Order-To-Cash Cycle Explained by Experts

Dimitri Raziev08 Nov 202212 mins
Order-To-Cash Cycle Explained by Experts

Key Points

As a company expands its operations, there is a greater chance for it to encounter risks in critical areas such as customer acquisition, credit management, customer satisfaction and retention, alongside cash flow. Hence, businesses need an internal procedure to sustain their operational prowess and quality.

The order-to-cash (O2C) cycle is the end-to-end procedure that companies undertake to accept an order, extend their credit terms, provide their products and/or services, collect payments from their customers, as well as monitor the process closely.

Despite many businesses frequently neglecting and underestimating the importance of this process, the O2C cycle is actually a necessary procedure that can enhance a company’s operational efficiency, improve its working relationship with clients, and increase its overall cash flow performance. With that, the O2C cycle may substantially influence a firm’s profitability and reputation. Thus, it is a process that should not be under-leveraged.

The order-to-cash (O2C) cycle is a core component that can make or break a company’s ability to succeed, and this process also plays a significant role in defining a firm’s working relationship with its clientele. This thereby suggests that investing resources into optimising the entire O2C cycle may bring about fantastic returns that have a company-wide impact. 

Fortunately, businesses today have the luxury of being able to access a wide variety of functions relevant to the O2C cycle via employing an integrated software-as-a-service (SaaS) solution. In particular, corporations can now streamline the whole O2C cycle from start to end in order to address their customer needs quickly and efficiently, reducing the number of errors and delays in the process, as well as ensuring that the modifications have a maximum positive effect on the firm’s bottom line.

With that in mind, Kolleno is a smart credit control platform offering an order-to-cash software solution to help companies optimise their accounts receivable operations. In particular, Kolleno accomplishes this by combining all receivable and payment modules into a centralised business process.

What Is the Order-To-Cash Cycle?

The order-to-cash cycle can be defined as the procedure behind how a company obtains, processes handles, and close its incoming orders from customers. In addition, the O2C cycle also refers to the entire sales and logistics management system, including the delivery of the product and/or service, customer payment collection, invoice management, and performance monitoring for the whole end-to-end procedure.

Why Is It Critical for Businesses to Set Up an Effective Order-To-Cash Cycle?

In essence, the O2C cycle is a crucial component dictating how a firm operates. To briefly elaborate, streamlining the O2C process could enable a business to:

-Optimise the purchasing journey for its customer base

-Allow customer orders to be accurately fulfilled upon their first placement

-Enable orders to be consistently settled in a punctual manner

-Minimise the time taken for a client’s order to be fulfilled

-Reduce the necessity for the customer service department to intervene during the process

-Permit a faster conversion of accounts receivable and collections for clients

-Prevent the re-inputting of orders and customer data

-Demonstrate the company’s competency and professionalism in serving its customers’ needs

-Protect itself against supply shortages by ensuring that there is sufficient inventory on-site

-Enhance the company’s capabilities in reporting accurate and insightful analytics over the long-term

All in all, it comes as no surprise has optimised the entire O2C cycle to generate satisfied clients. This, in turn, leads to positive feedback, more outstanding marketing via word-of-mouth, and, subsequently, recurring purchases. In the long run, such practices may equip businesses with a unique and intangible competitive advantage that may be extremely difficult for others to replicate.

To help firms achieve these objectives, Kolleno provides a range of features through its order-to-cash solution, whereby it comprises a centralised source of information, a module enabling accounts receivable professionals to perform a comprehensive customer credit assessment, a collections management function, as well as a payment automation feature.

The Components Within the Order-To-Cash Cycle

Companies typically go through a similar series of steps during the implementation of their O2C cycle, beginning with:

Credit Approval By The Company

In the majority of business-to-business (B2B) transactions, it is relatively common for clients to purchase products and/or services via credit, whereby such credit requests and limits will need to be reviewed and authorised by the business. On that note, businesses would usually have a team of credit managers who are responsible for assessing their clients’ creditworthiness as part of determining the amount of credit to be awarded. Such research process may thereby include gathering information on the customer from their banks, reading through the credit bureau’s report on them, or even consulting other players about their experiences working with the client via reviewing trade reports.

