The order-to-cash (O2C) process is a defining part of a companyâs success, and it also plays a big role in driving an organizationâs relationship with the customer. While many companies focus the bulk of their resources on the period up until the customer places an order, optimizing the O2C process can yield remarkable benefits that ripple throughout a business.
The good news is that the various functions involved in O2C can be improved significantly through the use of an integrated software solution. You can streamline your O2C process from beginning to end to serve customers faster and more effectively, minimize errors and delays, and ensure performance data has maximum impact on the company.
The order to cash (O2C) process is a crucial aspect of any business that sells products or services. However, many companies, especially small businesses, may not have a full understanding of what the O2C workflow entails and how to optimize it. This article will clearly explain each step of the order to cash process and provide tips for improvement.
What is the Order to Cash Process?
The order to cash process, also known as O2C or OTC, refers to the series of steps a business takes from the moment a customer places an order until the payment for that order is received and recorded in accounts receivable.
The O2C workflow includes the following core steps:
- Order placement
- Credit verification
- Order fulfillment
- Order shipping
- Invoice generation
- Payment collection
- Payment reconciliation
Optimizing this process is crucial for strong cash flow, working capital, and customer satisfaction. Streamlining O2C can get money in a company’s hands faster.
Why is Order to Cash Important?
An efficient O2C process provides many benefits:
- Faster payments – Shortening the time from order to payment improves cash flow
- Higher customer satisfaction – Quick fulfillment and fewer mistakes create happy customers
- Increased efficiency – Automation and streamlining reduce manual work for orders
- Better forecasting – Analytics provide insights into future cash flow
- Higher productivity – Less time spent on order processing means more time for strategic work
For these reasons, order to cash should be a priority for businesses looking to improve their finances and operations.
Step 1: Order Placement
The order to cash process begins as soon as a customer places an order for a product or service. This can occur through:
- Online orders on a company website
- In-person orders at a retail location
- Orders placed over the phone
- Orders submitted via email or other channels
It’s crucial that order details are accurately captured at this first stage. Relevant information includes:
- Customer contact information and account details
- SKUs, quantities, pricing for each item ordered
- Requested delivery address and date
- Payment method and terms
Step 2: Credit Verification
For new customers or large orders, the next step is to verify the customer’s creditworthiness to prevent late or non-payments down the line. Important credit checks include:
- Running a credit score check through reporting agencies
- Calling customer references to confirm payment history
- Checking that the customer is under their credit limit
- Ensuring accounts receivable are not past due
If the customer fails the credit check, the company can request prepayment or a deposit before fulfilling the order
Step 3: Order Fulfillment
Once the order is verified the fulfillment stage begins. Depending on the business this may include
- Picking, packing, and checking ordered items from inventory
- Performing any manufacturing or assembly required
- Bundling items into shipments
- Generating paperwork like packing slips and shipping labels
Quality control checks should occur to ensure accuracy. Inventory levels must be updated in real-time to prevent overselling.
Step 4: Order Shipping
The next step is arranging for delivery of the packed shipments to the customer. Key aspects include:
- Scheduling pickup times with the selected carrier
- Inspecting shipments before release to carrier
- Providing accurate delivery addresses and paperwork
- Confirming pickup and estimated delivery times
- Adding tracking information into the order system
Communication with the customer should confirm shipment and delivery details.
Step 5: Invoice Generation
Once an order ships, it’s time to officially bill the customer. Correct invoicing is critical for timely payment. Invoice creation involves:
- Listing all items, quantities, and pricing from the order
- Applying any relevant taxes, shipping fees, discounts or surcharges
- Including complete remittance details for payment
- Sending invoice to customer via email or mail
- Adding invoice to accounts receivable ledger
Step 6: Payment Collection
The payment collection process will vary depending on a customer’s credit terms and company policies. Payment can be collected via:
- Online payment portal or credit card processing
- Mailing a check to company address
- Wire transfer or ACH to company bank account
- Auto-debit when terms allow
All payments should be matched to relevant outstanding invoices and order information. Receipts and confirmations are sent to the customer.
