Last updated on October 8th, 2024 at 07:14 am
The order to cash (O2C) cycle is often overlooked but always addressed. It’s the lifeblood of any business. It’s the process that turns sales into countable cash. A well-tuned O2C cycle is efficient, productive and profitable like a well-oiled machine.
But let’s be honest: many businesses treat the order to cash cycle as an afterthought and, as a result, get delayed payments, increased costs and cash flow stress. It’s time to stop treating this process with indifference and start treating it as the business imperative it is.
In this blog, we cut through the corporate speak and explore the practical strategies surrounding O2C. Start reading now.
What is the Order to Cash Cycle?
The order to cash process cycle is the series of steps involved in turning a customer order into cash. It starts when a customer places an order and ends when the payment is received.
For example:
You order a new laptop online.
The O2C process starts when you place the order on the website. The retailer verifies your order, checks inventory and processes your payment. Once the laptop is shipped you get an invoice. When you pay the invoice the O2C process is complete.
Understanding Order to Cash Cycle and vs QTC: A Comparison
O2C and Quote to Cash (QTC) are revenue-generating business processes for a trade life cycle. While they have some similarities they are different in scope and focus.
Key Differences
- Scope: QTC has a broader scope, it covers the entire sales process, while O2C focuses on the post-order activities.
- Timing: QTC starts earlier in the sales cycle, and O2C starts after an order has been placed.
- Integration: QTC involves more cross-functional collaboration between sales, marketing, finance and operations, O2C is more focused on finance and operations.
Relationship Between O2C and QTC
Subset: O2C is a subset of QTC. O2C is a part of the overall QTC cycle.
Interdependence: The O2C process affects the overall QTC cycle. For instance, if the O2C process is inefficient it can lead to delayed payments and increased costs. This, in turn, can impact the QTC cycle by reducing sales and damaging the company’s reputation.
On the contrary, a well-tuned O2C process can enhance customer satisfaction, drive revenue growth and contribute to the overall QTC cycle.
Why a Well-Tuned O2C Process
A good order to cash cycle is needed for:
- Cash flow: Payment on time implies cash in the bank.
- Customer satisfaction: Order fulfilment and invoicing on time equates to happy customers.
- Bad debt: Good credit management and collection practices indicate less bad debt.
- Data-driven decision making: O2C analytics provides valuable insights for business improvement.
Stages in the Order to Cash Process: Order to Cash Cycle
The O2C process is a key business function that covers the steps from when a customer places an order to when payment is received. It includes:
- Order placement and processing: A customer places an order, online, in-store or over the phone. Then comes the verification of order details, product availability, pricing and shipping information.
- Credit approval: For new or credit-worthy customers, a credit check is done to assess their creditworthiness. Based on credit history, a credit limit is set.
- Order fulfilment: Products are picked from inventory and prepared for shipping to the customer’s address using the right shipping method and carrier.
- Invoicing: An invoice is generated with the items ordered, quantities, prices, payment terms and any applicable taxes or fees. This invoice is then sent to the customer, usually electronically or by mail.
- Payment collection: Receiving and processing payments from customers follows here. Accepted payment methods can be credit cards, debit cards, checks, EFTs or online payment gateways. The brands reconcile payments against invoices to ensure accuracy and prevent errors.
- Cash application: The payments are applied to specific invoices or customer accounts. These payment records are kept in the accounting system.
- Accounts receivable management: Brands then urge the customers to ensure timely payment. They then analyse the accounts receivable based on age to identify risks and prioritise collection efforts. They initiate collection for overdue payments using phone calls, emails and letters.
- Closing the books: The O2C process is part of the overall accounting cycle for financial reporting. The last process is to initiate the accounts receivable with the general ledger to ensure accuracy.
Order to Cash for Subscription Businesses
The O2C process for subscription businesses has its own challenges and opportunities due to the recurring nature of the revenue streams. Here are some key points:
Subscription Management
- Customer lifecycle management: Manage customer acquisition, retention and upsell to maximise revenue.
- Subscription tiers and pricing: Offer flexible subscription plans to cater to varying customer needs and revenue.
