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

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

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.

Make Your Working Capital Work for You: Ways to Optimise Your Accounts Receivable

Make Your Working Capital Work for You: Ways to Optimise Your Accounts Receivable

Accounts receivables are one of the most important components of your working capital. Receivables refer to the money which you must receive from your debtors, i.e., the people you sell your products or services to. When you get your payments on time, your working capital remains in good health.

But many people struggle to take control of their receivables process. When this happens, increasing cashflow becomes difficult and it becomes challenging to run your business operations.

Here we explore what you can do to ensure your accounts receivables practices work well and you optimize your collections.

Step 1: Make accounts receivables a key metric in financial performance measurement

Many times, working capital takes a backseat when we’re measuring company profitability and financial health. Typically, the section which companies falter with is the accounts receivables. When you don’t keep an eye on your receivables, it becomes difficult to identify any existing problems with our receivables process.

But, when you make your accounts receivables a KPI, you strictly track your receivables and you get a better picture about who owes you what. You’ll be able to identify customer accounts that are draining your coffers and amend those processes that are harmful to your working capital health.

Step 2: Bring your departments together to ensure a collaborative collection effort

Accounts receivables management isn’t just the prerogative of your company’s accounts department.

The sales team, which deals with clients on-the-ground, plays a huge role in getting collections faster. Additionally, your finance teams – who control budget allocations – affect the company’s ability to offer extended credit periods and limits to customers.

When your sales, accounts and finance departments work together, you will have a bird’s eye view of your accounts receivable management processes. You will be able to determine the exact payment terms and credit limits to be offered to each customer, to ensure you’re always repaid and have the lowest default rate.

One process to initiate here is a comprehensive credit check to gain credit insights about current and prospective customers. This credit check will give you information about the purchase and repayment history of your customers, whether there were any defaults and the frequency of on-time payment vs default. This way, you’ll be able to plan how to reduce your default rates and ensure you receive your payments and your working capital is optimized.

Step 3: Use a robust Accounts Receivables Solution to collate bills of the same customer

It’s easy to miss out on a specific invoice when the same customer has a hundred different bills. This is where Accounts Receivables Solutions like accounting software, order management software and a master excel sheet can help. They give you the means to bring together data that is completely staggered in your system and make sense of the overall receivables each customer owes you.

When you have this collated information in a single place, there’s a lesser likelihood of your missing any bills that need to be followed up. Plus, this will help you identify any wrongdoing that any customer might be doing to cheat the system.

Step 4: Automate your receivables to ensure you always get paid on time

Finally, the best way to optimize your working capital and get your payments is by automating accounts receivables.

Manual receivables management can lead to a lot of errors. You may either claim lesser than what is owed to you or accidentally include wrong invoice details that can reduce your credibility in front of your customers.

But software like MYOB, XERO & Netsuite can help you manage your invoices carefully. These tools also take control of the payment follow-up process, ensuring you don’t need to do the heavy lifting. Contact our team at ezyCollect for more information.

Sweeping Reforms to Business Insolvency Laws Announced Today

Sweeping Reforms to Business Insolvency Laws Announced Today

Major Reform of Australian Insolvency Laws announced today: What does this mean for Your Business?

The Morrison Government has today announced the most sweeping changes to Australian Insolvency Law in over 30 years.

In anticipation of a significant increase in the number of small businesses being put into external administration following the end or temporary measures extended until 31st December, the Australian Government has today announced major changes to come into effect 1st January 2020.

What are the changes?

The reforms will allow businesses with liabilities of less than $1 million to restructure their debt, similar to the Chapter 11 bankruptcy model in the United States.

The previous “creditor in possession” model will be replaced with the “debtor in possession” model, where businesses can restructure their debts without giving up control to appointed administrators.

Click here to read the Aust Govt. Fact Sheet released today.

What does your business need to consider in light of these changes?

Credit risk management is important in good times, in slow and uncertain times with less protection it is even more critical for businesses.

Businesses need to consider:

  • How can you jump the queue for payment with customers you are worried maybe insolvent?
  • Should you immediately stop extending credit to customers who may be insolvent?
  • Should you be running credit checks on ALL customers (good, bad, old) – every time you extend credit in these extraordinary times?
  • What measures do you have in place to best protect your business?