Step 7: Payment Reconciliation
Finally, payments must be reconciled and recorded in the finance system. This involves:
- Posting payments to customer accounts
- Applying payments to open invoices
- Sending account statements to customers
- Depositing payments into bank accounts
- Updating accounts receivable
At this stage, any discrepancies or disputes should also be addressed and resolved.
Streamlining the O2C Workflow
Companies can improve and optimize the order to cash process in several key ways:
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Integrate systems – Connect order processing, inventory, shipping, invoicing, payments and accounting on a single platform to eliminate silos and manual work.
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Leverage automation – Use rules-based workflows to trigger order processing steps instead of human action. This accelerates order completion.
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Monitor metrics – Track KPIs like order processing time, days sales outstanding, payment error rates. Use data to find inefficiencies.
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Increase visibility – Give customers access to order status and tracking information to improve satisfaction and communication.
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Optimize processes – Review each step in the cycle to identify and eliminate bottlenecks slowing down order completion.
The Bottom Line
A streamlined order to cash workflow is a competitive advantage for any company that makes sales and wants to enhance operational efficiency. By understanding the steps in the O2C process and looking for opportunities to implement automation and analytics, businesses can significantly improve cash flow, reduce overhead costs, and provide better customer service. The order to cash cycle should be a key area of focus for supply chain improvements and financial performance gains.
The O2C Process is Affected by all Aspects of Your Business
Companies should strive to optimize the order-to-cash cycle for various reasons. For starters, O2C activities impact operations throughout the organization, including supply chain management, inventory management, and labor. Bottlenecks in one area can cause headaches for units that are completely separate.
Secondly, the invoicing and accounts receivable functions carried out during O2C determine the companyâs cash inflows. Delays in collection can complicate accounts payable, payroll, potential acquisitions, and other issues related to liquidity.
Finally, managing a reliable and consistent O2C process shows that your organization isnât a one-trick pony. To manage the process well, you need to excel at every function of business, including sales, manufacturing, technology management, fulfillment, shipping, and accounting.
What is the order-to-cash process?
Order-to-cash is the entirety of a companyâs order processing system. It begins the moment a customer places an order. Everything before that time is related to some function of branding, marketing, or sales. Itâs important to note, however, that branding, marketing, and sales functions do not immediately cease when a customer places an orderââºbut their core activities are generally located in the phase of the customer relationship that lies before the O2C cycle begins.
While some may think the O2C process is complete when the order is received and paid for, there are other important steps that occur after these actions. Activity data recorded throughout the order-to-cash cycle must be analyzed to help management identify opportunities for improvement or optimization.
Order to Cash (O2C) Process Overview and Accounting Entries
FAQ
What is the O2C process?
What is an order-to-cash with an example?
What is the first step in the order-to-cash process?
What is the order-to-cash process?
The order-to-cash process is a series of steps that start when a customer makes a purchase—in the case of ecommerce, when the Buy Now button is clicked—and ends when the business has received and cleared cash for that purchase.
Why is the order to cash process important?
This means handling all aspects of the sale including shipping the items, collecting the payment, creating invoices, and reporting on the end-to-end process. The OTC impacts your bottom line and relationships with your customers, so the process must be well-optimized.
What is the order to cash cycle?
But fundamentally it will remain the same from start to finish. Below is the step-by-step process of the order to cash cycle: The tracking system of an order from inception to fulfillment, along with all of the information and processes. The order management system (OMS) manages the order and provides transparency to the business and the buyer.
What is order to cash (O2C)?
Order to cash, also known as O2C or OTC, is the entirety of a company’s order processing system. The business process begins the second a customer places an order and goes until payment is made and logged to account receivables. The O2C system is a critical part of getting and maintaining a healthy cash flow.