Billing and Invoicing
- Recurring billing: Set up recurring automated billing to ensure timely invoicing and payment collection.
- Usage-based billing: If applicable, implement usage-based billing to charge customers based on consumption.
Payment Processing
- Secure payment gateways: Integrate secure payment gateways to protect customer data and make payments easy.
- Multiple payment options: Offer credit cards, debit cards and EFTs as payment options.
- Payment failures and dunning: Get robust dunning management in place to handle payment failures and recover lost revenue.
Revenue Recognition
- Subscription revenue recognition: Recognise subscription revenue according to accounting standards (e.g. ASC 606).
- Deferred revenue: Account for deferred revenue on prepaid subscriptions.
- Revenue recognition policies: Have clear revenue recognition policies in place to ensure consistency and accuracy.
Customer Support and Churn Management
- Good customer service: Answer customer questions, resolve issues and improve customer satisfaction.
- Churn analysis: Analyse customer churn rates and implement retention strategies.
- Upselling and cross-selling: Offer additional products/services to existing customers to increase revenue and reduce churn.
Subscription Analytics and Reporting
- KPIs: Track customer acquisition cost, customer lifetime value and churn rate.
- Subscription analytics: Use data analytics to see customer behaviour, subscription trends and revenue performance.
- Reporting: Generate reports on subscription revenue, customer metrics and financials.
5 Order-to-Cash Best Practices
The Order to Cash (O2C) process is key to any business. By following these best practices, you can optimise your O2C cycle and get lots of benefits:
1. Simplify Order Processing
Use technology to automate repetitive tasks like order entry and verification, reduce errors and improve efficiency. For example, have an online ordering system that verifies product availability and calculates shipping costs.
Additionally, you can provide a user-friendly online ordering platform to give customers a seamless experience. This is especially useful for businesses with a large customer base.
2. Improve Credit Management
Have clear credit policies and guidelines to assess customer creditworthiness and set credit limits. Use credit scoring models to automate the credit approval process and reduce manual work. For example, integrate a credit scoring API into your ERP system to automatically score customer credit risk.
3. Invoice and Payment Collection
Here’s how you can simplify this process:
- Electronic invoicing: Send invoices electronically to reduce processing time and errors.
- Clear and concise invoices: Make sure invoices are easy to read and have all the necessary information.
- Multiple payment options: Offer credit cards, debit cards and electronic funds transfers (EFTs) to customers to give them a choice.
- Automated payment reminders: Send payment reminders to reduce late payments and improve cash flow.
4. Implement Accounts Receivable Management
Analyse accounts receivable regularly to identify overdue payments and prioritise collections. Additionally, have clear collection procedures and dedicate resources to follow up on outstanding invoices. Lastly, offer discounts for early payment to encourage timely payment and improve cash flow.
5. Tech and Analytics
Here’s how you can utilise technology to your advantage:
- ERP systems: Use ERP systems to O2C and get real-time visibility into key metrics.
- Data analytics: Use data analytics to see customer behaviour, identify trends and optimise the O2C cycle. For example, see payment patterns to see where you can improve your collections.
- Automation tools: Use automation tools to automate repetitive tasks, reduce errors and improve efficiency. For example, use RPA to automate invoice processing and payment applications.
Summary
The O2C cycle is the engine of a business’s revenue. A well-optimised O2C process means smooth operations, timely payments and steady streams of cash. However, many businesses struggle with inefficiencies in their O2C cycle and get delayed payments, increased costs and hindered growth.
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Frequently Asked Questions
What is the order to cash cycle?
The O2C cycle is a business process that tracks from the moment a customer places an order to when payment is received.
How do you explain the O2C cycle in an interview?
Emphasise its impact on a company’s financial health. Highlight how a well-optimised O2C process can help overall cash flow, customer relationships and retention.
What is the order to cash in finance?
This is the financial aspect of the O2C process, invoicing, payment collection and accounts receivable management.
Who is involved in the O2C process?
All the departments in the O2C process include sales, customer service, finance, logistics, IT etc.
