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The Importance Of Financial Reporting And Analysis

The Importance Of Financial Reporting And Analysis

With the End of Financial Year (EOFY) fast approaching, SMEs are now starting to prepare financial reports. But more than a mandatory report to be submitted to the taxation office, financial reports play a critical role in building a successful business.  Financial reporting and analysis offer insights into financial data that will help you make better business decisions, eventually improving the business’s financial performance.

We’re providing you with a comprehensive guide to help you understand how crucial financial reporting and analysis are to your business. In this article, we will explore the importance of financial reports and how they benefit different business stakeholders.

What is Financial Reporting?

Financial reporting is a standard accounting practice that documents the company’s financial data. This data helps companies understand their financial health and performance in a specific period. Based on the report, they can make informed business decisions.

Financial reports are useful for businesses and for, investors and banks. Based on these reports, an investor or a bank invests or gives loans to a company. Suppose you plan to expand your business, and a bank will grant a loan based on your company’s financial report. If the company is financially healthy, then you can expect a loan for your business expansion.

How are financial reports generated?

The use of spreadsheets for financial reporting is widespread across businesses worldwide. However, spreadsheets can fall short of capabilities to generate efficient financial reports as a business grows and more users, data, and formulas are added to the reports. Financial reporting has become more efficient and sophisticated thanks to digital technology.

More and more businesses are now adopting the use of ERP platforms to streamline their accounting, automatically generate financial reports and even provide data-backed insights. Integration with other solutions, such as Accounts Receivable automation, further improves accounting software’s capabilities to create fast and accurate financial reports.

Types of financial reporting

1. Income Statement

An income statement or profit and loss statement essentially show a business’s loss or profit during a specific period. It’s a summary of key sales activities, costs of production, and any other operational expenses within the accounting period. This statement aims to understand if the business is making any money or suffering losses.

2. Balance Sheet

A balance sheet provides an overview of a company’s overall assets, liabilities, and stakeholders’ equity. Broadly, the balance sheet reflects the financial health of a company. By analyzing this sheet, the company’s management can see where the business is heading.

The balance sheet is not only useful for the management but also for investors. By assessing the balance sheet, investors can form an opinion on whether to invest in a specific company or not. The sheet has all the vital information like the company’s finances and other data to help them make an informed investment decision.

3. Cash Flow Statement (CFS)

A Cash Flow Statement (CFS) documents the amount of cash coming into the company and the cash flowing out of the company during a specific period. The statement includes elements of both the income statement and balance sheet. CFS is critical because it tells the business owner or management about the company’s cash position. Businesses need sufficient cash all the time. They require cash to pay expenses, loans, taxes, and equity purchases. A cash flow report tells if the company has sufficient cash for carrying out such activities.

Now that we have seen what financial reporting is let us explore some benefits of financial reporting.

 

financial reporting benefits

Benefits of Financial Reporting 

1. Helps In Effective Debt Management

The poor management of debts can be disastrous for any company, whether small or big. When it comes to debt management, several financial reporting platforms are available that will help you track your company’s current assets, current liabilities, accounts receivables, and liquidity. AR automation software provides data on your customer’s credit scores that can help you gauge how to manage debts effectively.

2. Trend identification

Financial reporting helps identify seasonal trends or cycles that can help you plan ahead. Understanding trends and the historical context of numbers empowers you to improve your business’ performance effectively.

3. Real-time insights

Updated financial reporting provides you with real-time insights into your financial health. Thanks to advancements in technology, access to real-time data are possible and provides you with the ability to take action to either correct issues or take advantage of opportunities. Cash Flow statements, for instance, provide you with information about the company’s availability of funds which will help you ensure you always have money to cover payments.

4. Liabilities tracking

Managing liabilities is paramount for any business, especially if the business is looking to apply for a bank loan for expansion. Defaulting loan payments is seen as a red flag by banks that can reject the application for a loan. A financial reporting template allows for exploring current liabilities. Based on the data, the company can determine if it is required to reduce liabilities before applying for a bank loan.

5. Compliance

Complying with the rules is essential for the survival of any business. Maintaining updated financial reports help your business comply with the regulations set by the governing body.

6. Cash Flow

Management of cash flow is essential to any business. If you face challenges with the cash flow, financial reporting metrics will let you know the root cause of the problem.

With benefits covered, let us get to the crux of the topic – The Importance Of Financial Reporting.

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Why Is Financial Reporting Important?

