What does order to cash mean?

What does order to cash mean?

The order to cash is one of the important parameters that describe the organisation success and also plays an important role in determining the relationship with its customers. Order to cash is an entity of a company’s order processing system. Its starts immediately when the customer places an order. Before placing an order, everything is related to some function of branding, marketing, managing or sales. Once the customer places an order, everything is dependent on order to cash. Their core activities are dependent on the order to cash cycle.

While some people may think that Order to cash is completed when order is placed and received successfully, but there are some important functions part from placing an order and receiving the confirmation messages. Activity data recorded through the order to cash process must be properly analysed and optimised to help management organisation to identify and optimise the opportunities. Keeping in mind the process involved in order to cash process changes slightly from one company to another, the order to cash process looks some wards like this:

Quote, request and delivery updates– When a customer requires quotes, invoice and prior approval before placing any order.

Order entry– When a customer purchases any items or make a request on any service.

Order fulfilment- When a customer place an order and that order is successfully delivered.

Invoicing- When an order or service is successfully delivered to a customer.

Invoice collection- The process of collecting the payment due from the customer after successfully serving him with the product or service.

Cash application- When the payment is recorded in the general account.

The process seems simple, but each sub-process has its very own set of challenges, inefficiencies, and another issue that can slow the final and arguably the most important stage of the process, getting paid.

Importance of Order to cash process

Just think about what all the order to cash cycle involves- it clearly depicts the condition of any company and how its management runs. Streamlining the order to cash process is very crucial because it helps to improve and maintain the profit records, gain customer retention and depicts the company growth. The slow or any open process along the cycle might cause sufficient damage to the bottom line in multiple verities.

One such example would be a customer leaving your company and going to another company because you are facing some trouble with stuff like order fulfilment and processing cycle. If you or your staff is running late or sending incorrect orders, they will eventually get fed up and they will quickly find another company providing the same service or same product. Sometimes it may also happen that when a customer has taken a few excuses for not clearing their invoices and has gone a few months past due, this causes many problems to your business.

There are several possibilities for things to go wrong throughout the order to cash cycle, but we have concluded that a majority of businesses struggle occurs toward the end of the cycle, collecting the money owed to them. Usually, companies going through hard times find it difficult because the customer is disputing an invoice or avoiding payment, but actually, because the company does not have the complete visibility into their accounts receivable and the tools they are using to quickly identify late invoices and take proactive steps to rectify the situation. Think about it- If you are using customer management software and technology such as CRM and ERP to help your business at the beginning of the cycle, then why can’t you use the same software and same technology to close the purchase and get your money back to your general account?

Using software and technology to improve the order to cash process

Since ERP and CRM software is not able to fulfil the needs of invoices collection, account receivables software have a tendency to solve their shortcoming very easily. An automated account receivable software has a tendency to automate emails. These automated emails will send out invoices, welcome messages and prior notice to the customers that fall in this payment delay condition. If your business wants to send an email immediately after 15 days then there are certain rules and parameter designed in the software through which an email can be sent after 15 days.

Account receivable options also provide an option using online bill pay method, which allows the customer to enter a secure payment option and pay their invoice using their credit card or debit card, speeding up payment option and reduce the burden on the customers. Among many other functionalities, accounts receivable software helps to fill the gaps in the order to cash cycle that are very important to collecting payment.

Highlights of order to cash process

The eight steps in order to cash process have been summarised into four main categories: order entry, order fulfilment, billing and payment. Depending upon the type and size of the company, the order of these process might change but the overall work and the function remain the same. The order entry process may require manual intervention from a sales representative or an order details entered by a customer directly. A better and consistent order entry system an prevent many problems arising later in this process so it is important to determine whether the process is properly built for better performance and efficiency.

Order fulfilment varies from companies to companies. The Construction company, service company and sales company operate entirely differently. Each industry has its own best practice to fulfil their orders. Whenever possible, invoicing and accepting payment is very essential for every business. This process can be reduced drastically by using order to cash cycle. In an ideal world, billing takes place automatically when the order is entered. However many businesses understand that their business is very far away from an ideal one. If ordering, invoicing and the pricing are connected in one platform then that will definitely help the company to manage better flow behind the scenes.

Payment can be made by crediting the invoiced amount to the ledger account or by issuing a check with check writing software, cash, credit card, debit card, or electronic funds transfer in most cases. This options widely depends on the type of industry and needs of the customers. As a rule, it is best to make it as easy as possible for customers to pay your invoiced amount. Doing so will result in quick and on-time payment from the customer end. It is important to remember that good sales bring business at the door but effectively responding to each client?s unique needs in a timely manner is important and critical.

Importance of order to cash cycle

While many companies consider an order to cash process as cost cost-cutting measures and the best method to improve the efficiency of the company, order to cash process plays a very important role in business growth of the company. Many top executives and CEO have shared their experiences on how order to cash method has drastically improved their growth and revenue of the company.

Cash flow issue has put the countless business in danger position; many well-run companies could face a cash crunch or even bankruptcy if orders are not quickly paid. By prioritising and refining the order to pay system, you are setting your company up for long-term success.

1. Standardise order to cash procedure

Whether the company has 15 employee or 15 thousand employees, accuracy, consistency and standardisation can help to increase productivity and decrease order to cash process cycle time. Even lowering down the entire billing and processing cycle by one or two days will help the companies to generate more financial revenue in their bank account and companies can earn more through short term investments.

2. Integrate all order to cash systems

Many large companies especially Fortune 500 companies often have thousands and thousands of independent computer systems. Integrating those systems create efficiency that can reduce the timing and overall operation period of order to cash process. Fully integrating order, billing and payment processing system eliminates the possibility of human error and cut off days and even week of the order to cash process.

3. Empower staff to handle order to cash efficiently

Even the best engineered and integrated processes sometimes face small errors. Some customers or sales staff do not enter an order right, a short system downtime causes some orders to fall out of the process, or one of the dozens of other potential problems can arise. It is important to have well-trained staff standing by and ensure those employees are empowered to resolve the issue quickly and independently.

4. Monitoring and evaluations of the order to cash process

The ERP system behind corporate order to cash systems should be programmed to send an automated alert any time when any exception takes place. Requiring a human to review and intervene creates a lot of error and several situations, it can lead to failure. In addition to automated alerts, managers should use a scorecard or dashboard to optimise and review key metrics on a monthly or weekly basis to identify and remove unnecessary obstacles from the process. Setting high but better goals encourages the entire team to take all possible steps for company success and better management.