Order-to-cash: Definition, examples, and accounting basics

The order-to-cash process is a fundamental business workflow encompassing all the steps and activities involved in receiving and processing customer orders through to the final collection of payment for goods or services rendered. This end-to-end process is a crucial component of any organization, as it directly impacts revenue generation and customer satisfaction. With the range of benefits that the order-to-cash process brings, it's important to understand how this process contributes to the overall efficiency and success of a company. Keep reading to find out more about this process: what it is, how it works, its benefits, alternatives, and more! 

What is order-to-cash?

Order-to-cash, commonly abbreviated as OTC or O2C, is a comprehensive business process that encompasses all the steps involved in receiving, processing, and fulfilling customer orders, as well as managing the subsequent billing and payment processes. 

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How does order-to-cash work?

The order-to-cash process begins with the receipt of a customer order, which is then entered into the company's system for further processing. This initiates various steps, such as inventory checks, credit verification, and order prioritization.

Let's explore each step in detail:

Order placement

The O2C process begins when a customer orders a product or service. This can happen through various channels, such as online platforms, sales representatives, or electronic data interchange (EDI) systems.

Order processing

Once the order is received, it undergoes validation and processing. This step involves verifying the order details, checking for product availability, pricing accuracy, and compliance with contractual terms. Automated systems may be used to validate the order, and any discrepancies or exceptions are flagged for resolution.

Order fulfillment

After the order is validated and approved, it moves to the fulfillment stage. The goods or services are picked, packed, and shipped to the customer's specified delivery address. In some cases, services may be rendered directly without physical shipping involved.

Invoicing

As the order is fulfilled, an invoice is generated. The invoice details the items or services provided, their quantities, and the agreed-upon prices. The invoice is sent to the customer, physically or electronically, depending on the chosen communication method.

Accounts receivable

The customer receives the invoice and makes the payment according to the agreed-upon terms. The payment is recorded in the organization's accounts receivable, and any outstanding amounts owed by the customer are tracked.

Payment collection

Customers pay for the goods or services they receive. Accountants diligently track and match these payments with the corresponding invoices. If any discrepancies or outstanding payments arise, they promptly follow up to resolve them. 

Cash application

Payments received are accurately recorded and applied to the appropriate customer accounts. The cash application process ensures the proper allocation of payments against outstanding invoices.

Benefits of order-to-cash

Implementing an effective O2C system offers numerous advantages for accountants. Some key benefits include:

• Enhanced cash flow: O2C automation streamlines the entire order processing and cash collection cycle, reducing manual tasks and errors. This efficiency leads to faster order fulfillment, shorter payment cycles, and a more streamlined cash flow.
• Improved customer satisfaction: A well-executed O2C process ensures timely delivery of orders, accurate invoicing, and efficient query resolution, thereby boosting customer satisfaction.
• Real-time insights: O2C systems provide valuable data and analytics, enabling accountants to gain real-time visibility into sales, receivables, and other critical financial metrics.
• Cost reduction: Automation in O2C reduces the need for manual intervention, saving time and labor costs. Additionally, faster order processing and reduced disputes lead to lower operational expenses.

Challenges with order-to-cash

While O2C offers numerous benefits, it's important to consider potential downsides. Here are some factors to keep in mind: 

• ‍Implementation complexity: Adopting an O2C system requires careful planning, configuration, and integration with existing accounting software, which can be a complex undertaking. ‍
• Technological dependencies: O2C heavily relies on technology solutions, such as accounting software, CRM systems, and payment gateways. Any technical issues or system failures can disrupt the entire process. ‍
• Change management: Transitioning to an O2C system involves a significant shift in workflows and processes for your organization. This can lead to resistance from employees accustomed to traditional methods, requiring effective change management strategies to ensure a smooth transition and proper training to mitigate any productivity dips during the learning curve. 

Alternatives to order-to-cash

In addition to the traditional order-to-cash process, businesses can consider several alternative approaches to optimize their revenue generation and customer interaction strategies. Let's explore some of these alternatives:

Purchase-to-pay (PTP)

Primarily focusing on procurement activities, PTP manages the end-to-end process of ordering and paying for goods and services, covering vendor selection, purchase orders, receipts, and invoice processing.¹

Quote-to-cash (QTC)

QTC encompasses the entire sales cycle, from creating quotes and proposals to closing deals and collecting payments.² It provides a holistic view of the sales process and integrates with other systems, such as CRM and finance.

Software for order-to-cash management

Software solutions play a vital role in effective O2C management. Here are some key tools commonly used in the O2C process: 

Accounting Software: Tools like NetClose provide robust accounting capabilities, allowing businesses to track and manage financial transactions, invoices, and payments efficiently.

Customer relationship management (CRM) systems: CRM systems, like Salesforce or Microsoft Dynamics 365, enable businesses to manage customer interactions, track sales leads, and maintain a comprehensive customer database. 

Electronic data interchange (EDI): EDI enables the electronic exchange of business documents, such as purchase orders, invoices, and shipping notices, between trading partners.

Differences between order-to-cash and procure-to-pay?

Order-to-cash and procure-to-pay are two distinct financial processes within a business. Order-to-cash involves a series of steps from customer order placement to receiving payment, encompassing order fulfillment and revenue collection. On the other hand, procure-to-pay entails the activities from procurement requisition to supplier payment, covering sourcing, purchasing, and settling financial obligations.

Frequently asked questions 

How can order-to-cash benefit small businesses?

Order-to-cash can greatly benefit small businesses by improving cash flow, reducing operational costs, and enhancing customer satisfaction. It enables efficient order management and ensures timely payments, which are critical for small businesses' financial stability and growth.

How can order-to-cash improve financial visibility?

Order-to-cash provides accountants with real-time insights into sales, receivables, and other financial metrics. By tracking the entire order fulfillment cycle, accountants can gain a comprehensive view of cash flow, revenue trends, customer payment patterns, and other critical financial indicators.

Is order-to-cash part of procurement?

No, order-to-cash is not part of procurement. Procurement involves the process of sourcing, purchasing, and acquiring goods or services needed by a company. On the other hand, order-to-cash refers to the set of processes involved in receiving and fulfilling customer orders, including order processing, inventory management, and invoicing. 

Sources: 

1. Banton, C. (2023, January 28). Purchase-to-pay (P2P): Definition, process, steps, and benefits. Investopedia. https://www.investopedia.com/terms/p/purchasetopay.asp 
2. Quote-to-cash (Q2C) software market size, share, Scope & Forecast. Verified Market Research. (2022, June 8). https://www.verifiedmarketresearch.com/product/quote-to-cash-q2c-software-market/ 
3. Kothawade, S. (2023, June 9). SAP order to cash process – SD. SAP Blogs. https://blogs.sap.com/2023/06/09/sap-order-to-cash-process-sd/#:~:text=The%20SAP%20OTC%20(Order%2Dto,enter%20it%20into%20the%20system.