Financial reporting offers a wealth of insight into financial data that helps make better business decisions. Apart from this, there are many other reasons. Let us look at each one of them in detail.

1. Taxation purposes

The biggest reason for performing financial reporting is taxes. For instance, you need to lodge EOFY tax returns and other financial reports in Australia. These reports are mandatory by law to ensure that a company pays its fair share of taxes. Before filing taxes, an audit is also necessary, and accounting and auditing firms review financial reports to ensure accuracy and credibility.

2. For Attracting Investors, Bank Loans

Financial reports are critical for attracting investments. If you are looking to expand your business, the investor will surely ask for the company’s financial report. The investors will examine the report to see how the company is performing. Is it earning profits? Or is it at a loss? How is the company managing its cash flow? These are some key indicators that investors examine. 

If your company’s financial health is not optimal, no matter how excellent your product/service is, most investors will decline to invest in your company. Similarly, when you apply for a business loan from a bank, the bank examines your company’s financial report before lending the loan. Based on the information gathered from the report, banks can determine if the company can repay the loan.

3. For Better Business Decision-Making

A financial report is one of the essential tools for making better business decisions. For instance, if you want to open a new branch, a financial report can help you gain insights. You can assess crucial information like the company’s cash flow to identify if you have enough capital to expand and maintain solvent for daily operations. However, it is necessary to have detailed financial reports based on accurate data to make such decisions. 

In a survey conducted by Deloitte, most respondents identified an insufficient level of details as the main issue in financial reporting, as this can affect financial performance assessments. The advent of modern accounting software has mitigated inaccuracies from old financial reporting techniques, leveraging data and automation to reduce errors in financial reports. These software solutions often have an intuitive dashboard that provides businesses with critical information in an easy-to-understand format to help them make better financial decisions.

4. Builds Trust With Stakeholders

Financial reports help in fostering trust with stakeholders. Accurate and transparent financial reports – backed by data – help convince stakeholders about your business’ performance. Leveraging technology helps build detailed, accurate reports that provide your stakeholders with the information they need to understand your business’s financial position and performance. 

Who Uses Financial Reporting and Analysis?

Throughout the article, we’ve often mentioned several entities that can benefit from financial reporting and analysis, such as investors or lenders. Here is a list of other entities.

1. Business Managers

Business managers use financial reports to help them track and measure the performance of an organization. With deeper insights, they can then devise intelligent strategies to improve the company’s financial health. 

2. Tax Agents And Various Government Agencies

These groups use financial reports to check if the businesses comply with tax regulations. Financial reports are also reviewed as part of the auditing process.

3. Customers

Customers use financial reports to judge whether a company is reliable to do business with. They examine the statements to ensure that the company is financially healthy and determine whether it can stay for a long period.

Conclusion

Financial reporting is essential for any business, regardless of its size. It helps you better understand the company’s financial performance and enables you to make the right decisions that help in the growth of your business. 

Manage your accounts receivables better

 Book a demo of ezyCollect and see how AR automation can help you keep track of accounts receivables and improve data accuracy in your financial reports.

The Human Side of Accounts Receivables Automation

The Human Side of Accounts Receivables Automation

Accounts Receivable automation is becoming increasingly popular in the finance sector, having the ability to replace manual processes – from invoicing to credit risk management – to save time, prevent errors and reduce costs.

The global AR automation market was valued at 1891 million USD in 2020 and will be worth 3861 million USD by 2026. That is a CAGR of 12%. An increased focus on cash flow improvement and reduced accounting time are the major drivers behind the growth of this market.

Despite all the latest technologies, the human touch is still essential for any financial automation endeavour. Let’s take a closer look at how automation can emphasize the importance of the human factor in accounts receivables. 

How does automation uncover the human side of accounts receivables?

Automation offers numerous benefits to the accounting world, from digital payments to accurate projections to valuable data helping organizations make more informed business decisions. 

Some feel that the shift from manual bookkeeping to automation will reduce the need for AR staff. However, automation creates clean and accurate books, helping AR staff be more productive and contributing to customer retention. 

Implementation and adoption

Businesses use many different accounting tools for bookkeeping, reconciliations, revenue forecasts, etc. However, if you use an automation platform, it will be only as effective as the data you feed into it. The more accurate the data goes into it, the more accurate the output will be. This is precisely where you need the human touch when implementing an AR automation solution for collections, B2B payments, or more. 

