The Order-to-Cash Process: Automating a Traditional Accounting Cycle

The order-to-cash process is one of the most important aspects of business and is part of what define’s a company’s success. O2C also plays a large role in customer relationships and reputation management. While many organizations focus the bulk of their attention on the period leading up to when an order is placed, optimizing the order-to-cash process can yield incredible benefits, that have ripple effects throughout operations.

The various functions of the O2C cycle can be greatly improved with digital transformation and a SaaS platform. Through the use of integrated software, you can streamline your O2C process from beginning to end. Not only does this minimize errors and delays, but it helps to serve customers more effectively, and ensures performance data has a maximum impact on your business.

Here’s a quick breakdown of the O2C process, why it’s important, and how to automate your workflows for future success:

The order-to-cash process (O2C process)

The order-to-cash process is often referred to as O2C or OTC for shorthand. It involves a set of business processes for receiving, managing, and fulfilling customer requests for goods and services. It’s used by management to describe the financial components related to customer sales. In simple terms, it is the entirety of your order processing system, from beginning to end.

The O2C cycle starts the second an order is placed. Everything before that is related to a function of branding, marketing, or sales. While some think the process is complete once the order is received and paid for, there are more important steps that occur afterward. Accounts must be reconciled, payment collected, and analyzed to identify areas for optimization and improvement.

The importance of the O2C process

A business should always strive to optimize the order-to-cash process because it has an impact on every workflow throughout the organization, from supply chain to inventory management, labor costs, sales pitches, marketing content, and especially cash flow. Bottlenecks in one area can cause headaches in departments that are completely separate.

Another reason why the O2C is critical for smooth operations is that invoicing and the accounts receivable functions (carried out during O2C) determine your company’s cash inflows. Delays in collection or issues with invoicing will complicate accounts payable, potential acquisitions, payroll, and other challenges related to liquidity. Financing software can help bridge this gap.

An end-to-end net terms management solution like Resolve controls every facet of offering net terms to your customers, from the application process to credit line management. Companies like GB fabrication use it to streamline the payment process, so they can continue to work, without relying on customers paying early. This makes things a lot less stressful when building a business.

Managing a consistent O2C process shows that your company is reliable and it helps to boost brand loyalty. It’s also crucial to completing customer orders on time and simultaneously reduces production costs, while boosting productivity and profitability. All of this results in a greater degree of customer satisfaction and a higher level of retention.

How do I make an order-to-cash?

The order-to-cash cycle has a few distinctive steps, no matter the size of your business or industry type. These are as follows:

1. Order management

The O2C process begins when a customer places an order. Whether through an eCommerce site, email to sales, or in person, order management starts the second the purchase is confirmed. This order management system should be automated, with instant notifications triggering actions in other departments.

An IBM study found that companies that adopted best-in-class O2C practices were 81% more effective at order management than those that had not. Always make sure new orders are acknowledged and organized properly. Also, notify relevant parties to ensure timely and accurate fulfillment.

2. Credit management

Diligent B2B credit management on the front end minimizes issues that could occur towards the end of the process (i.e. receiving payment). Every first-time customer that places a large order should go through a proper business credit check and approval process. Solutions like Resolve can take care of reliable check approvals (or denials) through a quiet business credit check.

Resolve is one of the most popular B2B payments solutions on the market for growing B2B companies that need credit management. While Resolve extends buy now pay later capabilities (BNPL) for B2B transactions, its product functionality expands far beyond the benefits of just boosting working capital. It offers complete net terms-as-a-service while eliminating the risk of managing traditional credit decisions that are handled in-house (or not at all).

This type of software will also send returning customers with current credit approval, straight through to the fulfillment stage. Meanwhile, anyone applying for the first time will have to go through strategic credit check guidelines to ensure you only issue credit to worthy customers.

3. Order fulfillment

Modern fulfillment processes rely on automated inventory management to update stock counts in real-time. This is to avoid accepting orders that cannot be completed. If an order makes it through that is out of stock, it must be flagged immediately. Then you can alert the customer and cancel the order to avoid billing issues.

Orders sent to fulfillment should be in a standardized format so that anyone working on the order can clearly decipher the details. Paper orders, and those in a legacy system that do not contain details, lead to bottlenecks, inaccuracies, and costly clarifications for order shipping.

4. Shipping the order

The success of your shipping depends on product logistics. This is why the shipping part of the O2C process needs to be audited on a regular basis to ensure it meets performance standards.

