Order to cash (O2C) encompasses all transaction steps from the customer making a purchase to the business getting paid. This includes the ordering process, credit checks, product delivery, invoice delivery, and payment completion.

A well-managed O2C process improves cash flow, reduces financial risk, and helps maintain strong customer relationships. Businesses that have refined their O2C process have accelerated order fulfilments, gained insight into customer payment behaviours, and reduced the average number of days it takes to collect payment – also known as days sales outstanding (DSO) – by up to 30%, according to a 2020 report.

Below, we’ll cover how the O2C process works; what kinds of businesses use it; and its benefits, challenges, and best practices.

What’s in this article?

• How does the order-to-cash process work?
  
• What kinds of businesses use order to cash?
  
• Benefits of refining your order-to-cash process
  
• Challenges and solutions for order-to-cash management
  

How does the order-to-cash process work?

The O2C process involves several interconnected stages that guide a customer order from initiation to final payment. Here’s how each stage works.

• Order management: A customer places an order, and the business captures the order and enters it into the system. The business then validates order details, checks inventory availability, and confirms the order with the customer.

• Credit management: The business evaluates the customer’s creditworthiness and establishes credit limits to lower the risk of bad debt. This is especially important for new customers or large orders.

• Fulfilment: The business picks, packs, and ships the product or delivers the service.

• Billing and invoicing: The business generates an invoice and sends it to the customer. This invoice details pricing, taxes, any discounts, and payment terms.

• Payment collection: The business monitors outstanding payments, sends reminders, and handles any disputes or payment issues until payment is complete.

• Payment reconciliation: The business reconciles incoming payments with outstanding invoices and updates financial records to keep the accounts receivable balance up-to-date.

What kinds of businesses use order to cash?

Any business that sells goods or services and manages customer orders has an O2C process. Here are some business types where the O2C process matters most.

• Manufacturing: These businesses often handle large order volumes, complex supply chains, and inventory management. An improved O2C process can help them manage orders, lower inventory costs, and reduce the time between order receipt and payment collection.

• Wholesale and distribution: Wholesalers and distributors operate on tight margins and high volumes. An efficient O2C cycle can help them manage large orders, credit terms, and timely collections while maintaining good relationships with both suppliers and customers.

• Retail: Retailers, both online and physical, use O2C processes to handle customer orders, process payments, manage returns, and operate various payment methods. With an effective O2C system, they can more easily manage inventory levels, speed up payment collection, and improve customer satisfaction.

• Subscription-based services: Subscription businesses (e.g. software-as-a-service, streaming services, recurring product deliveries) rely on O2C to manage recurring billing, subscription renewals, and payment collections. These businesses can enhance their O2C processes to reduce churn and maintain a steady cash flow.

• Professional services: Consulting firms, law firms, and other service-oriented businesses use O2C to manage client engagements, invoice clients for services rendered, and track payments. These businesses rely on good O2C practices for accurate billing and prompt payments.

• Telecommunications: Telecommunications companies handle massive transaction volumes, often with complex pricing structures and payment plans. They need effective O2C processes for order management, billing, credit checks, and collections.

• Healthcare: Hospitals, clinics, and other healthcare providers rely on O2C to manage patient billing, insurance claims, and collections. An improved O2C system helps with accurate billing and can decrease the time it takes to collect payments.

• Pharmaceutical and life sciences: These companies need well-designed O2C processes to operate complex distribution networks, manage compliance, and simplify billing and collections – especially when engaging with insurance providers, healthcare facilities, and pharmacies.

• Energy and utilities: Utility companies – such as those providing electricity, gas, or water – use O2C processes to manage billing cycles, credit assessments, and payment collections from customers. Managing customer accounts and reducing late payments can be simplified with an effective O2C cycle.

