Order to Cash Process: What You Should Know

Whether through an ecommerce platform, email or direct contact with a sales rep, when a customer makes a purchase, the order to cash (O2C) process kicks off. Most companies spend much of their time and resources–through branding, marketing and sales– on getting those all-important orders to bring in revenue and enhance customer relationships. But shifting focus to improving your order to cash cycle can result in significant benefits as well.

No doubt about it, the fastest way to improve your order to cash process is with technology. From beginning to end, automation and AI-powered software solutions can transform every step of the O2C process. A streamlined and optimized order to cash process reduces errors, improves the customer experience, decreases costs and produces accessible real-time data for finance teams and management to use in reporting and decision making.

The 8 Steps in the Order to Cash Cycle

The order to cash process is straightforward, starting with the customer placing an order and ending with their payment. In between those steps, the cycle includes order entry and fulfillment, invoice creation, payment collection and reconciliation. It’s important to manage this process effectively to make sure your customers receive their orders quickly and you get paid promptly. 

Some businesses manage every facet of the cycle, while others choose to outsource different parts of the process. No matter which model you follow, your goal should be a cohesive, streamlined process all the way from fulfillment to payment.

1. Order Placement and Management

As soon as a customer places an order, it must be managed to ensure its timely and accurate fulfillment. This is accomplished through a series of actions that ripple through your business. New orders must be organized and each department involved has to be notified.

2. Credit Management

The best time to take care of credit issues that may show up at the end of the cycle is before they occur. That’s why it’s critical to be diligent with credit management, the second step in the O2C process. Once an order is placed, if credit is applicable, the customer’s credit risk must be evaluated. First-time customers should be sent automatically through a credit approval process which includes a review of their credit history against your company’s credit policy. Returning customers with current credit approval can be sent directly to the fulfillment step. The bottom line is you want to accept orders on credit from the customers who will be able to make payment on time.

3. Order Fulfillment

During this step of the process, inventory must be continually checked. Updated information is necessary to avoid accepting orders that cannot be shipped due to lack of inventory. If an order for an out-of-stock item does manage to go through to fulfillment, you must flag it and notify the customer immediately. 

4. Order Shipping

Product logistics and high performance standards are key in this step. Shipping must be immediately updated from order and fulfillment functions and coordinated with carriers. After delivery, at least two documents need to be collected: a signed proof of delivery that shows a list of goods delivered and the quantity; and a bill of lading (receipt) from the shipper detailing the truck cargo.

5. Customer Invoicing

Invoices–complete with order details such as order date, cost, credit terms and shipping date–  are created and sent to customers through a variety of channels in this stage. Accuracy and timeliness are critical here. Any delay or inaccuracy can result in cash flow issues that impact the entire business and yield unreliable forecasts.

6. Accounts Receivable

The next step in the O2C process is accounts receivable. Chasing late payments is not fun–or cost effective– so it’s essential that payment reminders are sent at pre-set intervals before payment is overdue. 

7. Collections and Reconciliation

Most businesses have a person or team responsible for dealing exclusively with outstanding invoices.  Dunning can be performed through calls or written correspondence. This task is vital, especially if your company functions on credit. As soon as an invoice lapses into overdue status, the customer should be contacted and handled according to your specific credit policies.

8. Reporting 

This final step uses data from the order to cash cycle to give leaders insight into how the O2C process impacts other business areas, including customer relationships, DSO, onboarding and more. The order to cash cycle is highly interdependent, so even miniscule inefficiencies occurring in one step can lead to bigger issues later in the cycle.

Why is the Order to Cash Process Important?

Successful management of the O2C cycle helps you receive payments on time while delivering value and a better experience to your customers. In addition, when the order to cash process is optimized, it will reduce operational costs and improve cash flow. An O2C cycle running like a well-oiled machine means orders are fulfilled quickly and accurately, invoices are remitted in a timely manner and payments are made on time. 

All these efficiencies result in your spending less time on collections, managing customer complaints and correcting mistakes. Consequently, your finance professionals are able to shift focus away from tedious tasks and perform more strategic work.

Common Obstacles Order to Cash Teams Face

The siloed nature of most AR or finance teams is one of the biggest challenges a business has to overcome. When teams are unaware of what’s going on in other areas, it results in higher DSO, increased write-offs and an undesirable customer experience. For example, without integrated operations, you may reach out to a customer who has made payment, but the payment hasn’t been posted yet. That interaction is a waste of time and could possibly lead to friction with a valued customer. 

A number of problematic issues are associated with a disconnected O2C process:

Order Diversification–Orders coming in from a variety of sources–phone, email, direct contact–and especially, if they are entered into your system manually, leads to bottlenecks in processing and ultimately a bad customer experience which could include non-payment.

Manual Invoices– Because customers can have differing preferences on how they like to receive invoices, AR teams are stressed with having to manually create and send invoices in order to please each customer. According to the Aberdeen Group, businesses with efficient O2C systems use manual input for only 16.2% of their invoices.

Multiple Payment Formats–While providing multiple payment formats enhances your customers’ experience and increases the likelihood of on-time or early payments, this benefit adds a layer of difficulty for AR teams that have to reconcile accounts manually.

Ineffective Collection Efforts–Collections teams have to prioritize which accounts to follow up with every day. When the dunning strategy is driven by manual processes, there’s a lack of real-time visibility which means the most at-risk customers could be passed over and low-risk customers are contacted.

Dispute Resolution–Any time a customer questions something, you have to research and gather various documents. This is time-consuming and costly.

How Advanced Technologies Improve the Order to Cash Process

Although there are best practices you can implement to improve a manually-driven O2C process, real transformation happens with advanced technologies that go beyond simple automation.

The most effective and efficient order to cash process will provide different teams within an organization with real-time, accurate information any time they need it. Interconnected data is only the beginning. In addition to a shipping management solution, automation and AI-driven platforms that seamlessly integrate with your ERP or accounting system are the tools you need to experience the following benefits:

Greater Efficiency

Teams that have to contend with manual paper-driven processes and legacy accounting systems which lack features or don’t communicate with each other, will appreciate an automated O2C process. Information is connected, accurate and accessible. Tedious, time-consuming manual tasks are replaced with automated ones. And automated processes are easily scalable.  

Fewer Errors

It’s easy to make mistakes when financial data is siloed and manually input. A single inverted number can mean the wrong customer was invoiced or the amount owed you is less than what it should be. 

Automation greatly reduces the number of errors caused by human inputting. Data is transferred directly between systems resulting in far fewer mistakes.

Improved Customer Satisfaction

Today’s customer expects service that’s quick and accurate. One mistake can tarnish your reputation and color their experience. With an automated order to cash process, you’re able to deliver an experience that is smooth and professional. One feature of an automated O2C process that rates high with customers is the availability of a self-serve portal for purchases, order tracking and payment history.

Higher Profitability

Because streamlined order to cash processes reduce the time it takes to receive payments, cash flow is improved. Decreases in DSO of up to 30% are not uncommon. 

Boosted Employee Satisfaction

Automating the order to cash cycle isn’t about removing humans from the process, but is about getting rid of the uninspiring manual tasks involved. With automation, your finance team is free to work on more challenging initiatives that engage and stimulate them. They will be happier as they contribute to the growth of the business.

Businesses that want to stay ahead have to start examining every facet of their operations. Improving the order to cash process can reduce operational costs and improve the customer experience. 

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Payference is an all-in-one cash management tool for small to mid-market businesses. Connect with one of our experts to learn more about how automation and smart technologies can improve your order to cash cycle.