Originally published in February 2021, our newly updated blog post about the order to cash cycle for businesses has been updated with the latest insights for comprehensiveness.
The order-to-cash (O2C) cycle is essential to business operations, encompassing every activity from receiving customer orders to collecting payments. Mastering each step of this cycle and continually seeking improvements can significantly boost efficiency, reduce errors, and enhance overall financial performance.
Modern CFOs and AR teams need advanced tools to transform accounts receivable within their organizations. This involves not just automating the existing order-to-cash cycle but re-engineering it with the help of AI. The goal is to ensure that cash isn't just flowing—it’s getting unleashed.
What is the order-to-cash cycle - and why is it a crucial part of business?
The order-to-cash cycle, often abbreviated as O2C, is the complete process your business undertakes to accept an order, extend credit, deliver the goods or service, collect payments and report on the process. This cycle begins when a customer decides to make a purchase (the buyer) and concludes when the payment is received in your accounts. Despite its critical importance, the significance of the O2C cycle is often underestimated.
Streamlining various stages of the O2C cycle is essential and can profoundly impact your business. Consider the benefits of these enhanced processes:
- Avoiding backorders
- Reducing the time between order and fulfillment for your customers
- Accelerating credit approvals
- Speeding up the buying process
- Demonstrating professionalism
Fortunately, the O2C cycle has undergone significant transformations in recent years, largely due to advancements in technology, including AI. These innovations have facilitated electronic invoicing with digital payments and streamlined cash application and collections processes. Moreover, they provide real-time metrics and data, aiding in the identification of areas for improvement.
The 8 steps in the order-to-cash cycle
To fully grasp the O2C process, it's essential to understand each step or stage involved:
1. Order placement and management
The O2C cycle starts with a customer placing an order, which can range from a single product to a bulk purchase of goods or services. This order is directed to the appropriate department for processing. Efficient order management is crucial—it involves accurately capturing the order details and ensuring swift and precise processing. Sales teams collaborate with customers to place orders, providing information on available products or services, and negotiating terms such as price, quality standards, delivery schedules, and payment terms.
Download → B2B eCommerce [ Solution guide ]
2. Credit management
In B2B transactions, companies frequently purchase goods and services on credit. Effective credit management is critical for minimizing financial risk. This involves evaluating customer creditworthiness and setting appropriate credit limits. To determine how much credit to grant a customer, a credit professionals reviews credit reports from bureaus, consults with banks, and gathers trade references from other businesses. Advanced software solutions can streamline these processes, providing real-time credit scoring and monitoring to protect the business from potential losses.
An equally important part of credit management is analyzing the supplier’s own financial situation. After analyzing the supplier’s cash-on-hand, cash flow and outstanding receivables, the credit professional will be able to place a responsible limit on customer credit.
Credit approval professionals will work hand in hand with sales to set the payment terms of the customer’s potential order. Payment terms include when payment is due, any discounts available for paying early and any penalties incurred if payment is late.
In the end, the credit management professional is responsible for enabling maximum sales volumes at their company while minimizing risk. It is a difficult and high-stakes discipline. Consequences for extending credit to customers who can’t or won’t pay on time include cash flow problems, increased DSO and even losses.
3. Order fulfillment and shipping
If fulfilling a good, order fulfillment involves locating the items, preparing them and shipping while ensuring that all delivery details are correct. In the case of services, order fulfillment entails arranging the date and location of service and executing all promised services in the order. Whether it's goods or services, the essence of order fulfillment is delivering on the promise made to the customer.
4. Customer invoicing or billing
The delivery of a good or service requires accounts receivable professionals to now invoice the customer for the amount owed. This happens in a variety of ways, via a paper bill sent through the mail, or increasingly, though ePresentment or electronic billing. Newer, more efficient formats include emailed bills and bills presented via portals.
Quickly and accurately generating invoices and delivering them to customers is important and time-sensitive work. The faster the invoice is presented to a customer, the faster they can pay and realize cash for the business.
5. Payment process
Customers will try to pay their suppliers in the ways that are most convenient and beneficial to them— paper checks, credit card email payments, portals, or third-party e-payable providers.
