The order to cash ('O2C' or 'OTC') process is a critical function of any business that sells goods or services to other businesses. It is a series of steps that are designed to ensure that a company receives payment for the products or services it provides to its customers.
To better understand the order to cash process and how it benefits aspects of your business such as outstanding invoices, accounts receivable, cash flow, and customer satisfaction, we'll be diving into the O2C process and explaining how it works in B2B payments delivered.
O2C meaning and how it affects business processes
The order-to-cash process, also known as O2C, is a series of steps that a company takes to fulfill a customer order and receive payment for the goods or services provided. The process begins when a customer places an order and ends when payment is received for the order. The OTC process includes a variety of steps, including order processing, invoicing, payment, and fulfillment.
The O2C process is an essential aspect of B2B customer payments as it enables businesses to manage their cash flow effectively. It is critical to streamline the order to cash cycle to ensure that there are no delays in receiving payments, which if left undealt with, can have a significant impact on the company's financial health.
In addition to improving cash flow and other business processes involved, it can also help to improve customer satisfaction. From payment reminders that assist in payment reminders to a smoother invoicing system, optimizing the O2C process can offer a number of benefits to your customers. It's a major business process that finance teams can greatly improve given the right resources.
In B2B payments, the OTC process is often more complex than in B2C payments. Customer orders tend to be much larger and more complex. This can put a lot more strain on invoice creation, your order management system, and also the speed at which your company is processing customer orders. Without the right system in place, it could lead to inaccurate cash estimates and payment processing difficulties too.
The payment terms for B2B transactions also range from 30 to 90 days. This tends to delay a company's cash inflows and may complicate accounts payable. As a result, it is critical to manage the order-to-cash process effectively to ensure timely payment and avoid any delays that could impact cash flow.
Order to cash process steps
The OTC process involves several steps that are critical to the successful completion of a transaction. Let's take a closer look at each of these steps.
Step 1: Credit management and approval
Before a customer places an order, businesses must determine their customer's creditworthiness and ensure that the customer has the financial capability to pay for the goods or services. This involves conducting a credit check to determine if the customer has a good credit score and a history of paying their bills on time. If the customer passes the credit check, the business can proceed with the order.
A sophisticated credit management system within your company will greatly improve the speed of credit approval. If customer payments are more likely to happen and the approval process is faster, then it can speed up the order to cash cycle. Your business success hinges on ensuring the customer pays, so the last thing you want is to have issues when you collect payment.
Step 2: Order processing
Order processing involves receiving an order from the customer, verifying the order details, and entering the order into the company's system. Once a customer places an order, it's entered into the order management system and sent to the warehouse for fulfillment. It is also essential to ensure that the customer's payment terms are in place to avoid any delays in payment.
Step 3: Fulfillment and delivery
Fulfillment involves delivering the goods or services to the customer as specified in the order management system. Fulfillment management functions can be completed in-house or through a third-party logistics provider. When it comes to fulfilling a product order, the order fulfillment process entails identifying the location of the items, preparing them, and arranging for their shipment. Throughout this process, it's essential to ensure that all delivery details, such as the shipping address and delivery timeframe, are accurate and in order.
In the case of a service order, order fulfillment involves scheduling the service delivery date and location and making sure that all services outlined in the order are provided as promised. This may involve coordinating with other teams or external partners to ensure that the service is carried out successfully.
Step 4: Invoicing
Invoicing is the next step in the order to cash process. Once the order has been processed, an invoice is created. The invoice includes details such as the customer name, order details, and the amount owed for the order. See the full list of details that must be included on your invoices
Invoices can be sent to customers via email, SMS payment reminders, or via a payment portal system. In most cases, they should follow a standardized digital format to make them easier to read and understand.
Invoicing is a critical step in the O2C process, as it represents the company's request for payment from the customer. The invoice must be accurate, complete, and easy to understand to ensure that the customer can make a timely payment.
Step 5: Payment
Payment is the step in the order to cash process that involves receiving payment for the goods or services provided. Depending on the payment terms agreed upon by the customer and the company, payment may be due immediately on delivery of the goods or service, or at a later date.
The business must decide which types of payments they will accept and which channels they will use to accept payment.
In B2B payments, payment terms are often set based on the customer's creditworthiness and payment history. For example, a customer with a good payment history may be offered more favorable terms than a new customer with no payment history.
Step 6: Cash application
Once payments have been received via various payment channels, the business needs to apply the cash to the corresponding customer accounts. Cash application is the process of recording and matching the cash received with the corresponding invoice, and marking it as paid. This ensures that the customer's account balance is updated accurately, and the company can reliably use the cash for its operations.
Cash application can be a complex process for companies that receive a high volume of payments each month. Cash application specialists are responsible for matching the cash received with the corresponding invoices, which can be time-consuming and prone to errors. To streamline the process, companies often use payment remittance advice, which is a document that provides details about the payment and the invoices it covers. Some payment methods, such as paper checks and credit card payments, come with remittance advice attached.
Step 7: Accounts receivable
If payment collection isn't possible, then companies must undertake action to recover their accounts receivables or due amount from the customer. This can involve:
- Sending payment reminders
- Calling the customer to discuss when payment will be made
- Creating payment installment plans
- Using debt collections
- Handling customer disputes or queries about paying the invoice
It's important that a system is able to flag outstanding invoices so that they can be followed up. If there are errors or discrepancies, then it's important for everything to be traceable in order to accelerate cash flow and improve the customer experience.
