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Understanding the Order to Cash Cycle

The order to cash cycle plays an essential role in building your relationship with customers. Touching on a broad range of business functions, it’s critical to get this part of your operations right. But what is the order to cash cycle? Find out everything you need to know with our helpful guide.

What is the order to cash cycle?

Also referred to as O2C or OTC, the order to cash cycle is the business process that covers your company’s whole order processing system. It starts as soon as a customer places an order (up until that point, all processes are related to either marketing or sales) and includes all aspects of the sale, including shipping, collecting payment, creating the invoice, and reporting.

Why is the order to cash cycle important?

The order to cash cycle plays a significant role in driving your business’s relationship with the customer. It has a considerable impact on your bottom line and can be the defining factor in your customer retention rate and overall level of company growth. By optimising your order to cash process flow, you can streamline the buying process, reduce order-to-fulfilment time, avoid backorders, and improve the accuracy of your records.

Order to cash process flow explained

The order to cash process flow has six basic steps:

  • Order management – The cycle begins when a customer makes an order. To make the process more efficient, this part of the order to cash cycle can be automated.

  • Order fulfilment – The next step revolves around fulfilling the order, i.e., locating and preparing the item. In most cases, you can do this with the help of your business’s inventory management system.

  • Shipping – Then, it’s time to ship the order to the customer. Some parts of the shipping process can be automated, but either way, you’ll need to prepare the package using the correct fulfilment details; otherwise, it may not go to the right address.

  • Invoice generation – Next, it’s time to generate the invoice. Make sure that the invoice includes all the necessary information, including order date, a description of items purchased, and payment details. There are many different automated invoicing tools that can help you get this part of the order to cash process flow right.

  • Payment – At this point, you’ll need to collect payment from your customers. This part of the sales order to cash process can be automated using your order management and invoicing systems. Provide multiple payment options to minimise payment failures and delays, or utilise ACH Direct Debit so that you can take payment automatically.  

  • Reporting – Finally, there’s the reporting phase. You should report on all data related to the order to cash cycle, pulling data from your order management systems. This can help you to identify any inefficiencies and capitalise on the more successful elements of your order to cash process flow.

What’s the difference between procure to pay and order to cash?

Although order to cash and procure to pay may seem relatively similar, they describe very different processes. Essentially, order to cash comprises all the business processes related to a sale, whereas procure to pay includes all the business processes related to procurement from suppliers (i.e., purchase requisition). So, when it comes to the difference between procure to pay and order to cash, it’s simple – one is for sales orders, and the other is for procurement.

Order to cash for subscription businesses

Although the order to cash process flow is more or less the same for most businesses, there are a couple of significant changes when it comes to companies that operate with a subscription model, particularly those working in the SaaS space. Most importantly, the sale or order is never actually complete, as there’s always a recurring order later on in the subscription cycle.

It’s also crucial to remember that set-up costs, write-offs, upgrades, downgrades, and proration can all introduce an additional layer of complexity to your order to cash cycle. Furthermore, if you’re using annual contracts that are paid monthly or upfront, you may need to tweak the sales order to cash process (via deferred reporting) to ensure that your revenue recognition is accurate.

Optimising your sales order to cash process

Without a streamlined order to cash cycle, you may not be able to meet the needs of your customers as quickly and effectively as you should. Make sure that you’re integrating all of the systems used for day-to-day operations to shorten delays and reduce the potential for errors. You should also regularly evaluate your order to cash process flow to identify issues and improve your procedures over time.

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