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What is the order to cash cycle and why is it important for your firm?

July 18th, 2019

order to cash cycle, O2C, customer order, deliver process, automation

The order to cash system, commonly known as the O2C or OTC process refers to the end to end process from receiving a customer sales order to the payment for the goods or services. The process is crucial to the business as it impacts the cash flow of the organisation and any issues that occur within this system could result in financial losses and affect the reputation in the company. In recent years, many companies have worked towards streamlining the process with the use of software solutions that ensure this system functions in the most efficient way possible.  

What is the order to cash process?

As the name suggests, order to cash is the customer order process in the company. The process begins when the order is placed and ends when the payment for the goods and services is made. Various functions, both directly and indirectly, impact the order to cash process. Although functions like branding, marketing and advertising are not a part of the O2C process, they still affect whether the customer places the order. 

However, the order to cash process does not necessarily end when the payment is made. The management of the company assesses the buying habits of the customer and uses the learnings to identify areas for improvement in the customer purchase process. 

What are the steps involved in the O2C process?

The order to cash process includes five steps:

1. The customer places the order

The process begins when the customer places an order for the goods or services sold by the company. It is crucial that the company has a user-friendly and efficient system in place so that there are no delays or re-entries required when placing the order. A bad order management system can be costly for the business as they would need to spend money to fix their original errors.

2. Order is received and fulfilled

In the second step of the O2C process, the company receives and prepares the goods for shipment or in the case of a service, a date for the appointment is set. When fulfilling the order, the process of packaging and shipping the goods is linked to the order number. This ensures that the customer has full visibility in the order process.

3. Prepare invoice and ship the order

If the payment was not made at the time of purchase of the good or service, the company must prepare an invoice and send it to the customer for payment. This is included in the box when shipping the goods or given to the customer before the service. When the order is shipped it can be tracked by the customer via the order tracking number.

4. The invoice is paid

In this step, the customer pays the invoice they received. Like the order process, the payment system should be made as efficient as possible. The customer should be given a variety of options to choose from such as payment through a debit/credit card, net banking, e-wallets, etc. Streamlining this process ensures the company receives the money in a timely manner, thereby, maintaining a good cash flow balance.

5. Record the payment

When the payment for the goods or services is received by the company, it is recorded by the Accounts Receivable department in General Ledger. Given the high volume of transactions that some companies have, many businesses choose to automate the recording process to increase efficiency and reduce the chance of human error. 

How can your business optimise the O2C process?

When it comes to the order to cash process, there is no ‘one shoe fits all’ mentality. The system depends on the requirements of the business and how they can best utilise their tools to seamlessly integrate the customer and the order management system. Here are a few best practices that companies need to keep in mind when designing the O2C process:

1. The process should remain standardised

The key to successfully integrating a new process into the company is to ensure that it is standardised across all departments. This consistency makes it easier to implement the system and enables it functions with no hitches. With the O2C system, a streamlined process can ensure that your business has healthy cash flow for short-term investments.

2. Automation 

The role of technology in organisations is immense as companies have realised its importance in increasing productivity and efficiency. Automating the O2C process can help businesses integrate their various systems so information flows from one step to the next with no lag. This eliminates any chance of human error and for some companies, it can shave off a lot of the time spent in receiving the payment from the customer.

3. Evaluate the current process for improvements

The O2C process is a function of the Enterprise Resource Planning system. Hence, it is important that the company configures this system to send alerts if there are any exceptions to the process. In addition to this, managers need to periodically monitor and review the process monthly or quarterly.  This can help remove any potential bottlenecks, set goals for improvement and make the O2C process as efficient as possible.

Why is the O2C process important for a company?

When looking at the O2C process it is important to remember that is a crucial function that generates revenue for the company. Therefore, streamlining this process can increase profitability and impact the growth of the business. On the flip side, a bad process could impact various levels of the organisations, most importantly- the cash flow. 

Since the O2C process involves an interaction with the customer at various touchpoints, the process is very important to the credibility and reputation of the company. For instance, if the customer is not able to place an order on the website on the first try, they are likely to give up and purchase the product or service elsewhere. This results in the loss of the customer and potential revenue. Or in the shipping stage, if there are delays in the order or the wrong order is processed, it could affect the credibility of the company. 

Given the number of steps involved in the order to cash process, it is essential that the company has complete visibility on the system. This can help them identify any errors and take the necessary steps to rectify the problem. One of the best ways to close the loop between the different steps is to automate the process and streamline the ERP system. 

The revenue and operating costs of the firm ties into the order to cash process, therefore the greater the number of inefficiencies in the system, the higher the number of losses. Many companies have realised the impact of O2C process in their business and are taking proactive steps to implement the best practices when evaluating it. Automation of the sales order management system presents a viable solution to reinvent and optimise the order to cash process. 

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