What is order-to-cash process + how to optimize your O2C cycle

What is order-to-cash?

Order-to-cash (O2C or OTC) is a top-level term used to describe a company's entire order processing system. It is a set of business processes that include receiving and managing entire orders, invoicing, customer payments, revenue recognition, and other finance-related activities.

The data collected throughout the entire O2C process is analyzed to help management identify opportunities for optimization. By implementing the findings of the OTC process, the company refines its supply chain management and inventory management processes. As a result, the analysis eliminates inefficiencies that may affect the company's success.

8 crucial steps in an O2C process

The process begins when a customer places a sales order to when the system generates a final report—the following section breaks down all sub-processes to outline the order-to-cash workflow.

1. Order management

The first step begins when a purchase is confirmed, regardless of the channel it comes through. An automated order management system instantly alerts all the relevant departments. It ensures a timely and accurate fulfillment of the order. You need to organize all new orders appropriately as an error results in problems throughout the process.

2. Credit management

It is prudent to deal with credit management initially to avoid issues at the end of the process. Automating your credit management system streamlines the process. The software should accordingly handle new customers, returning customers, and returning customers who you denied credit previously. Setting credit guidelines will ensure you avoid extending credit to the wrong people.

3. Customer order fulfillment

Inventory management software is vital in customer order fulfillment. Inventory needs real-time updating on the sales side to avoid accepting orders that you can't fulfill, like an out-of-stock item. The order should be in a standardized digital form for easy interpretation and prepared for shipping or a service appointment booked.

4. Customer order shipping

This step involves delivering goods or completing service orders and revolves around product logistics. When shipping items, you can automate some processes, such as sending notifications to the customer and relevant departments. Having warehouse management software helps you track products wherever they are, while a system to track deliveries helps you flag those taking too long so that you can take appropriate measures.

5. Customer invoicing

Customers should receive an invoice unless they pay for the goods at the time of ordering. Automating your invoicing system ensures it generates an invoice automatically. You can easily share the invoice with relevant departments using the software, eliminating delays and inaccuracies that could lead to cash problems. Ensure invoices are in a format easily understood by everyone.

6. Accounts receivable

Automating your accounting system is a great way to ensure flagging of overdue invoices before their due date. This way, the accounts receivable personnel can review them for any errors that may cause the delay in payment. When you identify errors, you can deal with them and send a revised invoice promptly. You thus minimize cash inflow problems for the company.

7. Payment collection

Ensure you have a system in place to notify the accounts receivable department when a customer pays an outstanding invoice. Manual payment processes cause delays and errors. A digital operations system or an enterprise resource planning (ERP) system will automatically update all concerned departments. Your system should flag overdue invoices and also put the accounts on hold.

8. Reporting & data management

High-end software programs can track data across all the steps in the O2C cycle and generate it for you. Company leaders need to analyze this data and see where the process needs improvement. For example, you can measure the days’ sales outstanding (DSO) of your company. A successful and optimized order-to-cash process ensures value, leading to prompt payments. It also frees up resources, which you can use to enhance the customer experience. 

Best practices to optimize order-to-cash process flow

An inefficient order-to-cash flow process negatively affects your relationship with the customer. The customer expects to receive their order within the time that you have promised. When business processes make it hard to deliver on this promise, retaining customers becomes problematic, which affects your profitability. A customer relationship management system (CRM) is a great help in monitoring customer relationships.

Moreover, when a business optimizes its O2C process, it can expect to reap the following benefits: 

• Streamline the overall buying process 
• Improve cash flow 
• Avoid backorders 
• Improve customer satisfaction and relationships 
• Reduce costs 
• Reduce order fulfillment time 
• Improve record accuracy 
• Have more working capital

Here are some pointers to help you get started on optimizing your order-to-cash flow process.

Establish company-wide standards 

Standards create consistency which ensures things run smoothly now and in the future. Also, as every department does their work standardly, they become better with time. As they become more efficient, targeting any process that isn't working becomes easy. Any improvement helps you to earn more.

Focus on all-system integration

Manually pushing an order from one step of the process to the other is time-consuming and prone to errors. However, if you fully integrate all your systems, you shorten the O2C cycle time, reducing the number of days it takes for order fulfillment.

Regularly monitor the order-to-cash process

Monitoring the system helps you identify areas that need improvement. Technology is constantly advancing, and you need to change what is not working. Also, incorporate alerts into your system for instances of human error so that you can be on top of it before it creates a bottleneck in your system.

Order-to-cash (O2C) FAQs

What is the difference between order-to-cash and quote-to-cash?

The O2C processes involve the effective delivery of customers' orders. In contrast, the quote-to-cash (Q2C) process includes all the O2C processes, configuration price quoting (CPQ), and the entirety of contract lifecycle management.

What is the difference between order-to-cash vs. procure-to-pay?

The O2C process aims to fulfill a sales order, while P2P involves business processes related to procurement.

What is the difference between order-to-cash and accounts receivable?

The accounts receivable process includes everything from when a customer purchases to when the outstanding debt is collected. While the O2C process consists of all business processes related to the sale until data is collected and analyzed.

ProfitWell ensures all revenue is recognized regardless of the model of operation. For more information, visit our website.

Can order-to-cash work for SaaS subscription businesses?

Businesses that work with a subscription model, especially in the SaaS space, are different in that the sale/order cycle is never complete. Also, write-offs, upgrades, downgrades, and annual contracts paid monthly, among other factors, introduce a new dimension to the order-to-cash cycle. ProfitWell Recognized is excellent at accurate revenue recognition, including deferrals.