Credit risk management is all about good processes, systems, and data. But it does not need to be difficult, or time-consuming. To see how you can implement an effective system by COB today watch the demo.

“The October Effect”: What does 2020 hold for Your Business?

“The October Effect”: What does 2020 hold for Your Business?

The October effect refers to the psychological anticipation that financial declines and stock market crashes are more likely to occur during this month than any other month.

After what has already been a torrid year for Australia with bushfires and Covid 19, October 2020 looms with:

  • The typical pre-election business slump;
  • Loan deferrals ending;
  • Lease moratorium ending;
  • Jobkeeper reducing;
  • Govt. cashflow boost ending.

So how does your business keep the cash flowing in difficult times?

Make it easier for your customers to buy, and more importantly for your customers to pay, with ezyCollect’s Pay by Instalments, available now.

We all know that no matter what we go through, the economy always bounces back. It’s a matter of staying afloat during the storm, and then capitalising on the recovery.

We’ve seen the success of companies such as Sydney’s Afterpay, with a current market value of $21 billion (as at 14/9/2020) after only 6 years. People will still buy, if it’s easy for them to buy.

Your customers do still want to buy from you, and indeed need to keep buying from you to keep their business turning. It’s about making it as easy as possible for them to buy, especially in difficult times. And where they have choices in suppliers, they will obviously turn to the supplier who makes it easiest.

It’s about helping your customers through the tough times, whilst ensuring your own business does not suffer. And history shows us time and time again, that companies who survive the tough times, generally do very well when the market recovers.

How easy is it to buy from you? Click here to find out more

Transforming your accounts receivable process for a post-pandemic future

Transforming your accounts receivable process for a post-pandemic future

How we do business has changed. Physical distance from co-workers and customers has transformed how we communicate and connect. Supply chains once buoyed by cash flowing through them are hurting. Your accounts receivable process, which counts on both communication and cash flow, has probably been tested in a COVID-19 world.

The question is, did it pass? And how will you transform your accounts receivable (AR) process for now and a post-pandemic future?

Here are some of the pivot points every accounts receivable manager needs to know and the next steps to take in the current B2B environment.

Key points

  • Eliminate the mess and confusion with centralised accounts receivable data and task management.
  • Lower the time and financial costs of your accounts receivable process and invest in better customer care.
  • Listen to your customers and offer solutions to their cash flow constraints.
  • Actively protect your business from bad debt risks and lower your credit risk exposure.

     

1. Neither you or your customers want higher costs right now

 

What accounts receivable managers need to know:

Your high costs of accounts receivable management can be directly attributed to the cost of doing labour-intensive manual tasks. Accounts receivable tasks such as sending email reminders, preparing monthly statements and sifting through spreadsheets are eating up time your staff could be investing in other revenue-generating activities. Unsuccessful collection attempts due to a leaky process have a zero return on investment.

That’s just your story. What about your customers? They don’t want to be wasting their labour on dealing with your complicated order-to-payment process. They’ll simply move on to the supplier that’s easy to deal with.

 

Next steps to consider:

 

Automated accounts receivable solutions like ezyCollect do the groundwork for you: identifying when invoices become overdue, funneling invoices into a reminder schedule, taking care of your monthly statement run, accepting payments online and even thanking your customers for payment. 

With the routine tasks running in the background, your team has more time to further reduce accounts receivable costs. Spend more time analysing your books for the debts at risk of being written-off; pick up the phone and save those unrealised sales before they slip into the land of the lost.

Book a personalised product tour of ezyCollect

2. Your office loss slows down an already time-consuming process

What accounts receivable managers need to know:

 

An accounts team working remotely is separated from each other and their usual work practices. It is now harder to share tasks and get visibility on day-by-day accounts receivable task management. Who is making the collection calls today? What did the customer promise to pay? How will you accept customer payments over the phone when you’re not in the office? 

Next steps to consider:

Just as your sales team is using your ERP or CRM solution to track the sales funnel, your accounts receivable team can keep close tabs on the payments funnel with a cloud-based debtor CRM.

