What is order-to-cash?
Order-to-cash (OTC) is the journey of a product or service from the point when you order to its delivery and payment. This may seem a simple process, but big supply chains have a complex order-to-cash system with many steps. Each step can have a significant impact on a company’s finances, and the team must manage it efficiently.
This journey reflects how a business operates and its proficiency in processing orders, producing cash and making payments. Some of the important elements of order-to-cash are credit policies, logistics, inventory management, invoicing, and collections.
Order-to-cash journey steps
Once the customer selects an item and places the order, a process begins to fulfil that order. These are the steps that normally comprise an order-to-cash journey –
1. Credit management –Once a client selects a product or service, the business assesses its creditworthiness or credit risk. Based on a set of policies, it determines how much credit to extend, interest rates, and payment terms.
2. Order fulfilment –This step sets up an efficient communication channel between the sales and inventory departments. The inventory department can proactively replenish the stocks before the demand arrives, and the sales department can manage selling based on the inventory data.
3. Shipping –The logistics must be efficient and on time. Up-to-date and accurate data in the system ensures delivery to the right customer.
4. Invoicing –Correct invoicing depends on accurate and timely information that matches the order and has all the necessary details of the client.
5. Accounts receivable management –Any purchases done on credit fall under accounts receivable (AR) for which the business has not yet received the payment. Good credit policies and collection practices ensure healthy AR. The components of AR include credit extension, customer relations, invoicing, monitoring, and analysis of payment trends.
6. Payment collection –Payments not done on time will go to the collections team that follows up with the client as per a process.
7. Cash application -Accountants match incoming payments with the pending invoices and the proper chart of accounts. This step tracks cash flow and capital for efficient utilisation of funds.
8. Reporting and data management -Reporting is essential to track the health of the order-to-cash system using certain parameters. Some of the important metrics are days sales outstanding (DSO) and accounts receivable turnover ratio.
Order-to-cash best practices
Order-to-cash solutions speed up payments, increase financial health, and reduce bad debts. The five best practices for the OTC process are –
- Analyse each step in the process to know if it was manual or automatic. For example, consider automating invoice generation and emailing, collection reminders, and payment-invoice matching.
- Start by processes improvements that provide the maximum return for minimum effort.
- Adopt automation to improve cash flow and enhance ordering experience and efficiency. Automation can improve invoice generation, reconciliation, sending payment reminders, flagging over dues, and eliminating errors.
- Integrate the operations data with the ERP, thus accelerating and automating the complete OTC cycle.
- Get valuable insights from your customers and staff and prioritise important fixes in the OTC process.