 Without some amount of human intervention, you may not get the full value from automation. An AR team is still needed for better adoption and implementation of these platforms.

 

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Data-driven decision making matched with human intuition

Business leaders make critical business decisions based on data and counsel from key stakeholders. A key benefit of automation is that it makes it possible to create a dashboard with key metrics available in one place. Decision-makers would only need to look in one place for financials, sales data, and more.

Automation can help consolidate data – such as credit score insights – in an easy-to-understand format. The final decision still rests with the business leaders. Some leaders may use their intuition in making business decisions, but in the current market conditions, all businesses prefer to make data-driven decisions. With an automation platform, good data helps leaders make good decisions.

Technology can work wonderfully for the things they’re created for, but its programming is still limited. When it comes to navigating complex and unexpected events, it is hard to replace genuine financial experience. 

 

A tool to build meaningful customer relationships

Automation is perhaps the most popular when it comes to sending out communications. It is easier to set and forget notifications and reminders through various channels, not to mention cost-effective.

But while automation has created efficiencies in communication, this doesn’t mean that businesses should solely rely on it. When it comes to connecting with customers, the human touch is irreplaceable. It is, therefore, necessary for businesses to look at automation as a complementary tool that can unlock areas of focus in communication.

An AR automation platform, for instance, can tell you which customers may need a more personal approach through recorded data on credit scores and payment behaviour. Finding this information is more accessible, but you still have to call your customers to understand their issues with paying on time. Direct communication is necessary to help you make decisions that can impact your cash flow.

With automation becoming so deeply ingrained in our day-to-day lives, it is refreshing for customers to experience genuine connections with their business partners. By leveraging technology, you can create deeper customer relationships that help your business in the long run.

Conclusion

There’s no question that AR automation can drive business efficiencies. The emergence of advanced technologies like Artificial Intelligence, Machine Learning, and Blockchain is likely to transform further the finance and accounting sector further, like many other industries worldwide. However, to truly get the benefits of these tools, you will need some amount of human touch. Combining the accuracy of automation with human experience is a winning recipe.

Ready to start your business’s digital transformation?

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10 Hacks For Optimising The O2C Process For Your Business & Accelerating Cashflow

10 Hacks For Optimising The O2C Process For Your Business & Accelerating Cashflow

The O2C cycle is often riddled with manual steps that can cause a lot of friction in between- and frustration for both the business and customers. This dramatically affects your receivables collection and, eventually, the health of your cash flow.

In our recently concluded webinar, “The 10 Gifts of Accelerated Cash Flow”, we invited Amanda Lee, Founder and Receivables Management Advisor at The Retriever, to speak with  Arjun (AJ) Singh, Co-Founder and CEO ezyCollect, to discuss how you can take advantage of a streamlined and optimised O2C process through accounts receivable automation, creating a seamless cycle that not only ensures you get payments efficiently but also improve your relationship with customers. Here are the key takeaways from the session.

3 critical areas of focus in the O2C cycle for accelerated cash flow

1. Best practice credit approval

Extending trade credit is something that many businesses do manually, and this can cause a lot of issues that can lead to bad debts – affecting your cash flow in the long run. Adapting an automated and data-driven process delivers efficiencies that are beneficial for both you and your customers.

First of which is a more reliable credit check. Unlike manual application processes that primarily rely on trade references given by the customer, an online credit application system integrates credit risk scores from trade reporting agencies so you can get data-driven insights and make better decisions before onboarding customers and extending credit. Having this data at your fingertips gives you that professional knowledge without much effort, and you’ll be able to manage risk right from day one, making that goal of accelerated cash flow much easier.

Another benefit of online credit applications is a better onboarding experience. First impressions last, as the adage goes, and that couldn’t be farther from the truth in business relationships. Onboarding customers in a disorganised, time-consuming process that are prone to error reflects an unprofessional image on your part – inadvertently sending the message to your customers that they can cut corners as you do. By digitising a credit application, you create a streamlined and automated process that not only benefits your operational efficiency but also means you mean business, and customers need to be in that same level of credibility too.

2. Humanised automation

Humanised automation seems contradictory, but part of reducing your overdue accounts hinges on this balancing act of human connection and automation. Automation creates communication efficiencies in accounts receivables, paving the way for a more personal approach to customers that need it the most.

