improve business performance.

Read more: Benefits of Order Control Software

Challenges to O2C Process

The process may seem straightforward, but it involves a lot of moving parts. Failure in one step results in a breakdown in the cycle. The set of business processes involved needs a great deal of attention and all departments working together. A few things to watch out for are:

  • Inaccurate sales orders
  • Dissatisfied customers
  • Delays in collection
  • Time-consuming manual invoices
  • Data security

Inaccurate orders would mean that you need to redo the orders, costing you precious time. Manual invoicing takes time and has a greater potential for errors. Thus, leading to a waste of time and delay in collections. It could complicate other business processes like payroll, accounts payable, and acquisitions.

Your company must have an eye on customer satisfaction. Any hiccups in the O2C process diminish the customer experience. You may use customer relationship management (CRM) software to manage the company’s relationship with the customers.

Data breaches may lead to dissatisfied customers, so always take your cybersecurity seriously.

Read about: How to Speed up Your Purchase Order Process 

Dear Systems O2C Process Optimization

At Dear Systems, we help clients optimize all the aspects of the O2C process like accounts receivable, invoicing, and payments. Our experience says that high-tech works best when your deployment is high-touch. 

Hence, all of our order to cash software solutions are delivered as managed services. Get in touch with us to find out how we can help you optimize the cash cycle by automating the O2C process.

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