What is Order to Cash?

Category: Blog  |

Order to Cash, commonly abbreviated as O2C, provides users with a process to follow an order all the way from initial order receipt through payment.

Fully developed, O2C enables an organization to move automatically through these steps in the order process:

  • Customer onboarding/sales order creation
  • Sales order release and inventory reservation
  • Packing and releasing items
  • Shipping
  • Invoicing
  • Payment receipt

More robust 02C systems will also trigger ancillary value-added processes outside of the O2C stream, including collections for late payments and follow-up marketing efforts.

Order to cash is critical for organizations in an increasingly digital economy because the more efficient and accurate the processes, the better the company’s financial performance. Better managed invoicing and collections improve cash flow, while improved order placement and fulfillment help enhance customer relationships. Similarly, failures in invoicing or collections negatively impact company cash flow. Poor performance in order fulfillment — either through delayed or non-delivered products, improper declination of credit, or other O2C-related failures that result in a poor customer experience can contribute to dissatisfied customers, to the point of driving customers away for good. An unfulfilled order or other poor customer service experience can also have the multiplying effect of negative word-of-mouth if the disgruntled customer shares those negative experiences on social networks.

Data collected throughout the O2C process — including the customer details, product ordered timeliness of payment, etc. — provide key triggers for further marketing efforts, and, in some industries, the decision of whether to extend credit (i.e., a retailer’s credit card), as well as how much credit to extend.

Tracking the entire process from end to end is complex. If customer data isn’t gathered correctly at the beginning of the process, the mistake can carry though to fulfillment and billing, and until the bad data is cleansed. While recording a customer’s name as “Diane” rather than “Dianne” may never be noticed and/or may only slightly annoy the customer, consider the possibility of there being both a “Diane Smith” and a “Dianne Smith” with enough other similar attributes to mix up orders, billings, collections, etc. Similarly, an address misread as “159th Street” rather than “169th Street” can mean deliveries boomeranging back or never received, ultimately resulting in the loss of the customer and the lifetime value of their business.

While such a loss may be insignificant for a single customer, multiply that loss a thousand-fold or more, and the impact can pack significant financial impact now and in the future.

Though accurate customer onboarding is critical, it is still only the first step in the O2C process. Even if customer data is collected accurately at the beginning of the process, if there are issues during any other step in the process — order entry, billing or something else, a lack of clean hand off to the next step — the entire process will falter. This can keep companies from benefitting from enhanced efficiencies and lower operating costs, while also introducing unexpected delays in ordering, billing, fulfillment, etc., with little to no insight into where or why the error occurred.

Driving Order to Cash Success with Automation

Experts agree that clean, integrated automation is critical to an efficient O2C process that drives a magnitude of business benefits. Anytime automation can hand off details and automatically trigger the next step in the process, it eliminates the errors and delays inherent in human intervention. Automation also frees up staff from mundane data entry tasks to address more value-added work.

Leading companies are quick to adopt automation in the process because the see benefits, including:

  • A reduction in days sales outstanding, essential in improving a company’s cash flow
  • A reduction in order-to-fulfill cycle time
  • Greater visibility of exceptions, for faster intervention and resolution, resulting in fewer and less impactful order to cash interruptions

There are other important yet less quantifiable benefits too, including:

  • Faster conversion of receivables
  • Expedited collections
  • Improved accuracy of invoicing, collections and cash flow reports
  • Reduced exceptions
  • Improved ability to resolve customer disputes due to better visibility across the entire O2C process

While a true end-to-end automation process may seem simple in theory, in practice, it can fail because certain elements — such as customer onboarding or collections — haven’t been completely digitized so they are unable to handle the scale, different formats or different transfer methods, and/or integration with back-end systems has yet to be completed.

Some organizations attempt to solve the issue of different formats or different transfer methods by employing a multitude of workflows and processes, but each will have its own differences and may not mesh well with others, so this approach can thwart the realization of efficiencies and other benefits of order to cash.

While automation is an enabler of best-practice O2C, it isn’t a silver bullet. Automating poor processes only enables an organization to perform poor practices faster. The decision to automate does, however, provide a good impetus to ensure processes themselves are properly designed, and then to adjust them as necessary so that the organization receives the expected benefits from the O2C automation.

The caveat – start with solid well-thought-out processes and the architect O2C automation with the necessary process flows and data format translations to speed processing and minimize errors, all while reducing the need for IT intervention.

To correctly map process flows, companies must closely examine current workflows in each department (accounts receivable, etc.) as well as the workflows between departments, looking for inefficiencies in established procedures as well as a clean, logical flow from one step to the next.

From customer onboarding, the O2C system should complete order management, with properly organized orders and notification to the requisite stakeholders in the supply chain for timely and accurate fulfillment of the order. Where appropriate, the order management system should also trigger any needed credit approval, automating approvals when the customer meets the company’s established credit parameters, issuing automatic denials where appropriate, and flagging those areas in the middle for further review.

Once a business develops the workflows, data format translations and automates the O2C process, it’s important to monitor the performance of the system to see where it is meeting expectations, and where improvements can be made to improve efficiencies. The effect of small inefficiencies in a single area can become more significant downstream in the O2C process.

Among key KPIs to monitor are: Days Orders Outstanding, Collections, O2C Cycle Times, and Exceptions. Suffice to say, to support continuous improvement efforts, be sure O2C systems feature a critical component – the ability to easily extract data for benchmarking and reporting.

To facilitate O2C automation, many organizations rely on Docstar ECM, which easily integrates with existing ERP solutions and/or accounting systems, providing fast return on investment.

When used together, the ERP/accounting system and Docstar streamline the day-to-day mission-critical hand-offs to transform AP operations by extracting data from printed/typed documents, eliminating duplicate data entry and making it easy to retrieve data, review invoices, and push them along the AP workflow-automatically — all vital requirements for an industry-leading O2C system.