With an automated communication workflow, you don’t have to physically communicate with everyone, but you’ll be able to focus on customers that need more. An AR automation platform tells you who those customers are through consolidated credit and risk data, providing you with that opportunity to connect and build relationships. To truly understand why your customers’ payment behaviour changed, there has to be human interaction involved. You can work with them to resolve blockers preventing them from paying you on time. It’s about continuing that cycle to sell, and having a receivables ledger that’s 100% collected each month and clear, persistent, and personalised communication with your customers is going to help you achieve that.

3. Frictionless payments

Getting your payment on time is the goal of an optimised O2C process. It is crucial then to make this part of the O2C cycle as pain-free as possible, allowing your customers to pay at a time convenient to them through various payment methods that they can choose from. 

An online payment platform is designed to do just that, not only as a portal where customers can pay you but also includes their statements, so they no longer need to contact you, especially when making the payment after office hours – all the information they need is readily available to them. By creating convenient pathways for payment, you can get paid easily and quickly.

The gifts of accelerated cash flow

As we’ve learned thus far, an accelerated cash flow is very much possible thanks to accounts receivable automation. While an improved cash flow is the end goal of automation, optimising the O2C process also comes with its benefits.

1. Greater business intelligence

AR automation gives you access to data and gives you the insights to make better decisions that can affect the health of your business.

2. Business continuity and data integrity

AR automation resolves cash flow issues, as we now know. With an improved cash flow, you’ll be able to run and grow your business the way you want to.

3. Sharpen your focus

Automation gets all the repetitive tasks done, so you can hone in on strategy-related tasks that further your business.

4. Shore up customer trust

Automation ensures consistency in processes and clears communication pathways – both of which allow you to build trust with your customers and, in turn, foster customer loyalty and growth.

5. Customer Perception

Digital, automated processes are now the norm and what your customers expect. Adapting automation in your business creates a professional image and aids in brand equity.

6. Lowered DSO

Automation streamlines your O2C cycle, removing any friction between processes so you can get paid promptly.

7. Error reduction

AR automation minimises the need for manual entries, reducing errors. Its capability to integrate with your ERP also means there’s no double-handling of data that can lead to more problems in your accounting.

8. Time savings

Leveraging an account receivable platform removes the need for manual processes, saving your staff tons of time. The amount of time saved can then be used to focus on more high-value work that can grow the business.

9. Gain real-time visibility

With an AR automation platform, you can get a live view of credit risk scores to be confident in making decisions based on current and accurate data.

10. Enhance efficiency across the business

While AR automation improves the collections processes of your receivables, this also translates into improvements across business functions and teams.

Watch the webinar

Learn more about optimising your O2C process. Watch the entire webinar for insights from Amanda and AJ. Join our mailing list to receive invites for future webinars.

How to Transform Your B2B Business With an Order 2 Cash Platform

How to Transform Your B2B Business With an Order 2 Cash Platform

The cash flow in a business is a critical factor in deciding its success. A steady cash flow can only be obtained if your order to cash cycle is optimized. For B2B businesses, in particular, ensuring that all account receivables are collected on time is essential to increase liquidity. But often, businesses do not pay enough attention to their order 2 cash cycles until they hit a roadblock.

So what is the order 2 cash cycle, why is it important to B2B companies and how can an order to cash platform help? We have all the answers for you, so read on.

What is the order-2-cash cycle?

The order 2 cash cycle is the collection of activities involved in making a sale, starting with receiving an order right up to the point of payment and invoice receipt. Though the process sounds relatively simple, in reality, it is a lot more complex. Companies often focus all their attention on securing an order from a client, but B2B payments are not given the attention they deserve. This makes the order to cash cycle longer for the business, delays revenue generation, and impacts the overall financial performance of the business.

The usual stages of an order-to-cash cycle include the following-

  • Order entry – Entering the order, collecting and storing all related data
  • Credit – Analysis of customer’s portfolio and risk assessment before deciding on a credit limit
  • Order fulfilment/ returns – Checking product availability, confirming the order, dispatch, tracking delivery, and managing returns when necessary.
  • Order billing – Calculation and verification of bill
  • Collection – Accounts receivables collection, cash generation, and reporting, and bad debt write-offs
  • Cash application – Cash posting, deductions management, account reconciliation, and discrepancy resolution
  • Dispute management – Third-party complaints and customer disputes management

As evident from the stages listed above, the order to cash cycle does not end with the payment receipt. It involves certain critical activities even after the accounts are reconciled.

The order to cash cycle needs to be optimized, but it is hard to find an end-to-end solution that can improve this process. But businesses today are learning to leverage technology in this area too. With a host of integrated software solutions, companies are learning to improve the various activities involved in the order 2 cash process.

