What is Order to Cash?
In times of disrupted supply chains, order processing is becoming increasingly important. The process from order entry to delivery and payment is summarized under the term order to cash and is particularly relevant for supply chain managers - because if the product does not reach the consumer, all the effort up front was for nothing. And the payment also fails to appear. Reason enough to take a close look at the process and examine possible optimizations. 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 generic term for all processes required to process an order from sales to invoicing. The order-to-cash process begins with the purchase by the customer (purchase process) and ends with the receipt of payment by the seller. In B2B Sales these business transactions are also referred 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. The process begins with the receipt of an order or purchase order and ends with payment processing. The complexity of the Order to Cash process arises from the many departments through which the process flows. From the sales team to customer support and legal, there are many parties that need to access the information and are involved. If there are interruptions and errors within these process steps, about 3-5% of EBITDA is wasted, according to a recent McKinsey study.
And it's not called the order-to-cash process for nothing: in the end, payment should also be received within a reasonable period of time after the order is placed in order to ensure a steady cash flow.
In addition, smooth order processing contributes significantly to the customer experience. Or with what gut feeling do you receive a product that is delivered 2 weeks late and then also in the wrong version?
Therefore, an efficient order to cash process ensures satisfied customers and positive cash flow.
Below we have identified 6 steps that are critical in the O2C process.
The steps of the order to cash process
The order
The order-to-cash process begins with the receipt of an order. Whether via the online store on your website, by e-mail, via the supplier portal or in person via sales staff. To ensure a smooth process, your order management system should be automated and trigger notifications directly to the appropriate departments. Through an automated interface, such as the Procuros Integration Hub, you can receive orders from all your trading partners in one place, such as directly in your ERP system. In addition, the ERP system should be connected to the sales channels so that item inventories can be displayed in real time. This prevents inaccurate orders right from the get go. Likewise, paper purchase orders - as well as older software programs that don't pass on order data - lead to inaccuracies, costly clarifications and bottlenecks. A system that uniformly records and processes all master data is therefore indispensable for smooth order processing.
Define creditworthiness
Credit management in the order-to-cash process involves a variety of activities, including setting up and maintaining credit limits, issuing credit notes, updating overdue receivable balances, applying discounts and bonuses to orders, and communicating with customers who are late with their payments. The ERP system can help with automation and optimization, for example, by setting up a specific credit limit for (new) customers.
Shipment
Shipping data should also be automatically generated from order processing. This enables the shipping staff to schedule shipments for pickup in a timely manner and ensure speedy shipping. If you are already working with a fulfillment service provider, the necessary data should also be sent automatically. This prevents unnecessary errors (once again).
Invoicing
After successful processing and shipping or delivery of the order comes the invoicing. This should not only be correctly prepared for the customer, but also sent according to a reliable schedule. Thus, the finance department can effectively predict the inflow of funds and control the cash flow accordingly.
Dealing with payment defaults
A risk which, unfortunately, can hardly be minimized and is more frequently on the agenda: Sending receivables and reminders. It is important to observe deadlines precisely in order to be able to write off receivables in case of doubt. An automated order-to-cash process also includes this step and can issue notifications as soon as an invoice falls into arrears or requires a (manual) review.
Analyze the Data
If processes are digitized and automated, there is a further advantage: The large amount of data can provide information about possible optimization gaps. The analysis of the data can thus provide information about possible errors, bottlenecks and other information.
Recap
For many organizations, automating and digitizing processes is a major challenge. This blog post illustrates that order to cash is the entire order fulfillment process. There is a huge importance to this process because of its impact on the customer experience and internal cash flow. Up to 5% of EBITDA is given away on average if an order to cash process is not optimized. Through many possibilities such as cloud-based ERP systems or solutions for automated exchange of order documents such as the Procuros Integration Hub, the susceptibility to errors in the Order to Cash process can be significantly reduced. Thus, an efficient O2C process can become a real competitive advantage - if it is set up efficiently and possible sources of error are minimized.
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