What is the Order to Cash Process, and Why Should You Know it?

One of the more stressful parts of being in business is chasing unpaid invoices. Companies put lots of work in to provide quality services or products, and then they struggle to keep cash flowing when invoices are not paid on time.

One of the biggest reasons for a business going into liquidation is due to cash flow problems which end up with the accumulation of debt. Over the last eighteen months or so, the UK has suffered from several lockdowns caused by the pandemic, and this has affected business badly.

Millions of people found themselves furloughed or made redundant, and the list of high street shops that have closed keeps on getting longer. Many businesses are surviving by the skin of their teeth, and it is this uncertainty that means getting invoices paid on time is more essential than ever.

What are the processes involved with receiving orders and payments, and how can you make your collection systems more efficient? 

What is the state of small businesses in the UK today?

Depending on what type of industry a business is in, they may be hampered by social restrictions, curtailed opening hours, reduced capacity, or they might have reduced orders.

Many companies sailed through the pandemic and even grew. Retail businesses involved with essential goods, such as grocers, and supermarkets saw some increases in sales, especially during the early days. Panic buying meant that some shops had their stock wiped out in no time at all and had to impose limits on shoppers. Ecommerce businesses also grew. 

Uber Eats, Deliveroo, Netflix, and online gaming, all saw rises in orders and subscriptions. However, many other businesses didn’t. Businesses in the hospitality trade were hit especially hard. Tourism was another area that has suffered badly.

Many other small businesses are now surviving, but barely, and they are often looking at the steps to take to avoid insolvency and being closed down. One way to improve order and payment times is to understand the order to cash process. 

What is the order to the cash process?

This is also known as the O2C process and refers to the whole ordering system. It involves how you proceed with orders once they are placed, and through to completion.

By monitoring and fine-tuning these processes you can make your ordering system more efficient, smoother, and it will lead to strong customer relationships. To make this type of system work best, it needs some form of automation in the shape of software.

Order to cash software can help your business with real-time tracking of orders, and this means everyone in your firm is in the loop. The software tracks the order from the initial request through to delivery, and then to the cash payment. In fact, the software keeps processing after payment is collected by generating reports and managing data.

The whole order to cash process follows this route:

  • Order Management
  • Credit Management
  • Order Fulfilment
  • Order Shipping
  • Customer Invoicing
  • Accounts Receivable
  • Payment Collection
  • Reporting and Data Management 

Why is this process important?

The O2C process affects all parts of your business, primarily through cash flow or how much capital you have available. When a business develops cash flow concerns it can end up in financial difficulty. This could mean being unable to pay suppliers, service any company debts, or even pay the workforce.

When all means of cash flow have dried up, you will learn the meaning of liquidation and may see the end of your business. Assets will be stripped and creditors will be paid with whatever funds are realised. However, the order to cash process offers a chance to avoid this. 

The process is important because it affects your whole business, and can mean the difference between fast payment, or delays on invoices. By monitoring, reviewing, and adjusting the order to cash process, you can eliminate problem areas and inefficiencies, and speed up payments.

By using automated software, you could reduce the days sales outstanding, or DSO, and have a very healthy flow of cash running through your business. 

How does each area of the order to cash process work?

The first part of the process is order management. To make this area more efficient it will ideally be automated. That way, an order would be placed by the customer, which is then automatically relayed to the warehouse. Afterward, the inventory will be deducted by the appropriate amount, and the item dispatched to the shipping department. 

Credit management

This is a very important area of the O2C process when it comes to making sure your business stays liquid. As has been mentioned above, keeping steady cash flow in these times is important, and credit management plays a big part.

Alongside O2C software other systems can integrate and help with cash collection. Companies such as Payt specialise in supplying credit management systems that give up-to-date information about customers.

This can mean the difference between over extending credit, and being paid on time.

Customer invoicing

Once the order has hopefully been correctly fulfilled and dispatched, it is time to invoice the customer. Invoices should clearly display all the relevant information and be accurate to prevent delays. All terms and conditions should also be made clear, including the payment due date.

By automating this system, the invoice will be automatically generated as part of the O2C process, and once checked, can be sent electronically. 

Order fulfillment and shipping

These come next, and this part of the process is as critical as any other. Any mistakes in the order will lead to delays in payment, and possibly lost orders in the future. 

Accounts receivable

Once the due date is reached, debt management software can help with automatic reminders. As part of the whole O2C process, integrated software can send out first, and second reminders, before moving on to the collection process. 

Payment collection

Hopefully, your customer will have paid before any final reminders have to be issued. However, if the automated reminders have failed to recover any debts, then various things will now happen. Firstly, the customer’s account will be flagged as past overdue, then their credit line will be suspended. This means that if the customer tries to order again, they will be informed of their outstanding debt.

The system allows for amicable resolutions by offering payment plans, and other forms of payment to make it easy for creditors and debtors to continue working together. 

Reporting and data management

Finally, the O2C system will report on the overall process. This means that inefficiencies can be noted, and the process adjusted to help the whole business run smoother. 

Summary

The order to cash process affects the entire business from the moment an order is placed. Through data management and the right software, all areas of the business can be improved. One of the main areas that will benefit from O2C software is cash flow and the time it takes trying to get invoices paid.

When companies get low on funds they start looking for other options such as invoice factoring or looking at the benefits of cash business loans, but ideally, these can all be avoided. An automated O2C system can reduce the manpower involved in chasing invoices by around 80% and increase a business’s cash flow by up to 50%.

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