Why is the Order-2-Cash cycle important to B2B companies?

Unlike marketing or sales, the order 2 cash process does not operate on the very surface and is more of a background process, and still has a huge impact on the business’s performance. Not just that, it can impact a business’s customer relations too. An optimized order to cash process improves the customer’s journey from the moment the order is placed. As the process involves every function after this point, including order confirmation, dispatch, and even returns, a well-managed O2C cycle ensures a hassle-free experience for customers.

The complete process from order placement to invoice receipt involves several departments in a company, including marketing, pricing, sales, finance, warehousing, collections and more, depending on how the business functions. This expansiveness of the order to cash process is what makes it so complicated. With so many functions and departments involved, making changes to the process becomes all the more challenging.

The order to cash process affects various operations throughout an organization, from supply chain management and logistics to inventory management and more. An optimized order to cash process means that all of these different operations involved are working at an optimum level. On the contrary, a bottleneck in any one of these business areas will affect the entire order to cash process.

The O2C process is also important because it determines the cash flow in the business through invoicing and accounts receivable functions. Any significant delays in invoicing or collection can affect other areas of your business’s finances like accounts payable, salaries, business loans, probable acquisitions, or any other activity that relies on liquidity. This is one of the major reasons why optimizing the order 2 cash cycle is essential.

Despite the dire need for a digital solution that can optimize the order 2 cash cycle, it is not possible to have an off-the-shelf software solution that can handle the entire process as one. This is because the process can be dynamic. There is no one-size-fits-all approach here, as the O2C process can vary for different industries, products, companies, locations, or customer segments. The process can also keep varying within the same company as well. So a comprehensive solution is not possible.

But businesses today are building their own order to cash platforms that unite all the related functions through integrated applications and technologies.

What is an order to cash platform?

An order-to-cash platform is a technological solution that lets B2B businesses bring all the functions involved in the O2C cycle together by seamlessly integrating various applications across various functions. The applications can readily exchange data to ensure that the process runs smoothly from end to end. Payments are collected faster and disputes resolved quickly so that customers can find a reason to remain loyal to the brand.

The best way to ensure that the order 2 cash process is optimized is by making sure that the related functions can exchange information and data with ease for every transaction. For achieving this, technology plays a very crucial role. Interconnected applications that allow different functions to have access to real-time data increase productivity in the order to cash process. Technology also provides other perks like digital invoicing capabilities or accounts receivable automation.

An organization that runs on a platform-based structure can brave these challenges by building platforms that utilize the power of both the human workforce and the technological tools. They combine modular data and technology architecture to create scalable solutions that are handled by agile front-end teams.

An efficient and futuristic O2C platform should have a front-end team, an underlying support team, and a modular infrastructure of applications and tools. This entire ecosystem needs to be dynamic to instantly pivot to meet customers’ changing demands and the organization’s.

Front-end team

The front-end team in an O2C platform is a multi-functional team that directly deals with the customers to ensure seamless orders and payments while delivering a frictionless experience for the customer.

Support team

Supporting the front-end team is a well-defined structure of agile teams that work on the back-end using digital tools and applications and effectively manage end-to-end processes to deliver the order to cash services.

Modular infrastructure

At the base of it all is the technological infrastructure that completes the ecosystem. The tools and applications are necessary to manage all the different functions related to the order 2 cash cycle. Examples of such applications and capabilities include CRM software, customer service platforms, ar automation platforms, automated workflows, among other things.

How can an order-to-cash platform help your business?

A comprehensive order to cash platform can help your business in more than one way. Right from analyzing data, increasing sales, and providing automated transparency to customers at the time of invoicing to payments, the O2C platform can bring numerous benefits. An O2C platform can provide a unified processing capability that helps deliver faster turnaround times for customers and the front-end teams.

A unified O2C platform also ensures data consistency and accuracy across the various functions. The flexible modular architecture of individual applications and platforms enables repeatable processes. It also ensures that you can add new applications and platforms to the ecosystem as the need arises.

Key benefits of an order-to-cash platform for businesses

An order-to-cash platform can address many of the pain points that a business faces in optimizing its order 2 cash cycle.

