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The Order-to-Cash Cycle: A Guide for Mid Market Businesses

by | Nov 30, 2021 | 0 comments

What Order-to-Cash does for accounting systems

The Order-to-Cash cycle, also commonly known as O2C, is an essential part of your business’ operations that helps you accept and complete orders. The process manages your business’ order processing and accounting system from start to finish. Though it may seem like the O2C cycle ends when an order is completed, several important steps follow it. O2C not only records 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 optimizing the O2C cycle

The O2C cycle impacts many areas of a business, making its features beneficial to companies of all sizes. From sales analysis to streamlining a company’s B2B payments process, this cycle encompasses a variety of benefits 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. This process usually requires the business to approve the supplier’ credit application. Approval for credit requests and credit limits for each customer are also taken into consideration when determining how much credit to lend a customer. In order to make sound decisions about extending credit, credit management professionals need to rely on accurate customer credit reports, also known as trade reports.

The credit approval step also reviews the financial situation of the supplier. It takes into account various essential 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 together 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 minimizing risk while maximizing 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 the services they offer. Based on customer interest, sales professionals negotiate with customers on the order’s price, quality, delivery, and payment terms.

Making sure the suppliers are able to meet the terms of the order is part of the order acceptance process.

Step 3: Order fulfillment

The step involves locating, preparing, and shipping the order. Making sure the date and location details of the shipment are accurate is of utmost importance during the fulfillment stage. Here’s where automation plays a essential role in streamlining the fulfillment process. Updating sales inventory counts on time is key to avoiding accepting new orders before the previous ones are finished..

If an unavailable item is accidentally purchased, the same needs to be recorded in real-time to avoid any future billing issues. 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 the delivery is complete, accounts receivable professionals invoice the customer for the amount owed. The invoice is either shared physically or electronically, depending on the order. The use of electronic billing via email has become more popular recently, 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 – 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 in a way that benefits both sides.

Step 6: Cash application 

After payments are received, the money is then allocated to specific accounts. This process acknowledges the receipt of cash and marks the invoice as paid. Though seemingly simple, this step is actually a little more complex than it appears

Since companies usually process a good number of payments every month, it’s crucial to have a system for categorizing them properly. That’s where cash application specialists come in- they match up these receipts with the correct invoices. Remittance advice helps with this process, as it often comes with certain types of payment.

Remittance can also be sent through email or telephone, but this only further complicates accounting systems and leads to inaccuracy. When particular payments are delayed or cover multiple invoices, additional complications can arise that require more sophisticated 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

When a payment is not received by the due date, the account becomes delinquent. At this stage, the account is transferred to the collections department.

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 any future issues.

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 

If you are looking to improve your Order 2 Cash process, then you need to know how to do it the right way. Implementing cost-saving measures is one benefit of enhancing your O2C solutions, but there are many more advantages to be had. 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 is not complete until the cash due is properly allocated to a specific record system. For a business to receive money through these payments, there needs to be an automatic application of cash. Any delays in cash allocation 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 due date.

As customers clear payments in a variety of ways, cash application becomes all the more complex. 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 become disconnected from their respective invoice, requiring additional time and resources to find a match. Trying to handle all of this without accounts receivables automation can be difficult.

Although a 100% match rate is the goal, realistically there will always be some exceptions. Automating the cash application process not only cuts costs but also reduces the average days sales outstanding (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, using automation improves overall hit rates and minimises transaction 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. More advanced systems also let customers manage their own invoices with easily accessible web applications. Additionally, O2C enables businesses to free up their resources for other tasks, allowing them to focus on customer experience and other key operations.

O2C systems also help identify possible areas that could use further optimization to boost customer experience. Knowing which areas to improve for customers helps a business deliver great experiences, which develops brand loyalty and business growth.

Conclusion

The Order-to-Cash process can offer your company untold strategic potential. The right approach can help improve your company’s cash flow and boost customer satisfaction. It also has the potential to help you achieve your goals for sustainable business practices, all while significantly reducing costs.

Selecting the most appropriate solutions for your company can be challenging and require some experimentation. However, it is important to consider the flexibility of these solutions when making your decision. You need a system that can adapt to your specific invoicing needs.Additionally, the ability of the system to manage both intelligent cash applications and electronic adoption is essential.

These key capabilities will help suppliers achieve the right balance between buyer satisfaction and low DSO.

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