In the meantime, another essential aspect of the credit approval step is to study the company’s own financial status by reviewing the firm’s cash flow, cash-on-hand, and accounts receivables. Much of this is because credit managers must be mindful of the cash flow situation of their firm and thus establish a responsible credit term for their clients.

Besides that, the credit manager ought to coordinate well with the sales department when setting the payment terms for the prospective customer’s order, whereby they need to align on areas such as the invoice due date, whether early-payment discounts can be awarded to the customer, and the penalties to be charged upon late payments. Not to mention the credit manager will need to also align with the sales team on the company’s maximum sales volume to ensure that it is not overly vulnerable to credit risks.

The Acceptance of The Customer’s Order

Once the business has confirmed its credit approval, the sales department will liaise with the client to sort out the details of their order, including aspects such as the specific types of products and/or services to be purchased, the price points, quality thresholds, date and timing of delivery, as well as the payment terms and conditions. Essentially, this is an essential step of the O2C process to safeguard the proper and accurate fulfilment of the customer’s order by the company.

Fulfilment Of the Customer’s Order

The order fulfilment procedure will largely depend on the specific type of offering purchased by the customer. Should the business be required to deliver a product, this step will primarily involve locating the correct inventory, preparing it, and shipping the finished item whilst taking great care to ensure the delivery information is accurate. Meanwhile, suppose the company has to fulfil a service. In that case, the order fulfilment step will involve the arrangement of a time and data for the service to be delivered, followed by organising the relevant logistics to ensure everything has been implemented as promised.

Delivery Of an Invoice to The Customer

Accounts receivable professionals are usually responsible for preparing and delivering the invoice to the client, in which this piece of document entails the amount owed for the company’s successful provision of the product and/or service before receiving any payment. With that, this process can take place through various mediums. For example, a paper-based invoice could be posted to the customer’s mailbox. Alternatively, the company may adopt digital options ranging from emails to electronic billing software solutions to enable faster delivery.

Nonetheless, it is crucial to bear in mind that this step requires the business to be highly time-efficient. Much of it can be attributed to the sooner the presentation of the invoice to the client, the quicker they would be able to settle their debt, and therefore, the earlier the business will be able to realise cash.

Payment By the Customer

There is a myriad of ways in which customers could pay the business for its offerings, including via automated clearing house (ACH) transfers, wire transfers, paper-based cheques, or virtual credit cards. As a result, the firm will need to select the payment methods that they are able to accept and subsequently establish a seamless process to elevate its efficacy in receiving payments through those selected channels.

On that note, there are various benefits and drawbacks associated with each type of payment, so the company have to strike a delicate balance between matching their choice with their customers’ preferences as well as their own.

Cash Application

Whenever the customers’ payments have been received through multiple payment channels, the cash obtained needs to be “applied” to the company’s accounts. Simply put, this basically means that the amount of cash received will need to be acknowledged in the invoice as “paid”.

Even though this complex may sound relatively straightforward on paper, it remains essential to take note that corporations usually receive up to hundreds, or even thousands, of payments every month. Thus, it is the role of cash application specialists who have to complete the cash-and-invoice matching procedure. Not to mention, additional layers of complexity may occur if the customers made a single lump sum payment to cover several payments at once or unexpectedly if payment errors were to happen. 

Regardless, the general rule of thumb remains that if the received cash is applied quicker, this means the firm will be able to utilise it to finance its operations sooner. This thereby results in the more incredible speed at which the client’s credit may be replenished, thus allowing them to purchase more of the company’s goods and/or services.

Management Of Past Due Invoices and Delinquent Accounts

In an unfortunate situation in which a payment has not been collected and applied by a previously aligned upon date, the customer’s account would consequently become delinquent. Should the worst-case scenario occur, the settlement of this unpaid invoice may need to be outsourced to a third-party collection agency, whereby the collectors will be responsible for contacting the client, followed by working with them to recover the debt entirely.

On that note, this effectively summarises the end-to-end journey of the order-to-cash cycle implemented by businesses. 

Common Challenges Within the Order-To-Cash Cycle

The O2C cycle – particularly amongst companies managing a large volume of sales – comes with a number of moving parts alongside dependencies. A prime example of this would include companies that rely on their customers’ ability to settle their invoices on time, in which a single failure in any step could snowball into the collapse of the entire cycle.