  • Client facing platforms help deliver value to interactions with customers and help enhance the customer’s buying experience.
  • AI and machine learning-powered platforms help identify common challenges faced in the O2C process by detecting patterns
  • Modular data and technology architecture helps deploy new applications easily as and when required
  • A platform that allows for easy integration with all the related applications can reduce the complexity of the O2C process and help you respond to customer needs better
  • Data moves in both directions among interconnected applications, enriching the connections between various functions and departments. Such integration of data streams creates greater transparency in the whole process for all users
  • Workflow management is made easier through automation and accessibility to data
  • Integration to various accounting software like MYOB, SAP, Pronto, Attache, etc. can bring together all your financial operations for greater visibility into the process
  • An effective O2C platform can also help increase employee satisfaction by reducing the amount of repetitive work through automation and minimizing complexity

How to implement an order to cash platform in your business

Now that we know why a cash 2 order platform is beneficial to your business, it is also important to know how you can implement one to manage your B2B payments and the O2C process overall. Like all other initiatives, you take in business, deploying an O2C platform for optimizing your order 2 cash cycle requires measurable goals before anything else. Having your goals set will give direction to your efforts.

Setting Goals

For most organizations hoping to optimize their O2C cycle, there are three measurable goals in general.

  • Reducing the cost per order – This goal is usually measured in terms of the labour cost involved in fulfilling each order or the number of orders fulfilled per employee. It may also be measured in terms of the share of automated transactions. In simple terms, the lower the cost of labor or the greater the number of orders handled by each employee, the better. Similarly, if the share of automated transactions is greater, the process is considered to be heading towards optimization.
  • Reducing the number of days’ sales outstanding – Process optimization, in almost every business area, means minimizing the processing time. In this case, the aim is to minimize the outstanding sales. The shorter the duration from order placement to completion, including account reconciliation and dispute resolution, the more efficient is your O2C process. Capabilities like e-invoicing, accounts receivable automation, automated workflows, automated cash application, etc., can help reduce the cycle time.
  • Increasing customer satisfaction – Most of the optimization efforts of a business are focused on enhancing the customer experience and increasing customer satisfaction. The O2C process is no different in this regard. By minimizing errors in invoicing, delivery or pricing, and closing deals faster, customer satisfaction can get a boost.

Platform design

When designing your order to cash platform, three essential characteristics can ensure efficiency and effectiveness. These three characteristics are –

Easy integration

The platform’s architecture has to be such that it easily integrates with your existing internal applications, external applications, and any new application you may need to add in the future. Integration is the key to success in an O2C platform. An effective order to cash platform allows both internal applications of the organization and applications used by third parties to run together seamlessly.

This ensures that the ecosystem created is barrierless and that there is free, unrestricted data flow wherever necessary.

Customer-focused solution

Introducing customer-centric solutions can make your order to cash platform far more effective. Leveraging technology to offer customer-facing solutions, like self-service capabilities, order tracking, payment requirements, and such can help improve the customer experience further. It can also reduce the order 2 cash cycle time as the manual intervention required is minimal.

Distributed responsibility

The O2C platform cannot be the responsibility of a single team or a single department. As the process itself involves multiple functions throughout the organization, the responsibility has to be shared among various teams. So any time an issue arises, it should be clear who is responsible for tackling it. Also, there has to be a process owner to distribute responsibilities across functions. This will ensure that the platform is not fragmented and there is no scope for confusion or mistakes, irrespective of the volume of client interactions on the O2C platform.

Challenges

In implementing an order-to cash platform in your business, you may face a few common challenges. Some of the most likely challenges that almost every organization faces in its efforts to optimize the order 2 cash cycle are –

  • Getting buy-in from all the relevant functions and top executives. An O2C process owner can bring all the functions together to agree to the initiative unanimously.
  • Creating end-to-end solutions that create tangible value for all. All business functions and stakeholders involved need to benefit equally from the solution.
  • Convincing decision-makers to invest in the initiative, as the ROI is certain but slow. The gains from this initiative are only seen over time, but the revenues generated once the ROI is realized are usually ten times greater than the investment.
  • Training employees for the disruption that the O2C platform will bring about. Organizations that take on change management initiatives before implementing O2C platforms are better positioned to handle the transformation.

Conclusion

Receiving B2B payments on time is only one of the many advantages of having an effective O2C platform. Optimizing the order 2 cash cycle in a business can bring better cash flows, increase process transparency, and enhance customer and employee experiences. With new insights from the integrated data across applications, more informed decisions can be made in sales and other areas of the business. If done right, an order to cash platform can be an invaluable addition to your business.

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.