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The Order-to-Cash Cycle: A Guide for Mid Market Businesses

by | Nov 30, 2021 | 0 comments

What Order-to-Cash does for accounting systems

Commonly known as O2C, the Order-to-Cash cycle helps your business accept and complete orders. The process manages your business’s order processing and accounting system from end to end. Though it may seem like the O2C cycle ends when an order is completed, several important steps follow it. Not only does O2C record significant payment details, but it also helps identify ways to optimise the process further.

It covers several functions that handle your accounting systems with ease and accuracy.

The value of optimising the O2C cycle

The O2C cycle impacts many aspects of a business, making its offerings beneficial to companies of all sizes. From sales analysis to enhancing a company’s B2B payments process, this cycle covers a variety of features that help manage:

  • Customer relationships
  • Cash flow
  • Order fulfillment timescales
  • Credit replenishment/sales potential
  • Working capital costs
  • Business health insights

The seven steps of O2C

  1. Credit approval
  2. Order acceptance
  3. Order fulfillment
  4. Customer invoicing
  5. Payment process
  6. Cash application
  7. Collections

Step 1: Credit approval

B2B payments involve the purchase of goods and services through credit. Here, the process requires the business to approve the supplier’s credit application. Approval for credit requests and credit limits for each customer is also taken into consideration. To know how much credit to lend a customer, credit management professionals provide supporting customer credit reports, also known as trade reports.

The credit approval step also analyses the financial situation of the supplier. It takes into consideration various necessary details ranging from their cash flow to outstanding receivables. Once this is done, a set limit on customer credit is placed.

Credit approval professionals work in step with the sales team to set the payment terms of the order. These terms include due dates for payments, early payment discounts, and penalties for late payments.

In addition, the credit professional also takes care of minimising risk while maximising sales volumes. Being a high-stakes discipline, they also face the consequence of incurring losses and cash flow problems by extending credit improperly.

Step 2: Order acceptance

Sales teams connect with customers to share information on what services are available. Based on customer interest, sales professionals negotiate with customers on the order’s price, quality, delivery, and payment terms.

Ensuring the suppliers fulfill the terms of the order is a crucial part of the order acceptance step.

Step 3: Order fulfillment

The step involves locating, preparing, and shipping the order. During the fulfillment stage, ensuring the date and location details of the shipment is of utmost importance. Here’s where automation plays a key role in streamlining the fulfillment process. Updating sales inventory counts on time is key to avoiding accepting new orders before the previous ones are completed.

If an unavailable item is accidentally purchased, the same needs to be recorded in real-time to avoid further issues in billing. Automating this process allows businesses to manage this step with ease and efficiency. Without involving manual assistance, automated services can easily fetch necessary order details and assure no bottlenecks in delivery occur.

Similarly, all services promised in the order are duly followed from end to end.

Step 4: Customer invoicing 

After delivery, accounts receivable professionals invoice the customer for the amount due. The invoice is either shared physically or electronically, depending on the order. Currently, the use of electronic billing via email has become more popular, overtaking older systems of faxing and telephonic billing.

Generating and delivering invoices to customers is crucial and time-sensitive work. The sooner a customer receives and clears a payment, the sooner the business stabilises its cash flow.

Step 5: Payment process 

Customers clear payments in a variety of ways – ranging from paper checks to virtual credit cards. Here, the supplier must decide which forms of payment they are willing to accept. The supplier then sets up processes to increase the efficiency of receiving payments through these select channels.

To prevent incurring high costs associated with each payment, businesses need to manage their customer payment preferences with their own interests.

Step 6: Cash application 

Post payments, the money is then applied to specific accounts. The process acknowledges the receipt of cash and marks the invoice as paid. Though seemingly simple, this step is a bit more complex than it appears.

As companies typically handle large quantities of payments on a monthly basis, the need to categorise them is high. Cash application specialists are responsible for matching these receipts with their respective invoices. Remittance advice assists this process as it comes inclusive with certain forms of payment.

