What is order to cash (O2C)?

The O2C system is a critical part of getting and maintaining a healthy cash flow. As the process aims to cut down on the time between when an order is received and when the business is paid. Activities within the O2C system can directly impact supply chain management and inventory management procedures.

The order to cash process shouldn’t be confused with quote to cash (Q2C or QTC), which is a broader, end-to-end business process. The Q2C, as its name infers, starts before point of sales and includes initial steps, such as quote preparation and tailors offers to meet customers needs.

A better way to differentiate the two is that the O2C processes are within the Q2C process. Q2C begins with customer purchase intent and ends at the final pricing decision. Which is where O2C then picks up. The order to cash system should be analyzed to ensure that the business is seeking out constant optimization and improvement.

The order to cash process differs slightly depending on what type of business it is, such as through an ecommerce platform or direct sales. But fundamentally it will remain the same from start to finish.

Below is the step-by-step process of the order to cash cycle:

The tracking system of an order from inception to fulfillment, along with all of the information and processes. The order management system (OMS) manages the order and provides transparency to the business and the buyer.

If the business is doing sales on credit, it’s important to have a customer financial risk assessment or approval process. This might include a credit check on a new customer or require references from them before extending credit payment terms.

This step entails actually picking the ordered items and then packing and shipping it to the customer. If the business is dealing with physical products, then inventory management and the fulfillment process will be involved.

The shipping process can be complex and will vary depending on product logistics. A regular audit should be done to ensure that regulations and performance standards are met. It’s important that all data from the purchase order and fulfillment side of things is updated for the shipping team so that carrier pickup and delivery is done in a timely manner.

Invoice generation and payment is a critical step in O2C. Customers receive invoices for their order, which should include line items, details on cost per item, taxes and any discounts applied to the order. This step launches the payment process. Accurate invoicing systems start from staff collecting correct information from the point of sale, such as order notes, costs, credit terms, order date, etc.

Following the invoice generation and the order has been sent to the customer comes the accounts receivable team. This step ensures that payment is collected and is most efficient through implementing an automation process that alerts the team to outstanding invoices at predetermined times. The automated accounting system can detect when errors are made and accounts receivable professionals can then quickly review the data and revise the invoice in a timely manner.

The way a customer pays the business for an order should be determined at the time of purchase and spelled out in the invoice clearly. The customer payment is then collected through online payment, bank transfer, a written check or any other format accepted by the business. To ensure that payment is made, an order reference number is given to the customer and correctly matched to the physical order. This limits confusion and helps with customer satisfaction and further limits issues with accounts payable or the general ledger. Other payment reminders can be made like mobile notifications.

By using integrated software, businesses can analyze every step of the O2C cycle in real-time and monitor where inefficiencies are and where in the process they are having the most success. An integrated data management system, such as enterprise resource planning or ERP systems, is important for reporting and analyzing data so that adjustments to the O2C workflow can be done. By tracking key metrics, a business can streamline its O2C process, remove bottlenecks and fulfill more customer orders.

A business' growth and development rely heavily on a several factors, especially strong customer relationships. With a robust order to cash process it ensures that customers are being served in an optimal way that is both effective and efficient. An O2C system can improve cash flow and working capital, while simultaneously enhance the customer experience as long as all parts of the O2C process are working together.

Separately, the O2C process is key to customer satisfaction. It is one of the most direct ways that a customer interacts with a business and directly related to overall profitability. A successful order to cash cycle will allow customers to easily place an order, receive an invoice for how much they owe and when, and monitor the ETA for order delivery through notifications. Satisfied customers are a major part of any successful business and an efficient order system that streamlines the order to cash process is optimal.

The current business environment requires CFOs, finance professionals and the finance functions they lead to be open to learning new approaches to financial management. This includes adopting and harnessing the power of artificial intelligence (AI). The AI-driven innovations on offer can improve order to cash system credit scoring, pricing decisions and aid in the prevention of fraudulent payments.

Leaders should consider new technology tools like AI and generative AI (gen AI) as a way to improve finance processes and optimize operational costs for their business. Specific to order to cash, generative AI can recover cash by validating customer claims and deductions, which can result in a cut to revenue loss by 60 to 70%. A performance improvement such as this can be a major boost to a company’s bottom line if finance teams are trained to use the technology responsibly.

Enhancing the order to cash process is important for cash inflows and the overall success of all sales orders. Here are four best practices to optimize your O2C cycle.

Quote to cash is a broader system with more initial steps leading up to the order. Whereas O2C begins at the point of sale.

The billing step in O2C refers to the request of payment from the customer. This is typically done through an invoice.

The typical steps include order management, credit management, order fulfillment, order shipping, customer invoicing, accounts receivable, payment collection and reporting and data management.

Procure to pay and order to cash both manage purchase or service requests. However, procure-to-pay is specifically focused on processing orders placed by the business for within the organization.

Accounts receivable is the step within the O2C process focused on documenting customer purchase and ensuring payment is collected.

The O2C process becomes more complex as the sales volume goes up and requires a business to stay on top of each step in the process. The snowball effect is very much at play when it comes to the success of an O2C process. An example is if a customer is late to pay an invoice, which might take capital away from a business, which could then trickle down to an impact to employee payroll.

Customers want to trust the business they are buying from and vice versa. A transparent and efficient O2C process can ensure an almost-seamless buying experience and a streamlined customer service process. Aside from customers, employees can also benefit from an automated O2C system that relieves them from mundane tasks and gives them more time to work on strategic projects.