Order-to-Cash

DEFINITION

What Is Order-to-Cash?

The order-to-cash process is a standard order fulfillment process for any business that sells goods. It begins when a customer places an order and concludes when the invoice for that purchase is paid and recorded. Even if a business owner might not know it by that name, the order-to-cash (O2C) cycle is involved in every purchase a business facilitates.

Awareness and careful management of your order-to-cash process is an essential piece of planning your organization’s cash flows and time management strategies. It is important to remember that the O2C process does not end when the invoice is paid. Accurate recording and data analysis are also key to making this process as efficient and effective as possible.

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What are the key steps in the order-to-cash cycle?

While every organization has its own particular processes and policies to work through, generally speaking an order-to-cash cycle will follow a core set of steps across all industries. The following nine steps provide a strong baseline for keeping orders flowing smoothly across your business processes.

1. Order placement

Your customer places an order via an online form, an email exchange, a telephone purchase, or whichever system your business prefers.

2. Order management

The order is entered into your system to be routed to all relevant departments and individuals. With an automated order management system, instant notifications are sent to every department that will need to interact with the order.

3. Credit management

If the customer is making a purchase using credit, the order enters the credit approval process. This is especially important when dealing with a new or unfamiliar customer. If further approvals or reviews are needed, the order is routed to the appropriate staff. Otherwise, it is approved and moved on to the next step.

4. Order fulfillment

The order fulfillment step is the point where the goods or services are delivered to the customer. This step makes it especially important to have a close eye on inventory counts. An inventory management process including real-time updating on inventory levels and out-of-stock items helps to prevent complications and billing problems that can create discord in a valuable customer relationship. Inventory counts should be updated on the sales side using real-time data to ensure an accurate count and to reduce the risk of unfulfilled orders.

5. Shipping

The shipping stage requires clear communication between your order processing and logistics teams. Time is always a factor for order shipping, so regular audits that ensure that your workflows are moving smoothly and predictably are essential for this step.

6. Invoicing and billing

Once the order is shipped, an invoice must be created and sent. All invoices should all data relevant to the order in question, including:

  • Specifics of the order
  • Cost of the order
  • Terms of credit and payment
  • Order and shipping date
  • Identifying customer data

Depending on the customer and the AP system, invoices may be submitted in a variety of formats, including PDFs, Microsoft Word documents, Microsoft Excel sheets, faxes, emails, or scans of physical documents. An automated data entry solution including optical character recognition (OCR) can automatically extract all relevant data from any of these formats and enter it into your AP system.

7. Accounts receivable processing

The accounts receivable process involves working with accounts payable to confirm that all of the collected invoice data is correct and properly recorded. That often includes using three-way matching to compare information between the invoice, purchase order, and receipt of goods or services. If errors or exceptions are detected, documents are re-routed for corrections before proceeding to the approval process.

Accounts receivable is also responsible for following up on outstanding invoices. An automated system can detect and flag any payments that remain outstanding beyond a set period of time and automatically issue payment reminders to customers.

8. Payment collection

Customer payments are collected by the accounts receivable department, usually within a specific time frame in order to reduce the risk of bottlenecks and delays. This can be handled via automatic payment processing tools or via manual payments, with the former being the faster and more efficient option. Automation also greatly reduces the risk of errors such as overpayments, underpayments, and duplicate payments.

If any errors or exceptions arise during the payment collections step, your accounts receivable team will need a process for communicating your concerns with the customer clearly and quickly. Failure to pay within a designated time window may require that a customer be flagged for non-payment, and possibly placed in a credit hold. Future orders from customers who have been flagged may need to be paid for in advance.

9. Reporting and data management

Even after the order has been processed, shipped, and paid for, there is still some important work for your team to complete. All processed orders should be recorded into your data management system. This makes your OTC data easily findable and usable for future data analysis that can play an important role in streamlining, refining, and improving processes in the future, as well as identifying any persistent problem areas that need to be addressed.

INFOGRAPHIC

P2P vs R2R vs Q2C vs O2C – The Main Differences Between the Process

Check out our infographic on the differences between the P2P, R2R, Q2C, and O2C processes, and read on as we go in-depth into each of the processes.

What are the risks of not automating your OTC process?

With all of the important and complex steps involved in the order-to-cash process, relying on manual processes or outdated systems to manage orders is an invitation to failure. All of the steps outlined above are closely connected, which means that a mistake in one step can have a ripple effect across the entire process. Errors and delays in the OTC system can lead to problems including:

  • Errors in sales orders – Data entry errors and overlooked order fields can lead to a customer receiving an incorrect or incomplete shipment. That can be a time-consuming and costly situation to remedy, and can create further delays and backlogs in your system.
  • Manual data entry slowdowns – Entering data by hand is simply less efficient than using a reliable automated system. Not only does it take longer to log each entry, the risk of human errors and the slowdowns that come with correcting them are raised significantly.
  • Strained customer relationships – Poor customer satisfaction rates can be a major stain on an organization’s reputation, and few things sour clients on a business’s customer service as quickly as problems with their orders. An automated software solution helps to ensure that each customer receives the same quality and speed of service every time, and that any issues are addressed and resolved as quickly as possible.
  • Collection delays – As with data entry, a system that requires manually billing, processing, and collecting payments is simply slower than an automated system. When mistakes are made, rectifying those errors takes an even longer time and can lead to financial confusion such as overpayments, underpayments, and duplicate payments.
  • Data security – An automated software system also provides automatic safeguards against cyberattacks and fraud. A manual system provides many more opportunities for bad actors to take advantage of outdated processes and security gaps that make it much easier for your valuable data to be misused.

Improve your OTC workflow with MHC NorthStar automated solutions

Ready to see for yourself how updating your order-to-cash workflow with our industry-leading MHC NorthStar software solutions can boost your processing speed, reduce errors, and keep your workforce more engaged? Contact us today to arrange a free demonstration!

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