Accounts receivable can be tough to handle, especially if the cause of a late payment is unclear. It might be the fault of late order shipping, or it could be a bug in your invoice system. However, there's always the possibility that a customer just doesn't want to cooperate. In this case, it's best to track performance data to determine worthy customers that you want to work with.
Step 8: Performance data
Data management is another important component of the O2C process. Most companies have interconnected software to perform everything from supply chain management to inventory management. By monitoring this data, a sales department and other related teams can analyze trends to improve a customer relationship, improve cash flow, optimize an order processing system, and even improve credit management for future transactions.
By analyzing this data carefully, order management teams can more accurately determine the impact of your order to cash process and where things can be improved. A company might discover that their accounts receivable process is full of issues that lead to payment collection issues, resulting in poor process management and a bad customer experience. Others may notice that their invoice generation system isn't working correctly, leading to incorrect figures and payment delays.
O2C process challenges in B2B payments
Managing the OTC process can be challenging in B2B payments due to the complex nature of these transactions. Let's take a closer look at some of the challenges that companies face when managing the OTC process.
Delayed cash flow
Delayed payments are a common challenge in B2B payments, as terms can range from 30 to 90 days. In fact, 9 in 10 businesses report that they are typically paid late for their goods or services. This can put a significant strain on a company's cash flow, as they must continue to pay their own bills while waiting for payment from their customers.
To mitigate the risk of delayed payments, it is essential to have clear payment terms in place, and to communicate these terms clearly to customers. It may also be helpful to establish credit checks and payment histories for new customers to ensure that they have a history of making timely payments.
Inaccurate invoicing
Inaccurate invoicing can also be a challenge in the O2C process. If an invoice is incorrect or incomplete, it can lead to delays in payment or disputes between the customer and the company. These are typically handled by the accounts receivable department or team.
To avoid inaccurate invoicing, it is essential to have a clear invoicing process in place. This process should include verifying the accuracy of the order details, ensuring that the correct pricing is applied, and checking that any discounts or promotions are correctly applied. Without a solid accounts receivable process, you may experience delayed payments.
Inefficient order processing
Inefficient order processing can also be a challenge in the O2C process. If it's not processed quickly and accurately when a customer places an order, it can lead to delays in fulfillment and payment. It's vital that your entire organization is on the same page and using company software to its fullest potential.
To improve order processing efficiency, it is essential to have clear processes in place for receiving and entering orders. This may include establishing standard order forms and processes, training employees on the processing procedures, and automating certain aspects of the process where possible. If order fulfillment is slow or inefficient, it will reflect badly on your company.
Lack of visibility
A lack of visibility into the O2C process can also be a challenge for companies. Without visibility into the status of orders, invoices, and payments, it can be difficult to manage the process effectively and identify areas for improvement.
To improve visibility into the O2C process, companies can implement software solutions such as ERPs, Order Management Systems, or CRM tools, that provide real-time data on the status of orders, invoices, and payments. This can help to identify bottlenecks and areas for improvement, and enable companies to make data-driven decisions to improve the OTC process.
Order to cash best practices
To effectively manage the O2C process in B2B payments, there are several best practices that companies can implement. Let's take a closer look at some of these best practices.
Establish clear terms
Establishing clear payment terms is critical to managing the order to cash cycle effectively. This includes establishing payment due dates, late payment fees, and credit limits for customers. Clear terms can help to avoid disputes and delays in payment, and ensure that the company has a healthy cash flow.
Explaining this clearly before a customer places an order will prevent issues with accounts receivable and result in smoother payment collections.
Automate processes where possible
Automating processes where possible can help to improve efficiency in the order to cash process. This may include automating the order processing system, invoicing, and payment processes. Automation can help to reduce errors, speed up processes, and free up employees to focus on more strategic tasks.
Enterprise resource planning software is typically used to automate many order to cash processes. Order management software can also supplement this workflow. For example, an invoicing system can automatically produce and send invoices, and a data management system can record performance data. Where possible, it's a good idea to automate an order to cash process to streamline customer orders and quickly process a customer order.
Monitor payment histories
Monitoring payment histories can help to identify potential issues with customers before they become a problem. This includes tracking customer payment behaviour and identifying customers who consistently pay late or have a history of disputes. This can help companies to adjust payment terms for these customers or take other actions to mitigate risks.
Implement a dispute resolution process
Implementing a dispute resolution process can help to resolve issues quickly and prevent them from escalating. This process should include a clear path for customers to report disputes, and a process for resolving disputes in a timely manner. A well-defined dispute resolution process can help to maintain positive relationships with customers and prevent disputes from negatively impacting the order to cash process.
Conclusion
The OTC, O2C, or order-to-cash process is a critical aspect of B2B payments that involves several steps, including order processing, invoicing, payment, and fulfillment. Managing the O2C process can be challenging due to delayed payments, inaccurate invoicing, inefficient order processing, and a lack of visibility into the process. However, by implementing best practices such as establishing clear payment terms, automating processes where possible, monitoring payment histories, and implementing a dispute resolution process, companies can effectively manage the OTC process and improve their financial health.
