A business entity is run through several processes to yield the desired objectives. These processes work hand-in-hand to ensure the optimum utilisation of resources that provide satisfaction to the stakeholders in all respects. One such process is the Order to Cash Process. This process deals with customers and the sales side of the business.
The order to cash process or OTC or O2C process starts right when the order is placed by the customer and ends when the entity receives cash for the sales made through order fulfilment. The entire process is divided into steps to ensure that the cycle runs smoothly and at no step should the process get stuck.
An optimum Order to cash Cycle will ensure a good customer relationship and increased sales. It will also ensure the organisation's working capital balance and positive cash flow, thereby aiding financial management.
Did you know? The O2C process is complete when the order is received and paid for, but there are other important steps that occur after these actions.
What is Order to Cash?
The Order to Cash process begins right from the point when a customer places an order with the company. This can be ordered for goods for the manufacturing industry and services in the service industry. However, merely this does not constitute an Order to the Cash cycle.
For an Order cash process to be full-fledged, the entity needs to streamline other linked processes responsible for the Order to cash process to function at an optimal level. Another crucial point in the process is the data analysis of the entire process that helps the entity find loopholes and bottlenecks in the process, assist in filling gaps, and incorporate improvements between the O2C process and other allied processes to generate the best results.
What is the Order to Cash Process?
The order-to-cash process is a series of activities involved in the sales process, from order placement by the customer to the collection of cash from the customer.
1. Order Placement
Order can be placed through any means, i.e. sales person, online portals, agents, etc. In the order-to-cash process, order placement refers to the point at which a customer places an order for goods or services. This can be done in a variety of ways, such as by phone, online, or in person. Once an order has been placed, the order-to-cash process moves to the next steps, which may include order processing, billing, and collection of payment.
2. Order Management
Once the order is placed, the system should immediately trigger signals to respective departments like inventory management, accounts receivables, sales orders, etc., to set ready for the commitment made to the customer. It has to initiate the order to cash process.
3. Credit management
A good credit management system ensures less hustle and minimizes time and revenue loss by the process's end. Companies often provide credit periods for their B2B transactions. Hence, before a customer record is set up in the entity data, the entity must check whether the customer is new or repeating. Every new customer has to go through the credit approval process, and the repeat customers can be assigned directly to order fulfillment depending on their past recovery performance. Only genuine customers must be allowed credit based on their creditworthiness.
4. Order fulfilment
The order fulfilment process requires accurate integration of inventory management systems. The inventory system must display the real-time data of goods in stock to ensure the timely fulfilment of the order. Any lag in this system can lead to the cancellation of orders and inaccuracies on the company's part, thereby leading to a loss of revenue. Out-of-order items must immediately be highlighted, and the production department must make an alert about the demand for those items.
5. Order shipping
Shipping activities require a keen watch to ensure better and timely delivery of orders to the customer. Order is shipped to the required designation based on information recorded in respect of the order at the time of placement. As soon as order fulfilment is ensured, the shipping department has to be informed to make arrangements for respective shipping. The billing address and delivery address may sometimes be different.
6. Customer invoicing
Invoicing is the pinpoint based on which customer makes payments to the company. Not only from the point of view of revenue generation, but also internal finance management requires that they know the cash inflows to plan company payments accordingly. The invoice has to be generated and sent to the customer via mail or post with all relevant details with utmost accuracy.
7. Accounts receivable
The accounts receivable team generates alerts and reminders to customers for their payment dues. The automation must enable timely reminders to customers based on the credit period of each and must stop the communication once the entire due is settled by the customer. This team's job is to review the invoices for any delayed payments and, if errors are detected, quickly send revised invoices to the customers to avoid further delay.
8. Payment collection
Payment collection is a tedious task. The company is at risk of loss if it sends reminders to customers who have settled their accounts and fails to remind customers who have overdue. Cash collection must be automatically updated in the system to ensure accurate figures of amounts received and receivables are reflected. For overdue beyond the credit period, the system must flag such customers and put them on hold to avoid further billing before clearance of existing dues.
9. Reporting and Data Management
Amongst all, the most important are reporting and Data Management. Through this activity, the entity can analyze the scope of improvement in the process and how better the process can be made to increase integration among various other processes.
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Challenges Faced by Order to Cash Process
The order-to-cash process is highly interdependent on other business processes. Hence, it requires accuracy within the process and around the process. Failure in one step leads to cascading effects of errors in the rest of the steps resulting in inefficient process outcomes. Following are the challenges faced by the Order to cash process:
For all processes to function properly, integrity has to be ensured. The most challenging part is the real-time updating of data in system records to enable the automatic functioning of all processes in harmony. Integration is needed for timely data to be available to avoid delays and losses.
Technology plays a vital role in enabling integration. With good ERP systems, data storage, retrieval and management will be much more efficient and timely. Technology adapted must enable timely error detection and an effective control mechanism for authority roles for data access.
A great deal of manual intervention in preparing sales orders, invoicing, inventory management or cash collection may lead to errors and scope for fraud.
The company is responsible for keeping confidential records of clients or customers regarding their bank details and transactions. Order to cash process reports generated contains a fair share of financial data about the company; hence, security of the same is essential at all levels.
Tips To Optimize Order to Cash Process
From a bird’s eye view, the OTC process seems reasonably achievable. However, at an operational level, every step needs the utmost accuracy to reap the benefits this process can generate. Some of the points, if given due consideration, can help optimize the Order to Cash process:
Standards have to be established to ensure all actions are conducted in a certain defined way. This will eliminate any variances and differences in decisions. A proper Order to cash process manual must be prepared for independent employees and workers to know about the process and the role they are required to play.
Accounting software is ultimately responsible for generating reports. Efficient accounting software that accumulates all data in one place and updates the same in real time.
Data evaluation must be a timely activity to review the process and identify any possible improvements to increase efficiency.
Technology must be adapted to reduce human interference so that human resources can be used in the management of other core business activities.
The order-to-cash process is a part of Supply Chain Management and includes a great deal of Customer Relationship Management. It helps build a good customer relationship, enabling business growth and revenue generation. An optimal O2C process can help develop the entity's customer base. The O2C evaluation and review process will also help detect errors in other processes connected to the OTC process. Order to cash cycle will help increase customer satisfaction, leading to a profitable business.
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