Benefits of refining your order-to-cash process

Refining the O2C process can significantly improve a company’s operations, risk management, and future strategies. With an enhanced O2C process, businesses can:

• Recognise revenue sooner by decreasing the time between invoicing and payment

• Clarify incoming payments and customer habits for better cash flow forecasting, working capital management, and strategic financial decisions

• Better evaluate a customer’s credit health and reduce the risk of unpaid invoices

• Decrease revenue leakage by lowering the risk of incorrect pricing, invoicing errors, or missed discounts

• Reduce the average number of days the company holds on to inventory (i.e. days inventory outstanding), thereby lowering holding costs and the chances of having outdated stock

• Focus on the right collections strategy and avoid wasting time and money chasing payments that are already on track

• Improve segmentation, and offer more customised payment terms or services for faster payments and a better customer experience

• Take advantage of cash discounts and rebates while protecting their profitability

• Smoothly handle high volumes during peak seasons to increase sales and keep customers happy

• Proactively find the patterns and root causes behind disputes—and resolve them before they arise

• Feed more accurate data into the supply chain and demand planning to stay agile in the face of inventory or supply chain changes

• Maintain stronger compliance and audit readiness with clear, consistent financial records

Challenges and solutions for order-to-cash management

The O2C process comes with certain challenges that can disrupt payment collections, decrease customer satisfaction, and impede operational efficiency. Here are some common challenges and how to address them.

• Order entry and management: Errors during order entry – such as incorrect pricing, product codes, or customer details – can lead to delays, back orders, and unhappy customers. Implementing automated systems for order capture and validation can reduce manual errors, ensure accurate pricing and inventory checks, and accelerate the order processing cycle.

• Credit checks: If businesses don’t continuously monitor customer credit and adjust it based on real-time data, they might miss early warning signs of financial trouble and risk bad debt or late payments. Using real-time analytics and dynamic credit scoring models can help monitor customer credit risk to set more accurate credit limits and terms.

• Order fulfilment: Delays in fulfilment often arise from poor inventory management, supply chain disruptions, or production bottlenecks. Using data analytics for better inventory forecasting and implementing just-in-time practices can help mitigate these issues. Demand-driven replenishment strategies can also reduce delays and help with timely delivery and high service levels.

• Billing and invoicing: Billing mistakes – such as incorrect amounts, missing line items, and late invoices – can cause payment delays and disputes, and they can increase DSO. Standardising and automating the billing process with electronic invoicing (e-invoicing) can help create timely, accurate, and consistent invoices that reduce the risk of disputes and accelerate the payment cycle.

• Payment collection: Slow or unclear payment collection processes and inadequate follow-up tactics can delay payments and increase DSO. Businesses can incorporate regular follow-ups, automated reminders, and multiple payment options to avoid this bottleneck and strengthen their payment collection processes. Segmenting customers by risk profile can also help prioritise collection efforts and lower their costs while improving recovery rates.

• Cash application: For businesses with high transaction volumes or multiple payment methods, matching incoming payments to the right invoices (known as cash application) can be complicated. Automated cash application tools can help by reducing manual effort and errors for faster reconciliation and more accurate financial records.

• System integration: Data silos form when O2C data is scattered across various systems – such as billing, enterprise resource planning (ERP), and customer relationship management (CRM). These silos can lead to inefficiencies and a lack of visibility across the process. Integrating these systems improves visibility into the entire O2C cycle and makes it easier to identify bottlenecks.

• Dispute management: Billing errors, damaged goods, and service issues can all cause payment disputes that result in delays and damage to customer relationships. Businesses can anticipate this by establishing clear dispute resolution protocols with quick escalation paths, dedicated teams, and transparent communication channels for faster resolutions. Using data to spot recurring dispute patterns can also help address root causes and prevent future disputes.

• Data analytics: Without advanced analytics, it’s challenging to identify trends, understand challenges, and make informed decisions about how to improve the O2C process. Using data analytics to monitor key performance indicators (KPIs) such as DSO and invoice accuracy can help companies fine-tune their strategies and make process improvements.

• Team training: If the team managing the O2C process lacks training or isn’t aligned, mistakes, slowdowns, and miscommunication can occur. Businesses must train and empower their teams with a solid understanding of the entire O2C cycle, in addition to encouraging cross-departmental collaboration so everyone is aligned.