This leaves the supplier responsible for choosing which forms of payments they will accept and for establishing processes to maximize the efficiency of receiving payments through their selected channels.
There are costs and efforts associated with receiving each type of payment, and businesses must balance honoring customer payment preferences with their own interests.
6. Cash application
Once payments have been received via the various payment channels, cash must be "applied" to accounts. In practice, this means recognizing that a certain amount of cash has been received and marking an invoice as paid. This is more complex than it seems.
Companies typically receive hundreds or thousands of payments each month. Cash application specialists must then "match" cash received with invoices. The use of remittance advice (often referred to simply as "remittance") assists with this. Some forms of payment, like paper checks and credit card payments come with remittance advice attached.
A check may have in its "memo" section a note that states it is paying off invoice #1358. But some forms of remittance, such as ACH do not support remittance advice coming attached with the payment.
There are many ways to send remittance advice. For instance, in an email or phone call. This complicates the work of applying the cash and requires advanced cash application solutions to ensure speed and accuracy.
Further complications arrive when payments are meant to cover multiple invoices, when customers short pay for various reasons, or when payment errors occur.
The faster that received cash is applied, the faster a business can reliably use it for operations and the faster a customer's credit can be replenished, enabling them to order more goods.
7. Collections
If payments are not received by the agreed-upon date, the account becomes delinquent and is transferred to the collections department. Collectors then contact customers to secure payment. Delinquencies can arise for various reasons: customers might need reminders, they might delay payments to manage their cash flow, they could dispute the goods or services received, or they might be unable to pay.
A collector has the complicated job of connecting with customers, understanding their reasons for delinquency and trying to work with them in order to realize payment for the company.
8. Continuous data analytics
With interconnected systems or processes in the O2C cycle, it's insightful to track data across all pieces of the puzzle. By analyzing this data, finance leaders can get insight in the overall process of order-to-cash and see what the effect is on the whole business. Is cash flowing in as fast as possible? What are the bottlenecks? Who are slow payers? And what's the reason behind that?
Now that you understand the essential processes of the Order-to-Cash cycle, let’s look at ways you can optimize the order-to-cash (O2C) in your business.
What are the most common challenges businesses face in the order-to-cash cycle?
Reviewing the aforementioned steps, it becomes evident that the O2C cycle significantly influences various crucial aspects of business operations:
- Customer relationships
- Cash flow and working capital costs
- Order fulfillment timelines
- Credit replenishment and sales potential
- Manual labor
- Business health insights
By focusing on refining the O2C process, businesses can unlock substantial improvements across these key areas. Companies that approach this process with strategic goals in mind gain considerable advantage over those that do not.
While optimizing the order-to-cash cycle offers numerous benefits, teams often encounter several challenges that can impede efficiency and financial performance. Understanding these obstacles is the first step towards overcoming them and achieving a streamlined O2C process.
Consider the following:
Addressing the challenges: order-to-cash best practices
Having familiarized yourself with the various steps and challenges in the order-to-cash cycle, you are now equipped to address these obstacles and optimize your O2C process. Several strategies and approaches can facilitate this, but it’s not enough for order-to-cash to be automated. It needs to be integrated and unified. This is why:
- You can provide a uniform experience for your customers with customer portals and templated email communications.
- Customers get transparency around their invoice and payment status allowing you to better justify any need for late fees and collect faster.
- An end-to-end solution empowers your data and enhances your bottom line.
- Your teams can focus on strategic initiatives, reduce the need for additional headcount, eliminate repetitive tasks, and gain deeper insights throughout every stage of the O2C cycle.
- A single centralized platform allows your teams to handle cash application, invoicing/payments, and collections seamlessly, while also facilitating collaboration with other departments.
Beyond integration and a unified strategy, every phase in the O2C process—from order placement to analytics—can be optimized. Consider the following examples:
- Order processing and fulfillment: Automate order entry, eliminate manual errors, leverage real-time inventory data to avoid stockouts, and track the entire process from order creation to delivery.
- Integrate risk management: Implementing automated credit scoring and monitoring systems offers real-time insights into customer creditworthiness, thereby reducing the risk of bad debt. Automated credit applications enable swift and consistent decision-making, with credit limits determined by customer history and future potential.
