fbpx
Glossary » Order to Cash (OTC)

Order to Cash (OTC)

What is Order to Cash?

The order-to-cash process encompasses an organization’s entire order processing system, starting from the moment an order is received up until the point the payment is made and an entry is logged with accounting. 

Everything that happens up until the point of an order being received is related to other functions, such as branding, marketing, or sales. However, it’s essential to remember that these functions do not cease to operate once a customer places an order, rather, their core activities tend to apply to phases of the customer journey that comes before the order-to-cash process begins. 

Synonyms

  • OTC
  • O2C

Order-to-Cash vs Quote-to-Cash

While order-to-cash involves everything from when a customer first places an order, right up until the payment of that order, quote-to-cash encompasses a larger set of business processes. 

Quote-to-cash envelopes everything from the order-to-cash process alongside other processes and contract management. In a nutshell, the quote-to-cash process starts from a customer’s intent to make a purchase, rather than the purchase itself, all the way through to revenue realization.

Order-to-cash and quote-to-cash differ in two key areas. The first is that order-to-cash doesn’t include configure, price, and quote (CPQ) processes – they are all done prior, and are part of the quote-to-cash process. 

The second main difference is that order-to-cash doesn’t include the entirety of contract lifecycle management, only part of it. 

The creation and negotiation of customer contracts happen beforehand, outside of the typical order-to-cash cycle, as part of the overarching quote-to-cash process. 

What is the Order-to-Cash Process?

There are 7 steps in the order-to-cash process:

  1. Receive order.
    This is the moment that the order is placed by the customer. The business will be notified via its order management system, and specific people, teams, and systems will be notified about the order in question. This is the very first step in the order-to-cash process, and once completed, the rest of the process can start.
  1. Manage customer payment.
    Once the order has been placed, it’s time for the organization to manage the customer’s payment – how it is handled will depend on the customer’s chosen payment method, i.e. credit card, PayPal, or debit card.

    The eCommerce system that is in place will do the majority of the heavy lifting here by submitting it for approval, from there, the system will either accept or approve the payment. Only if and when the customer’s payment is approved, can the order-to-cash process move forward to the next step – fulfillment. 
  1. Fulfill order.
    Now that payment has been approved, the order itself needs to be fulfilled. That means locating the product/ parts and preparing the item for the customer who purchased it.
    An inventory management system will do the bulk of the work here, telling those involved in order fulfillment where to find products, etc. 
  1. Ship order.
    Once the order has been packaged up, it now gets shipped to the customer – this should be done according to the customer’s chosen delivery method, i.e. home delivery, click-and-collect, next-day, or same-day delivery.

    This can either be performed manually or in an automated way, but businesses need to ensure the package is prepared for shipment using the fulfillment details, to guarantee that the right item will go to the right customer via the right delivery method and address. 
  1. Create the invoice.
    A customer invoice is a document that shows a record of the items purchased and the price at which those items were sold to the customer. Creating a customer invoice for each and every purchase and order is how organizations keep track of what’s paid for and shipped, to avoid any monetary discrepancies.
  1. Collect payment.
    While the customer’s payment was approved in step 2, it is yet to be collected.
    Assuming everything has gone accordingly up until now, this step of the cycle should be automated by the order management and invoicing systems an organization has in place. This means the customer’s payment method should automatically process as stated on the invoice.
  1. Report and analyze
    The order-to-cash process doesn’t quite stop once the customer’s payment is collected.
    Businesses need to report on all the data related to the order-to-cash process, this step is made easier by integrated systems such as automated ordering and invoicing, as they manage all data associated with customers, orders and sales. The reason businesses need to analyze the order-to-cash process data is to discover inefficiencies in the process, rectify them, and ultimately, always ensure a smooth process that supports customers and the bottom line. 

Order to Cash in the Cash Cycle

Optimizing the order-to-cash process will help businesses to eliminate inefficiencies and can result in more working capital, fewer bottlenecks, and a higher rate of customer satisfaction – it can also reduce fulfillment time. 

While the cash cycle or cash conversion cycle is the capital metric that expresses how many days it takes a company to convert cash into inventory, and then back into cash via the sales process, having an optimized order-to-cash cycle can decrease the amount of time it takes for businesses to convert inventory back to cash again by ensuring systems are automated and work together. 

Order to Cash Optimization

As mentioned above, optimizing the order-to-cash process can significantly improve a business’s cash conversion cycle by eliminating efficiencies, while also providing an improved experience to customers. 

Benefits of Optimizing the Order-to-Cash Process

There are three core benefits of optimizing the order-to-cash process:

  1. Enhanced customer experience: businesses can create a better fulfillment, invoice, and payment processing experience, which in turn, leaves customers with a positive lasting impression of the company, and increases the likelihood of them becoming repeat loyal customers.
  2. Increased revenue generation: by reducing bottlenecks and delays in payment collection, businesses can quickly increase their cash inflow. An optimal fulfillment process also generates greater customer satisfaction, which again, can lead to repeat purchases and long-term customer relationships.
  3. Improved cash flow: optimizing the order-to-cash process can uncover other ways to save on expenses. Businesses may be able to eliminate errors, streamline inventory processes, and reduce any unnecessary steps that are costing the company.

    This results in increased cash flow that can be spent on other profitable products and investments.

Order to Cash Best Practices

For businesses that are looking to optimize their order-to-cash process, several best practices can support this goal.

  • Create a standard
    Having standards, rules, and regulations that everyone in the company has to follow creates consistency and facilitates a seamless order-to-cash process. Company-wide standards also mean that while everyone is working to the same level and quality, overall outcomes are improved, and naturally, team members become more efficient and can better spot and more easily rectify any inefficiencies.
  • Ensure system integration 
    While having inventory, CRM, and inventory management systems are great unless they talk to each other and support automation of the order-to-cash process, they are providing true value. By ensuring that all systems are integrated, businesses can avoid human errors and shorten the order-to-cash process.
  • Monitor the process
    Regularly monitoring the order-to-cash process makes it possible and easier to detect issues that are battling its optimization. As technology constantly advances, systems and processes need to change with it to facilitate success. 

Order to Cash Solutions

There are many order-to-cash solutions available on the market, such as Microsoft Dynamics 365, Oracle Cloud ERP, Oracle NetSuite, SAP ERP SD, SAP Business ByDesign, or Workday.

People Also Ask

Why is Order-to-cash Important?

Without a comprehensive order-to-cash process, businesses can’t receive or complete customers’ orders, negatively impacting the customer experience, and they also can’t receive or approve payments, resulting in lost revenue and affecting the bottom line.

Is Procure-to-Pay the Same as Order-to-Cash?

While order-to-cash and procure-to-pay have similarities, they actually describe different processes.

As detailed above, order-to-cash encompasses all of the business processes related to a sale, whereas procure-to-pay includes all the business processes related to procurement from suppliers.

Simply put, the difference between procure-to-pay and order-to-cash is that one is for sales orders, and the other is for procurement.

What type of process is order-to-cash?

Order-to-cash is a business process that encompasses all of the steps involved from when a customer makes a purchase, up until that order is paid in full for the company.

What is an example of order-to-cash?

A typical example of an order-to-cash process includes:

1. Order received from customer.

2. Company manages customer’s payment.

3. Order moves to fulfillment.

4. Order is packaged and shipped to customer.

5. The customer invoice is created.

6. Payment is collected from customer.

7. Company reports and analyzes process to ensure improved optimization.