As a result, the series of processes taking place during the O2C cycle would necessitate a significant deal of attention and coordination between every department. In particular, specific areas to keep on the lookout for include data security, the accuracy of the customer order recording system, the time taken to generate invoices, customer satisfaction, as well as the time taken to settle delinquent accounts.

How Could Businesses Optimise Their Order-To-Cash Cycles?

In general, corporations approaching the O2C cycle with strategic objectives in mind will have a substantial advantage in comparison to firms that do not possess one. Meanwhile, although it is vital for a firm to identify cost-reduction opportunities within the O2C process, there are various upsides to investing time and resources into a few best practices in order to elevate the company’s standard of excellence.

Create A Guidebook Detailing the Company’s O2C Cycle

In essence, companies ought to develop and distribute a simple handbook documenting the firm’s O2C cycle with easy-to-understand terminologies. Such resources, in turn, can drastically aid employees in better navigating the process and understanding the significance of each step. Besides that, this may also help to generate consistency in the company’s workflow quality as the team will be much more educated at spotting and eliminating flaws that may be jeopardising the optimisation of the O2C cycle.

Utilising Electronic Invoice Presentment and Payment Solutions

In short, using electronic invoices on top of an integrated payment acceptance software solution can significantly accelerate the client invoicing and bill settlement procedure. This is because electronic invoicing eliminates the need for delivering paper-based invoices to clients. Additionally, digital payment solutions greatly simplify the customer payment journey, thus enabling cash to reach the company sooner.

Automating The Cash Application Procedure

Upon receiving the cash payment, the money must be posted to a system of records accurately before the firm is able to recognise the payments as revenue officially. Consequently, any delays in the cash application process place the company’s days sales outstanding (DSO) in danger.

With that, digitalising the cash application process from the beginning to the end helps to lower the firm’s DSO. As a matter of fact, the business would also be able to effectively extract data points to match payments with outstanding accounts receivables. Meanwhile, the data may also reveal striking patterns within the firm’s O2C process. Information suggesting frequent late-paying customers, a redundant protocol, or a recurring area of client dissatisfaction can be quickly identified and addressed. Not to mention, these digital tools can help companies manage their cash application process faster and more efficiently without the need to recruit a large number of employees.

Monitor and Examine the O2C Cycle Consistently

In essence, it is always a good practice to go the extra mile and constantly evaluate the O2C cycle for potential areas of improvement. Given that technology is regularly changing, what works well now may not necessarily be the optimal approach in the near future. Thus, creating an environment within the company whereby employees are able to offer ideas and suggestions for improving the order-to-cash process is always a worthwhile initiative for the long term.

Concluding Thoughts

In a nutshell, the order-to-cash (O2C) cycle has remarkable potential to serve as a strategic linchpin for the company. If executed properly, this process may enable the business to have an improved cash flow, greater satisfaction amongst clients, a tangible reduction in expenses, and a shift towards corporate sustainability in the long term.

Luckily, the digitalised world that we live in today offers an abundance of options for businesses to obtain insightful data as well as analytical tools to derive insightful action points. With that, inefficiencies ranging from supply chain complications to fulfilment backlogs within the O2C cycle may eventually become a thing of the past.

Having mentioned that, Kolleno is a smart credit control platform that empowers businesses with an all-in-one platform containing the accounting, communication, and payment systems to streamline their credit control procedure.

Frequently Asked Questions (FAQs)

What Is the Order-To-Cash Cycle?

The order-to-cash cycle can be defined as the process encompassing a company’s entire operating system upon the client placing an order to the performance monitoring stage.

Why Is the O2C Cycle So Important?

Having an order-to-cycle process that is seamless and highly efficient leads to more satisfied clients. This, in turn, usually results in more positive feedback and reviews, increased marketing via word-of-mouth, and, consequently, a rise in the number of repeat purchases from loyal customers.

What Are the Upsides to Having a Streamlined O2C Cycle?

A company that runs its operations efficiently can help to establish trust amongst employees and external stakeholders. In particular, possessing a streamlined O2C protocol can help to make employees more engaged while also permitting customers to have all their wants and needs well-satisfied. With that, building this strong and tight-knit working relationship with customers should be seen as a best practice and a way for companies to gain an invaluable competitive advantage.