What is the order to cash business processes?
Efficient management of business risk is critical for business success. As the business grows, the risk in vital business areas like customer acquisition, credit management, cash flow, client satisfaction, and purchase-to-pay processes also increases. Handling the order to cash (OTC) process effectively mitigates the risk associated with cash flow management.
What is the order to cash cycle? The OTC cycle comprises a set of business processes that involve receiving and fulfilling customer requests for goods and services. Simple order to cash definition is the spectrum of business processes that cover the order processing system, from receiving the order to payment of the order till entry is logged into the accounting books. Order to cash systems defines the success of the business and customer relationships. The order to cash process cycle refers to the entirety of a company’s ordering systems. The order to cash cycle process flow starts when the customer places the order and ends when the invoice is paid and settled.
The difference between the order to cash vs quote to cash is that the former is a subset of the latter. Quote to cash process covers all those processes that are involved in selling a product, while OTC is all customer transactions. The Q2C cycle includes customer purchase intent, configuration pricing quoting, and contract lifecycle management.
The difference between procuring to pay and order to cash processes is that both are complementary processes. Order to cash comprises all the processes that relate to the sale, while procure to pay relates to all the processes relating to procurement from suppliers.
Importance of the Order to Cash Process
The order to cash business process needs to be optimized in order to have a positive impact on the business bottom line. The OTC process impacts the billing process, accounts receivable function, sales process, and marketing processes. The activities in the o2c process have a direct bearing on the success of the supply chain, inventory, and labor management systems.
Here are how the business processes are impacted by the order to cash process:
Accounts receivable: a poor o2c process affects the accounts receivable function by delaying the time invoices are collected. The accounts receivable and invoicing system during the o2c cycle determines the cash flows in the company. Delays in these processes further complicate the payroll, accounts payable, general ledgers, and potential acquisitions.
The reliability of the business processes is directly affected by the consistency and reliability of the o2c process workflow.
efficient and quick conversion of the raw material to saleable goods depends on the o2c process. A streamlined order to cash business process ensures that less cash is tied up in various inventory stages and releases resources for other processes at the right time.
Business Processes that Impact the OTC Cycle
The OTC cycle is affected by several business processes. The sales orders, invoices, inventory, and logistics functions affect the OTC cycle. Processing sales orders is the first step in the order to cash process. If the sales details are not noted properly, the first stage of the o2c cycle itself would start on a wrong note. When wrong product specifications are noted or wrong products are ordered, the sales cause losses for the production unit.
Creating and handling manual invoices delays the payment process and increases the incidence of errors. The workload for the accounting department also increases when invoices are processed manually. Another factor that affects the OTC cycle is the logistics function. Last-minute delivery requests, unexpected transportation changes, or damages to cargo are some of the logistics disruptions that can throw the o2c process out of gear.
The credit policies of the company also impact the OTC cycle. Selling goods or services on credit, lack of liquid cash or cash inflow are some of the credit policies that may impact the OTC process. Dissatisfied customers often refuse to make payments on time. Such defaulted payments affect OTC collections and customer service departments.
Steps in the Order to Cash Cycle
The meaning of o2c process is a set of business processes that manage everything that is time-related to sales, marketing, or branding functions. In most large ERP systems, like SAP and Oracle, the order to cash process map is dotted with 8 steps. The OTC cycle steps are listed below:
the first step in the o2c process is triggered when an order is placed. The sales order to cash process begins once the purchase is confirmed at the customer’s end. The order could be placed in multiple ways, it could be a direct online order from the customer on the website, or through the sales team over email or telephone order. Order management may be done through eCommerce platforms, email to the sales department, notifying sales reps in person, or manual order entry.
the credit management process is known to be the front-facing step of the OTC process. For orders where credit is applicable, the customers who placed the order for the first time should be directed to the credit approval process. The credit management system must be able to choose eligible customers for approved credit.
at this stage, the order is prepared to be shipped to the customer. In case of a service order, an appointment for service is scheduled at this stage. In case of physical goods to be delivered, the inventory personnel must be informed of the details of the order to proceed with fulfillment and shipping. For delivery of services, access is granted for the service ordered.
for successful shipping of the order logistics and shipping arrangements come into play. Well-regulated logistics ensure that products/services are delivered on time without any compromise on performance standards. The design department needs to be informed about the shipping details. The audit must be done at this stage of the order to cash audit program.
the next step in the o2c cycle is customer invoicing. The customer receives an invoice with complete details of the order along with discount and tax information.
upon receiving the invoice, the customer clears the payment. Ideally, the customer should be presented with multiple payment options like electronic fund transfer, debit, or credit card payments. The OTC cycle in accounts receivable must be reviewed for outstanding dues or discrepancies in payments. In case of discrepancies, the revised invoice needs to be shared with the customer.
the received payments must be recorded against designated timelines. All past due accounts must be regularly reviewed to avoid lapses and cash deficits.
Reporting and data management:
the order to cash (o2c) process is complete once the payment is logged into the accounting books as accounts receivable against the raised order. OTC journal entries need to be recorded for the audit trail.
The stability of the order to cash modules and seamless coordination between them is instrumental in ensuring stable operations of several business functions. Some of the business workflows that are dependent on the OTC process are:
- Onboarding and training
- Vendor and customer relationships
- Customer service functions
- Length of the sales cycle
- Forecasting and cash flow
Challenges in Order to Cash Management
While the steps in the order to cash cycle flow chart may seem pretty straightforward, there are several moving parts involved in it. Failure in any one of the steps has a cascading effect on other business functions. Some of the common challenges in the OTC process:
- Inaccurate sales orders due to manual entries
- Inaccurate invoice entries in manual processes
- Dissatisfied customers that default on payments
- Delayed payment collection
- Security of data
Issues such as inaccurate orders need to be reworked and resent to the customer. Manual processing methods also increase the scope for inaccurate entries. Delayed collections lead to complications and bottlenecks in other business processes like accounts payable, payroll, and mergers and acquisitions. Other indirect effects of bottlenecks in the OTC process workflow are diminishing the customer experience.