Remittance is also sent through email or telephone, but this further complicates accounting systems and leads to inaccuracy. When certain payments are delayed or cover multiple invoices, further complications arise and require advanced solutions to ensure accuracy.

Clearing payments on time enables businesses to regain their cash flow for business operations and, in turn, replenishes credit limits for customers.

Step 7: Collections

An account becomes delinquent if it does not clear its payments by the established due date. At this stage, the account transfers over to collections. The collectors are in charge of contacting and reminding defaulters to clear their dues.

In certain cases, customers intentionally delay clearing payments to better manage their cash flow or business credit scores. Collectors will get in touch with defaulting customers to understand and resolve their payment concerns to avoid the same.

Now that you understand the processes in the O2C cycle, let’s look at ways you can optimise it for your business.

Best practices in O2C 

Knowing how to enhance the Order 2 Cash process can give your business an edge over companies that do not. Reducing cost is only one aspect of this practice, the other benefits you stand to gain from investing in O2C solutions are numerous, and we’ve listed a few below.

A logical starting point for invoicing and payment acceptance 

Several value-added O2C strategies are applicable to the payment process. Some of which are intelligent invoice design and Electronic Invoice Presentment and Payment (EIPP). To roll out timely payments, customers need to understand how to use these invoices. Making use of integrated payment acceptance solutions helps speed up the invoicing process for both customers and suppliers.

Older methods like paper invoicing cannot be optimised efficiently due to the limitations of old school systems, however the good news is that most businesses are on electronic invoicing. Similarly, modern invoicing systems require multiple steps for delivery and payment, which can be time-consuming. Electronic invoicing significantly eliminates the delivery time and helps speed up cash flow between the customer and company.

Automation of cash application or payment reconciliation

The O2C cycle stays incomplete until the cash due is properly allocated to a specific record system. For a company to receive revenue through these payments, there has to be an automatic application of cash. Any delays in cash application result in a high days sales outstanding (DSO) and a low business credit score. DSO occurs when companies do not receive a payment well past their invoice scheduling date.

Since customers clear payments in a variety of ways, cash application becomes all the more challenging. Certain payment methods involve manual keying, which can be time-consuming and less efficient than electronic payment options. In some cases, even electronic payments can disengage from their respective invoice, requiring additional time and resources to find a match. Handling such instances without accounts receivables automation can be challenging.

Realistically, no matter how hard a business strives to reach a 100 percent match rate, there will always be loopholes and exceptions. Automating the cash application process not only cuts costs but also reduces DSO. With the help of technology, sellers can automatically transact data from any source and match it with open receivables. Whether customers clear payments by cheque or electronic methods, this process improves overall hit rates and minimises their time.

Implementing such tools helps businesses work through exceptions and can help post payments on time. Being resource-friendly, it also helps get the job done without depending on manual intervention.

Increased brand loyalty through better customer experiences

O2C systems provide both customers and call center staff with secure access to research and print invoices and settlements. Some systems also let customers manage their own invoices with easily available web tools. In addition, O2C enables businesses to free up their resources for other tasks, allowing them to focus on customer experience and other vital operations.

It also helps identify possible areas that could use further optimisation to boost customer experience. Knowing which areas to customise for customers helps a business deliver service delight, which develops brand loyalty.

Conclusion

The strategic potential that Order-to-Cash can offer business is endless. The right approach creates an opportunity to improve your business’s cash flow and boost customer satisfaction. It also has the potential to help you achieve your goals for corporate sustainability while significantly reducing costs in the process.

Finding the right solutions for your business can be tricky and involve a bit of trial and error. But an important factor to note during the evaluation process is the flexibility these solutions can provide you with. You need a system that can accommodate strategic invoicing based on your customers’ needs. What’s more, is the ability of the system to manage both intelligent cash applications and electronic adoption.

These key capabilities will help suppliers achieve the right balance between buyer satisfaction and low DSO.

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