- Modern multi-channel invoice delivery: Topping the list of value-creating order-to-cash strategies is your invoice delivery process. Invoicing preferences vary among customers, requiring considerable time and effort on your part to manage and process invoices efficiently. With modern invoice delivery solutions, you can offer your customers various options such as email, online portals, and electronic invoicing.
- Payment acceptance: Closely related to invoicing, an integrated payment acceptance solution can help speed up the customer invoicing and payment process. Again, customers are driving your workflow based on what’s most efficient for them — paper checks, credit card email payments, portals, or third-party e-payable providers. By automating payments, regardless of customers’ preferred channels, you’ll get paid sooner — on your terms — while still providing exceptional customer service.
- Automated, intelligent cash application: The order-to-cash (O2C) cycle begins with invoice delivery and payment but isn’t complete until cash is properly applied. Once payment is received, the funds must be accurately applied (posted to a system of record) for a company to realize payments as revenue. Delays in cash application put DSO at risk. Cash application is challenging because buyers pay in a variety of ways. Exception handling poses yet another challenge. As much as a business strives for 100 percent match rates, the reality is that exceptions will occur. Automating the cash application process end-to-end cuts costs and reduces DSO. Through technology, sellers can automatically extract transactional data from any source and intelligently match to open receivables, which can dramatically improve hit rates.
- A holistic collections approach: Effective collections strategies require more than just diligent follow-up; they necessitate a holistic approach that balances stringent credit policies with outstanding customer relations. Advanced collections software can automate reminders and follow-ups, facilitate clear communication channels for resolving disputes, and enhance departmental collaboration while tracking collections progress. Real-time monitoring and reporting tools provide vital insights into payment patterns and potential issues before they escalate, allowing your business to act proactively.
Download → Climbing the payments optimization ladder [ Tip sheet ]
Unleashing efficiency: How automation transforms the order-to-cash cycle
The order-to-cash (O2C) cycle, while seemingly straightforward, can become bogged down by manual tasks, data silos, and human error. Fortunately, automation technologies are revolutionizing how businesses manage this critical process. By strategically incorporating automation throughout the O2C cycle, you can unlock a new level of productivity, accuracy, and valuable insights.
Automating repetitive tasks: Imagine a world where orders are automatically entered, credit checks are completed instantly, and invoices are generated and sent electronically the moment an order ships. This is the power of automation. Repetitive tasks like data entry, form processing, and sending emails can be handled by software, freeing up your team's time to focus on higher-value activities like customer relationship management and strategic analysis.
Real-time visibility and improved decision-making: Automation doesn't just save time; it provides real-time data and insights into your O2C performance. Imagine having instant access to metrics like average order processing time, DSO (Days Sales Outstanding), and customer payment history. This data empowers you to identify bottlenecks, optimize workflows, and make data-driven decisions to improve cash flow and overall business health.
Choosing the right automation solutions:
When selecting automation solutions for your O2C cycle, consider the following factors:
- Scalability: Ensure the software can accommodate your current and future business needs.
- Flexibility: Choose solutions that integrate seamlessly with your existing systems and adapt to your customers' invoicing and payment preferences.
- Security: Make sure the software provider prioritizes data security and adheres to relevant compliance regulations.
- Electronic Adoption Programs: Look for solutions that include features to encourage customer adoption of electronic invoicing and payments, further streamlining the O2C cycle.
Optimizing your order-to-cash cycle for business success
The order-to-cash (O2C) cycle is the lifeblood of any business. It's the smooth flow of activities that turns customer orders into revenue. By optimizing each step in this cycle, businesses can unlock significant improvements in cash flow, efficiency, and customer satisfaction.
This blog post has explored the different stages of the O2C cycle, from order placement to collections, and highlighted the challenges businesses often face. We've also discussed best practices and how leveraging automation technology can streamline the entire process.
The key takeaway is that optimizing the O2C cycle goes beyond accelerating payment collections—it's about creating a seamless customer experience and gaining insights that drive better business decisions.
Unlock the full potential of your O2C cycle today. By adopting the strategies discussed and leveraging automation technologies, you can enhance your financial performance and drive your business to new heights.
Contact a Billtrust expert to get started on transforming your order-to-cash process.
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