Data from order and fulfillment management functions must be made immediately available to the shipping team. That way they can plan shipments around carrier pick-up schedules, get out orders on time, and run an effective supply chain management process.

5. Invoicing

Manual invoicing delays and inaccuracies can snowball and lead to cash flow problems that disrupt the entire business. When accurate invoices are delivered on time, it’s easier for the finance team to forecast cash inflows and plan for expenses. A recent report by the Aberdeen Group showed that companies who excel at the O2C process, only require manual input for 16.2% of invoices, compared to 80% for companies on the bottom tier.

The invoicing system needs to receive correct information from staff who oversee the front-line functions. Invoices should be automated with the correct data and sent without delay. This includes important information like:

  • Sales order details (amount, type, etc.)
  • Costs for the entire order
  • Credit terms
  • Order date
  • Shipping data

6. Accounts Receivable (AR)

If you use order-to-cash software, the accounting system can be set to flag outstanding invoices at pre-set times, before they become overdue. Accounts receivable reps can then review these invoices to determine if there are any errors that may result in a delay. For example, unpaid orders on net 30 terms, should be flagged after two weeks. This can trigger the system to send automated payment reminders to the customer to avoid delays.

If an error is detected, AR staff must have a way to quickly review the data from the ordering system. This will help them find out where the breakdown in data occurred, and send out a revised invoice immediately. If you’re short on resources, consider outsourcing your accounts receivable process to solutions like Resolve. Trenchless Supply is an example of one company that solved their AR challenges by using Resolve as their outsourced AR team.

Trenchless Supply Resolve Case Study 3

7. Payment Collections

Payment collection starts with good documentation. A business will encounter issues when payments are received by customers, but not immediately logged into the system. In these cases, the customer accounts still show as unpaid. This creates an immense amount of friction when customers are asked to pay for something that has already been remitted. It’s not good for your company and it can hurt business relationships.

Failure to correctly document customer payments will also lead to inaccurate cash estimates, which causes finance teams to incorrectly forecast higher cash deficits.

When an invoice does lapse into overdue territory, the system should automatically flag the account and put the credit on hold. If the customer tries to place another order, they should be instantly notified of the late payment status. This must be collected prior to another order being placed.

All overdue accounts must be reviewed on a regular basis to reassess creditworthiness. This helps to keep an updated “bad debt” forecast in your ERP system (enterprise resource planning) and to work out the next steps.

8. Data Management and Reporting

Order-to-cash software can track performance data across every stage of the O2C cycle time. By monitoring and analyzing this data, management can see how the overall flow of the O2C process affects everything else in operations. This includes things like:

  • Length of the sales cycle
  • Customer relationships
  • Onboarding
  • Customer service functions
  • And so on...

Data can also be used to determine if bottlenecks in one area are adversely affecting other O2C processes. Since the entire journey is highly interdependent, even the tiniest of inefficiencies in one function can snowball into costly issues elsewhere.

How to improve the O2C cycle

Optimizing the O2C cycle takes a lot of careful consideration. Here are a few tips to improve the process:

Standardize the O2C process

Documentation is underrated. There should always be explicit policies and a standardized process surrounding the order-to-cash cycle. This allows for consistent communications and clear expectations. The more team members you have, the more necessary it will become to document financial procedures. This guarantees every employee receives the same instructions for their role, and enables new employees to get caught up quickly.

Once everything has been documented, be sure all involved employees complete the same tasks in the same way. Cutting down on variation will improve consistency and allow you to better measure progress; which always leads to improvements in the process.

Resolve tip: At Resolve, we have a “write it down” company value that ensures all processes are well documented to ensure efficient onboarding, training, and pivoting of processes, if necessary. Consider using a tool like Notion, Dropbox, or just Google Suite to document all your SOPs.

Don't automate customer service

A lot of businesses try to reduce costs by offshoring customer service. Having someone read from a script can be off-putting to customers. If you’re selling high-ticket items, customers will expect to speak with someone who is knowledgeable about the product and specific order.

Running customers through a chatbot is also a negative. The system can never answer questions adequately, and it won‘t win you any brand loyalty.

Resolve tip: At Resolve, we believe that the most successful businesses are as human as possible, which is why we always encourage companies to prioritize providing a exceptional customer experience, like we do. Invest in your customer support solutions.

Avoid extra fees

Be honest and transparent. Always try to invoice the customer for the product and fees they are expecting. Unforeseen costs can happen and you’ll be tempted to add them to a customer’s invoice. However, for anything unexpected, send a separate invoice describing in detail what the charges are for. Consider calling the customer, as well, to inform them of any additional fees. It’s best to let people know before they get the invoice. Otherwise, you’re looking at a bad customer experience.

