The order to cash (O2C or OTC) process includes everything that takes place after a customer places an order. It involves inventory and warehouse management, fulfillment, invoicing, collecting payment, and any other step until an order is complete.
The O2C process impacts most key areas of your business, from inventory to accounting to sales, and should be optimized to improve overall operations and cash flow.
Order to cash, or O2C, is a key order management process that ensures finished products are moving out and money is coming in. The process begins when an order is placed and concludes when payment is received in full.
The key steps in an O2C cycle include:
Having a solid understanding of how an order is managed until payment collection can help streamline operations and better manage your cash flow. For example, by analyzing your O2C cycle, you can reduce the time between paying suppliers and collecting customer payments. You can also discover ways to reduce bottlenecks and speed up order fulfillment.
There are many benefits to optimizing your O2C process, which we cover in the section below.
The order to cash process turns a customer’s purchase into profit. Making sure all the steps are running optimally can help improve your cash flow and a customer’s experience with your company. Here are the top three benefits of optimizing your O2C cycle:
Once a customer places an order, it’s up to the company to deliver the product and a great customer experience. With O2C process optimization, you can create a better fulfillment, invoice, and payment processing experience. This leaves customers with a positive lasting impression of your company, and increases the likelihood of them becoming repeat loyal customers.
All invoicing and payments take place during the O2C process. By reducing any bottlenecks and delays in collection, your business can quickly increase its cash inflow. An optimal fulfillment process also generates greater customer satisfaction, which can lead to repeat purchases and long-term customer relationships.
Aside from encouraging efficient customer payment and purchases, improving your order to cash process can uncover other ways to save on expenses. You may be able to eliminate errors, streamline inventory processes, and reduce any unnecessary steps that are costing your company. This results in increased cash flow that can be spent on other profitable products and investments.
In addition to serving as a guiding framework to build your order management process, O2C is an important metric to measure its effectiveness. By keeping track of your order to cash cycle times, you can develop company benchmarks to compare cycle times and optimize your business processes to achieve more favorable results.
Other metrics to measure the success of your order management process include the following:
Days inventory outstanding: Also known as days of sales inventory, this measures the average number of days a company holds inventory before selling it. There are industry-specific benchmarks you can use to measure your performance against competitors.
Days sales outstanding (DSO): This measures the average number of days it takes to collect payment on a completed sale. A lower ratio indicates a healthy O2C cycle, while a higher number suggests a clientele with credit issues or poor collection processes. This metric helps to identify your more reliable customers and prioritize them accordingly.
Order fill rate: Also referred to as demand satisfaction, this measures the percent of orders that can be filled immediately from available stock. This metric is closely tied to customer satisfaction and serves as a good indicator of how optimal your inventory levels are.
Perfect order rate: This metric considers several factors including order completeness, punctuality of delivery, condition upon arrival, and correct documentation. This metric also contributes to customer satisfaction and can help you earn repeat business and on-time payments.
Order Touches: This is a less conventional but no less useful metric. Companies like Hewlett Packard use this metric to gauge order fulfillment efficiency by literally measuring the number of times order items are “touched” during the picking and packing process. The data is then used to eliminate unnecessary activity.
In addition to your order to cash process, other processes fall under your company’s order management system. Let’s look at two critical related functions.
Order management encompasses a significant portion of your company’s entire operations. With so many moving parts and factors to consider, it helps to divide the entire process into individual steps. Two sub-processes that can help to better understand order management are procure to pay (P2P) and invoice to payment.
Procure to pay, sometimes abbreviated as P2P, can be considered a precursor to order management. P2P is essentially procurement planning and is driven by the need for raw materials and services as inputs to production. It begins with an internal request for materials or requisition order and ends when the supplier is paid and the transaction is closed in your general ledger. Procurement often represents an upfront expense and eats into a business’s liquidity, impacting the rest of order management.
The P2P process should be informed by demand forecasting, vendor pricing and reliability, and the cost of shipping. Inventory management software can help collect and analyze this type of data to help improve your P2P process.
To reduce inventory management costs and maximize liquidity, materials are ideally procured and paid for when needed.
Invoice to payment is even more granular within the larger order management framework. It involves only the time from which the invoice is generated to the time payment is reconciled. The process typically involves the following:
Depending on your business type, you may not invoice customers until orders have been delivered, and payment may be due 15, 30, or even 60 days from that time. To encourage on-time payment (and therefore compress your O2C cycle), you can offer small discounts of 1 or 2 percent if the bill is paid within 10 days of receipt. If you are concerned about late payments hurting your cash flow, other actions to take include:
If you are trying to keep better tabs on your order management process, it’s important to know where to look for results or lack thereof.
The complexity of the order process means there are plenty of reasons on-time payments might be held up. Investing in order management software can help your business automate many of the steps that go into fulfilling orders and reduce the likelihood of errors.
By having all aspects of order management in one place, you gain visibility across the entire process and can easily access the information you need to make better business decisions.
The best order management systems will include simplified order entry and fulfillment and the ability to handle invoices and payments. Here are the key features your order management software should include:
A solution that automates inventory management from the warehouse to your customer’s hands will go a long way in reducing fulfillment errors. By streamlining the barcode and shipping label process, you’re able to shorten the sales order lifecycle and speed up the time between receiving and delivering customer orders.
Seeing what’s in stock and what’s been ordered can help you calculate optimal inventory levels. An order management system shows precisely where an item is in your warehouse so you can improve your supply chain management and day-to-day operations.
Automated invoicing and payment significantly reduce the time spent collecting from customers and eliminate any errors in manual processes. You can generate invoices instantly after a sale order is made, send reminders for outstanding invoices, and find all necessary information all in one dashboard. Payment invoicing features include:
To recap, your business can achieve healthier better cash flow by:
By putting in the work and following these steps, your business can avoid cash flow problems and improve order management processes. Not only will this help your business achieve more lean, cost-efficient operations, it will also create a higher value experience for your customers.
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