What is order to cash?
At a time of disrupted supply chains, order processing is becoming increasingly important. The process from receiving an order through to delivery and payment is summarised under the term order to cash, and it is particularly relevant for supply chain managers – because if the product does not reach the consumer, all the effort that went before was in vain. And no payment comes in either. Reason enough to take a detailed look at the process and explore possible optimisations. In this article, you will learn which 6 steps in the order-to-cash process are crucial and how you can use them for efficient order processing.
What is order to cash?
Order to cash is the umbrella term for all the processes required to handle an order, from sales through to invoicing. The order-to-cash process begins with the customer’s purchase (purchasing process) and ends when the seller receives payment. For business customers, these transactions are also commonly known as purchase to pay or procure to pay (P2P).
Why the order-to-cash process is so important
Order processing is one of the most important processes in your company. It begins when an order is received and ends with payment processing. The complexity of the order-to-cash process stems from the many departments it flows through. From the sales team and customer service to the legal department, many stakeholders need to access the information and are involved in the process. If interruptions and errors occur within these process steps, around 3–5% of EBITDA is wasted, according to a recent McKinsey study.
And it is called the order-to-cash process for a reason: in the end, payment should also arrive within a reasonable period after the order in order to ensure a steady cash flow.
A smooth order process also contributes significantly to the customer experience. After all, how do you feel when a product arrives two weeks late – and in the wrong version?
An efficient order-to-cash process therefore ensures satisfied customers and a positive cash flow.
Below, we have identified 6 steps that are crucial in the O2C process.
The steps of the order-to-cash process
The order
The order-to-cash process begins when an order is received – whether via the online shop on your website, by email, via a supplier portal or in person through sales staff. To ensure a smooth process, your order management system should be automated and immediately trigger a notification in the relevant departments. With an automated interface such as the Procuros Integration Hub, you receive orders from all your trading partners in one place, for example directly in your ERP system. Your ERP system should also be connected to your sales channels so that stock levels can be displayed in real time. This prevents incorrect orders right from the start. Paper orders – as well as older software programs that do not pass on order data – likewise lead to inaccuracies, costly clarifications and bottlenecks. A system that captures and processes all master data consistently is therefore indispensable for smooth order processing.
Defining creditworthiness
Credit management within the order-to-cash process covers a wide range of activities, including setting and maintaining credit limits, issuing credit notes, updating overdue receivables balances, applying discounts and rebates to orders, and communicating with customers who are behind on their payments. The ERP system can help automate and optimise this, for example by setting a specific credit limit for (new) customers.
Shipping goods
The shipping data should also be generated automatically from order processing. This allows shipping staff to schedule shipments for collection promptly and ensure fast dispatch. If you already work with a fulfilment service provider, the necessary data should be transferred to them automatically as well. Once again, this prevents unnecessary errors and waiting times.
Invoicing
Once the order has been successfully processed and shipped or delivered, it is time for invoicing. Invoices should not only be created correctly for the customer, but also sent out on a reliable schedule. This allows the finance department to forecast incoming funds effectively and manage cash flow accordingly.
Handling payment defaults
A risk that unfortunately can hardly be minimised and is on the agenda more often than one would like: sending payment demands and reminders. It is important to meet deadlines precisely so that receivables can be written off if necessary. An automated order-to-cash process includes this step too and can issue notifications as soon as an invoice becomes overdue or requires a (manual) review.
Data analysis
Once processes are digitised and automated, there is a further benefit: the wealth of data can reveal potential gaps for optimisation. Analysing the data can therefore provide recommendations for avoiding possible errors, bottlenecks and other inefficiencies.
Recap
For many organisations, automating and digitising processes is a major challenge. This blog post shows that order to cash covers the entire order-processing process. This process is enormously important because of its impact on the customer experience and internal cash flow. On average, up to 5% of EBITDA is lost when an order-to-cash process is not optimised. With options such as cloud-based ERP systems or solutions for the automated exchange of order documents such as the Procuros Integration Hub, the error rate in the order-to-cash process can be significantly reduced. An efficient O2C process can thus become a real competitive advantage – provided it is set up efficiently and potential sources of error are minimised.
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