Whether you’re a manufacturer or distributor, keeping your products moving is critical. One key to this is to streamline the order-to-cash cycle with advanced automation. Simply put, order-to-cash (or O2C) is the business process through which you convert your inventory into cash, ensuring you get paid for what you provide. It is the engine that keeps your cash flowing and provides the resources you need to continue doing what you do.
However, there’s a bit more to it than just exchanging money for goods and services. Understanding the order-to-cash process is important if you want to know the ins and outs of your accounts receivable and cash flow. Read on to learn more.
The Basic Steps of the O2C Cycle
Also known as the credit-to-cash process, this cycle is composed of some general stages:
- Order Management: The process begins when a customer places an order, whether it’s by EDI -usually the case with large customers-, over the phone, on your website, or through a sales representative. Verification that the customer order details and pricing match your data is critical, especially for pricing and delivery terms. If you accept an order, usually you are stuck with its conditions.
- Vendor Compliance. Your biggest customers have standard rules for doing business, with significant deduction penalties if you don’t follow the rules. These vendor compliance penalties amount to a lot of money, enough to wipe out your net profits, so you need a system that takes this into account.
- Order Fulfillment: Once you know what your customers want, the next step is to give them what they’ve ordered. In the case of physical goods, it means shipments. In other cases, it could mean performing a service or providing the customer with certain access. The order must be filled in compliance with the purchase order requirements and Vendor Compliance Rules.
- Invoice Generation: The next step is sending or transmitting an invoice detailing the fulfilled order. This should explain the goods or services rendered, as well as the terms for making on-time payments. Failure to transit it according to the requirements will also cause a violation penalty deduction.
- Payment and Collections: In dealings with large customers, payments are on auto-pilot and according to the customer’s AP rules. Collections then is really a matter of handling the skipped invoices and exceptions, such as non-receipt of goods, and this accounts receivable collection follow-up can be automated so nothing falls through the cracks. Since even one customer can owe you hundreds or even thousands of unpaid invoices, “collections” is clearly an area that demands an automated system driven by collection priorities, strategies, and autonomous system actions. Once all issues are settled and payments are received, your accounts receivable department processes the reimbursement.
- Cash Application: A critical feature of any accounts receivable automation is to automatically convert the customer’s A/P and deduction reason coding to the coding used in your system so that it can be matched by your system to your records. In high-volume environments, such as with chain retail customers, without this feature, you will be doubling the deduction resolution cycle.
- Deductions: There may be situations in which a customer may dispute whether the terms of the deal were satisfied. In the event of an incorrect invoice, shipment, or the application of a discount, a deduction will be taken, not necessarily from the same payment. Deductions must be handled timely, and many customers will have rules -say 90 days – about how quickly you must dispute them. The importance of the quality of research, reconciliation, and collections of excessive deductions can not be overstated, as it will often determine whether you have a profit or a loss.
- Reporting: As important as it is to collect what is owed you, it is equally valuable to keep an auditable accounting of every transaction. Managing your accounts receivable ledger successfully means you can see which areas of your operation are functioning as they should — as well as where you may need improvement. As for customer deductions, it’s important to track the root causes so that systemic errors and problems on your end don’t eat your profits year after year. Some CFOs would be very surprised at the results of a customer P&L that includes the impact of deductions. Some customers are not profitable to deal with.
Order-To-Cash Best Practices
The number of steps involved in this cycle means there are numerous opportunities for greater efficiencies, which can help your operations. One of the most significant ways to improve your order-to-cash effectiveness is to utilize a cloud-based, automated software solution for your end-to-end credit process. Among the many best practices that automated platforms can enable you to utilize include:
- Integration: By meshing seamlessly with your existing accounting systems, automation can help prevent human error and give everyone real-time visibility into the procedures.
- Automation: Employing AI and RPA, repetitive manual operations can be autonomously performed which lowers your costs, and enables staff to focus on priority activities.
- Priorities and Strategies. Different customers and sectors require customized collection and deduction timetables and strategies, which can be built in to a modern collection system. If collection activities are performed optimally, cash flow is improved. The right system can ensure this happens
- Collaboration: Portals enable you and your partners to resolve any issues with an invoice as quickly as possible, without getting bogged down in endless email chains.
- Reporting: The data collected by these software solutions can be sorted and sifted almost instantaneously, providing the answers you need to make decisions without delay.
Carixa can provide automated software that can deliver all of this and much more. Our solutions include those used for managing your O2C process from start to finish. To learn more about what we can do for you, get in touch with our experts today.