Maintain accurate data

Maintaining accurate data across different systems can seem impossible at times. However, if your customer metrics are inconsistent, it can wreak havoc on customer satisfaction and productivity. For example, if the sales team is using a different CRM tool than the accounting department, which is using a different tool from procurement, updates about each customer much be sent to several touchpoints for accurate data. This kind of process is highly susceptible to errors and mistakes.

That being said, companies aren‘t always able to use the same system across multiple business verticals. As an organization grows, different systems are added and compatibility isn’t always considered. Some platforms have triggers that send a notification out automatically when customer data is updated. Other programs offer limited integration and remove any human interaction.

Additional best practices include:

  • A collaborative messaging process with weekly check-ins
  • Integrating systems to increase the accuracy of reports
  • Monitoring the process so it remains updated and applicable to your company’s operations

B2B Payment Solution Guide

Automation and order management

One of the most efficient forms of order management comes with technology. The more you automate menial tasks, the more time staff has to focus on driving value and business growth. It ensures jobs will be consistently performed the same way, every time.

You’ll also be able to incrementally improve workflows by measuring efforts against a baseline. There isn’t a single O2C task that can’t be improved through the use of interconnected systems and innovative technology.

Let’s use accounts receivable as an example. Sending out invoices and collecting payments are two of the first areas you can easily automate. This is known as automated invoice processing and works to convert the manual process of AR including creating invoices, sending them out, and receiving payments, into process automation. This is done through specific AR invoice processing automation solutions specifically designed for these purposes.

Benefits of automation

Automation solutions

Optimal management of the O2C process requires many different departments to have transparent access to accurate, real-time data at any moment. order-to-cash software makes that happen.

A prime solution for automating the O2C process is Resolve, a solution designed just for manufacturers, resellers, and distributors. With Resolve, buyers access a better way to manage their net terms without going through the traditional factoring system.

Resolve was designed to be unobtrusive to the end buyer, while allowing merchants full visibility to view all automated payment reminders, outstanding invoices, credit terms, remaining credit limits, and access to download statements.

Automation solutions like Resolve help to streamline workflows, increase customer satisfaction, and can even lead to tripling your revenue.

Order-to-cash automation will always facilitate finance, accounting, and procurement tasks. It works to improve internal procedures and avoid errors that prevent teams from accessing all available resources.

FAQ

Is order-to-cash accounts receivable?

An order-to-cash system contains the accounts receivable process. AR is a sub-process of O2C that influences customer relationships, revenue, and business growth. Both systems work the same way and the terms are often interchangeable. However, O2C also contains aspects of procurement.

What is the OTC cycle?

The order-to-cash cycle is how a company receives, manages, processes, and completes customer orders. This includes all aspects of the sale like shipping, collecting payment, invoicing, and in-depth reporting.

What is the difference between PTP & OTC?

While order-to-cash involves all the business processes related to a sale, procure-to-pay (also called PTP) includes all business processes related to purchasing from a supplier. It’s like the inflow and outflow of cash. Both systems must be running efficiently and are vital for effective B2B payment processing.

Summing it up

Ultimately, a modern OTC process requires a fusion of technology, interdepartmental collaboration, and astute process management. However, the performance of the order-to-cash process is hardly ideal in most companies. Lack of data, siloed operations, and outdated legacy systems are all major issues that stand in the way of adopting smart O2C software.

The future is bionic and requires both human intervention and technology architecture for a company to succeed. This includes the use of agile front-end teams, scalable processes, and robust decision support groups.

Using O2C software to bridge the gap involves a few measurable goals, like:

  • Reducing DSO: Shrink AR processing time and the dispute resolution cycle.
  • Increasing customer satisfaction: Reduce deductions per order/invoice and increase on-time and in-full payments.
  • Reducing the process cost per order: This is measured by the number of orders/employee or labor costs/order. This also includes the share of automated transactions.

When the O2C process is optimized effectively, businesses can deliver value to customers more efficiently and receive timely payments for their orders. Technology is just the icing on the cake to a well-oiled machine. The right software platform frees up resources so staff can focus on the most important aspect of the job: enhancing the consumer experience to fuel your business growth.

Learn how Resolve can act as your “AR and credit team on tap” while optimizing your net terms and credit management.


Learn B2B best practices.

Subscribe for tactical tips on growing your business and optimizing your net terms and receivables workflow.