Every business that sells goods has an order-to-cash process, whether it's an artisanal jam company, artistic t-shirt enterprise, or no-frills vendor selling pallets of roofing tiles.
When a customer places an order the order-to-cash (O2C) process begins. It ends when the company receives payment for the product or service. Even if you don’t know it by its acronym, as a merchant, you know this is a critical business process that impacts revenue, customer satisfaction, and overall efficiency. The more optimized your O2C is, with streamlined order management, automated tasks, improved communication, and tracked analytics to identify areas for improvement, the more it leads to faster order fulfillment, improved cash flow, and stronger customer relationships. According to a BCG report on O2C platforms, “companies that deploy O2C platforms and reengineer the process boost revenues by 1% to 3% a year.”
Understanding the process with a willingness to examine snags along the way results in a more efficient business—with the added perks of satisfied customers, staff, and vendors. Here’s how to manage and optimize your O2C.
What is the order-to-cash process?
The process of order-to-cash, often shortened to O2C in business-speak, includes fulfillment, invoicing, payment processing, and accounts receivable management, among other steps. Decades ago, the O2C process held a reputation for being a chaotic affair, one where handwritten purchase orders, faxed invoices, and other analog functions were the norm. But there are now numerous platforms and software options to help businesses streamline their O2C process.
Technology has enabled digital invoicing, tracking, and central hubs of information that allow sales teams, warehouse workers, accounts payable, and customer service to have access to the same information in real time. In addition, nearly all workflow processing software provides data for analysis at each step of the O2C process, with metrics helping to illuminate systems that work and those that need improvement. Financial forecasting is now an integral output of process workflows.
8 steps to the order-to-cash (O2C) process cycle
To understand the O2C process, you'll need a firm grasp of the steps from beginning to end:
- Order Management. Purchases can range from an individual at home buying a product online to a business or institution emailing an order of vast quantities.
- Order processing. This stage ensures that the purchase order is sent to the correct person or department.
- Credit management. While most individual customer purchases are conducted in real-time transfers, purchases made by businesses are often on credit. Managing a business customer's credit might include running payments through a software approval process and green lighting repeat customers in good standing.
- Order fulfillment. This is when the business prepares and packages the product or service for delivery. Myriad issues can arise during this step, from issuing a sales order for that special pair of sneakers when there are actually none left in the warehouse to promising a delivery date that is physically impossible.
- Shipping. The business delivers the product or service to the customer. When software, automation, and platforms are used correctly, they help protect businesses against delivery mistakes.
- Invoicing and billing. Whether a customer has paid in full or is waiting for a bill, an invoice with the correct information and status is issued.
- Accounts receivable. Accurate accounting software tracks overdue and near overdue invoices, as well as raises red flags on repeat offenders.
- Revenue Recognition. Software programs allow businesses to track when a customer's payment transaction is complete and properly record revenue for financial forecasting.
- Reporting and Analysis. Thorough analysis of data helps businesses see where improvement is needed. Depending on the software, businesses can detect patterns of miscommunication, the origins of bottle necked customer orders, and how one department's inefficiencies impact other departments.
Benefits of O2C Optimization
Optimizing your order-to-cash process delivers significant business advantages:
- Improved cash flow acceleration. Streamlined processes reduce the time between order placement and payment collection, improving working capital.
- Increased customer satisfaction through faster fulfillment. Efficient O2C processes result in quicker order processing and delivery times.
- Reduced operational costs. Automation and optimization eliminate redundancies and manual errors throughout the process.
- Enhanced financial stability and forecasting. Better visibility into the entire process supports more accurate revenue projections and business planning.
How to optimize the O2C process
Consider the following when strategizing how to optimize your O2C process.
Do you have an established set of standards? A simple guidebook with easy-to-understand terminology helps employees navigate the company's O2C process.
How effective is your accounting software? There are numerous accounting platforms and software programs that aim to help business owners with the general ledger. These assist in the receivable process and inventory management, among other facets of the 02C process.
Are your invoices digitized? It may sound obvious to have a digitized invoicing system, but some business owners are analog holdouts. However, most who take the time to learn digital invoicing discover it saves time in the long run.
How often are you checking in? Data taken from software on a regular basis can reveal interesting patterns in a business's O2C cycle. It can show redundant processes, customers who consistently pay late, or a repeated customer complaint—all of which indicate where tweaks, updates, and changes are needed.
Final thoughts
Most businesses that pay close attention to their O2C process find it yields dividends in terms of efficiency and customer satisfaction.
Today's software choices give businesses concrete data, and analyzing these metrics reveal precious insight. With an automated process, inefficiencies—from fulfillment backlogs to supply chain snags—are no longer vague abstractions but identifiable issues throughout the O2C cycle. When all steps of the O2C process are examined and best practices implemented, businesses are more efficient. When businesses proactively ensure a positive buying experience for their customers, they have robust, repeat purchases.
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Order-to-cash process FAQ
Why is the O2C process important?
A streamlined and efficient O2C process creates satisfied customers, which typically translates into positive reviews, organic word-of-mouth recommendations, and ultimately, repeat purchases.
What are some of the challenges of the O2C process?
An O2C process, especially for businesses that do a high volume of sales—has a lot of moving parts, as well as dependencies. For example, businesses are dependent on customers to pay their invoices on time. When payment is late, businesses have less working capital, which can impact payroll, timely vendor payments, and company morale—all of which can further negatively impact the O2C process and compound the problem.
What are the benefits of a streamlined O2C?
When a business runs efficiently, it builds trust internally and externally. Not only are employees more engaged, but a streamlined system allows customer service to answer nearly all questions. Both customers and vendors can be confident they are working with a reliable business. Creating this type of positive relationship with customers is not only good business practice, but it can give businesses a competitive edge.