To avoid the mess of spreadsheets and silos of information, your team can work from anywhere and check in with one shared accounts receivable data source. It eliminates confusion as it is the single source of truth for all overdues, customer communications, promises to pay, payment history, and tasks that are due.

3. Your customers are impacted and you need to respond

 

What accounts receivable managers need to know:

 

Of course you should be concerned with your own cash flow. But now is the time to also express empathy and be your collaborative best with the rest of your supply chain. ‘We’re all in this together’, right? As your customers come under financial pressure, will you keep communicating as if nothing has happened, or will you shift your message and tone to directly address their current cash flow crisis? Will you be the thorn in their side demanding payment or the guide who helps them to continue to trade with you?

Next steps to consider:

 

Businesses that emerge from COVID-19 with their customers intact will recover faster. You may now need to consider accepting part payments, offering buy now pay later, or accepting credit card payments as your customers look for responsible ways to extend their line of credit. If your customers want to continue to trade with you but need more options, how can your accounts service adapt to support your customer service?

 

4. Will new customers be more trouble than they’re worth?

What accounts receivable managers need to know:

 

A new customer who never pays you is literally more trouble than they’re worth. While it’s tempting to get more customers onto your books, if their cash doesn’t follow, it’s a useless exercise. Trade references have their place but they are time consuming and often biased. Your prospective customers arrive with an audit trail of past credit events and current credit activity.

Do you have eyes on every customer’s credit behaviour?

Next steps to consider:

 

Add a step in your customer onboarding process to thoroughly assess a prospective customer’s credit rating before you issue a cent of credit. For minimal effort and as little as $5, you can get a basic credit report from ezyCollect’s Credit Insights service.

With your credit risk assessments done, adjust your payment terms to minimise your credit risk exposure. Some customers should be on cash on delivery terms. For good payers, you could consider extending more credit to foster more business.

You can even go deeper with day-by-day analysis of how promptly your customers are paying you and others. For example, ezyCollect’s automated credit insights service will track every customer’s payment time and send you risk management considerations.

5. Buyers spend differently now

 

What accounts receivable managers need to know:

 

Supply and demand has changed. The multi-billion dollar uptake in the JobKeeper and cash flow boost payments from the Australian Government proves that business revenue has taken a sizeable hit. However, not everyone is in the negative. Some of your customers will be innovating, even thriving. How is your team quickly adapting to the fluctuating volume of invoices and payment reminders per customer? Can you track who has got money to spend and are you actively nurturing them for more business?

Next steps to consider:

 

Solidify valuable relationships by talking to customers and asking them how they are adapting their business now and for the future. Ask them what would make their payables experience with you better, then tell them how you intend to break down the barriers to paying you. Solving your busy customers’ problems makes you a valued supplier. Your permanent improvements will keep customers returning to do business with you.

6. Buyers pay differently now

 

What accounts receivable managers need to know:

In the April-June 2020 business quarter, the economic impact of the COVID-19 pandemic began to emerge. At ezyCollect we saw an interesting pattern in payment behaviour: an uptake in credit card payments and an increase in after-hours online payments. One in five payments were closed after normal business hours.

Do your payment methods support your customers to pay when and how they can? 

Next steps to consider:

 

To never miss a payment, you have to think digital. Every aspect of how we communicate, connect and transact each day has moved online. Have your payment methods followed? Have you adapted your payment methods to give your customers cashless convenience, access to credit, and the flexibility to pay you even if your business is closed for the day?

Get a free online payment portal for your customers

In summary

 

Working conditions and the market have changed rapidly. The Coronavirus pandemic isn’t over and even when it is, its legacy will remain. Both you and your customers are already adapting to a forced new reality.  It may not be easy or even desirable to go back to the way things were.

In fact, accounts receivable managers who fought the tidal wave of uncertainty with robust cash recovery processes, careful and consistent communications with customers and insightful risk management will not want to go backwards. It’s onwards and upwards from here.

For more ideas on how to transform your accounts receivable process, ezyCollect offers no-obligation daily product tours.