Every business processes customer orders. To do this efficiently, a solid order-to-cash process is critical. This process goes beyond getting paid on time and optimizing your cash flow. In fact, a smooth and automated order-to-cash process also plays an important role in improving your relationship with your customers.
Order to Cash Process
Order to Cash: Business efficiency and customer satisfaction
What is the Order to Cash process?
Order to cash is the process from receiving an order from your customer to processing the payment. This process is often abbreviated as O2C or OTC.
Receiving the order triggers a number of important actions in the O2C process, such as processing and shipping the order and sending the invoice. This is also known as the order-to-cash cycle.
The opposite of the Order to Cash process (on the buyer’s side) is the Purchase to Pay (P2P) process. This process begins with the purchase order and ends when the goods and/or services are paid for.
The Order-to-Cash Cycle in Practice
- Order Management & Credit Management
When an order is received, it is checked to ensure that all the information is correct and available to successfully process the order. If a quote has been provided, the order is compared to the quote. In case of missing information, errors, ambiguities or certain complexities, the customer will be contacted. When buying on account, it is important to have a credit approval process in place. New customers go through this process to avoid overdue payments later in the order-to-cash process. - Order Processing
Once all information is complete, the order is checked for stock availability. Any discrepancies are addressed before the order is approved. If there is insufficient stock, the customer should be notified and appropriate action taken. - Delivery
When the delivery date is known, the customer is notified or the delivery date is coordinated with the customer. For international sales, customs clearance should be considered. - Billing & Payment Processing
Once the order has been shipped, an invoice is prepared and sent to the customer. After the customer has paid for the products and/or services, it should be verified that the payment has been made in accordance with the invoice terms. The payment is posted to the purchase order and properly processed in the financial records. Any delays or payment disputes should be resolved.
Customer Service: Throughout the process, good communication with the customer is essential. Any questions, problems or requests should be handled promptly and professionally to ensure customer satisfaction. - Customer Service
Throughout the process, good communication with the customer is essential. Any questions, problems or requests should be handled promptly and professionally to ensure customer satisfaction.
Benefits of an Optimized Order-to-Cash Cycle
An efficient order-to-cash process offers many benefits to businesses:
- Improved cash flow: Streamlined order and payment processing ensures stable cash flow. You get paid faster because orders are processed faster and invoices are sent earlier and without errors.
- Increased customer satisfaction: Fast and accurate order processing, delivery, and customer service help keep customers happy. More on this later in this article.
- Efficient inventory management: The process helps identify the most popular products, which helps optimize inventory levels.
- Fewer disputes: Clear billing and payment terms reduce the risk of disputes between customers and the company.
How to improve the order-to-cash process?
To improve the order to cash process, it is important to:
- Integrate data that exists in multiple locations throughout your organization,
- Automate the processes associated with that data.
McKinsey’s Perspective on Order to Cash
McKinsey, a leading consulting firm, emphasizes the importance of technology integration in the order to cash process. McKinsey advocates automated systems that provide real-time visibility into order status, inventory levels, and payment status.
EDI in the Order-to-Cash Process
EDI is a critical tool in the automation of the Order to Cash process. EDI enables the electronic and automated exchange of data throughout the entire O2C cycle.
Below is an overview of what EDI can do at each step of the order to cash process:
1. Order Management
In an automated order-to-cash process, orders are received digitally via an EDI message. Depending on the EDI standard, this message has a specific name. In the EDIFACT standard, this message is called Purchase Order Message (ORDERS).
This message then initiates the entire order-to-cash cycle. The Purchase Order message is validated according to the agreed EDI standards.
In response to the purchase order message, the receiving party sends a response message to confirm the order. In EDIFACT, this message is called Purchase Order Response Message (ORDRSP) Items that cannot be delivered may be flagged in this message, and the message may also suggest changes to the purchase order.
In EDIFACT, changes to the purchase order are automatically received (and processed) with the Purchase Order Change Request (ORDCH).
2. Purchase Order Processing
The Purchase Order message initiates several processes on the order processing side. Depending on the type of business, these can be ranging messages. For example, in the manufacturing industry, the delivery schedule message (DELFOR) is important. With this message, the manufacturing company provides a sales forecast to its suppliers.
The message contains information about the expected sales and the amount of material needed from the supplier.
On the supplier side, receipt of the DELFOR message initiates scheduling or modifies an existing schedule. Another important EDI message in the order fulfillment process is the inventory report message (INVRPT). This is used by chain partners to inform each other of available inventory. For a given period of time, this can include: beginning inventory, ending inventory, and/or the movement of goods between warehouses or distribution centers.
3. Delivery
The delivery side of the purchase-to-pay process can also be fully automated using EDI. Again, different types of messages can be exchanged between partners in the chain, including messages to arrange and manage transportation, as well as messages to inform the receiver of the arrival of the shipment.
Examples of EDIFACT delivery messages are:
- Booking Messages (IFTMBF, IFTMBC).
- Instruction Messages (IFTMIN and IFTMCS)
- Arrival Messages (IFTMAN).
4. Billing & Payment
Efficient invoicing is a critical part of the order-to-cash process. It is the key to smooth cash flow. The faster a company can send an (accurate) invoice to the customer, the faster payment will occur.
Therefore, it is important to minimize delays between order processing and invoicing. Everything revolves around sending (accurate) invoices on time.
An invoice message in EDIFACT is simply called Invoice Message (INVOIC). This message can be used for normal invoices as well as for debit and credit invoices.
A widely used network for electronic invoicing is PEPPOL. This network is used by government agencies such as municipalities and water boards.
On the client side, a payment message initiates the payment of the invoice. In EDIFACT, this is called an Extended Payment Order Message (PAYEXT).
Impact on Customer Satisfaction
The order-to-cash process is a vital link in the business world. It brings together processes from different departments and supply chain partners to deliver better and faster to the (end) customer, while keeping cash flow in order.
With the right approach, this process not only increases operational efficiency, but also contributes to better customer relationships. In fact, an excellent order-to-cash (O2C) cycle has a significant impact on customer satisfaction.
A smooth-running O2C process provides several benefits to customers, including
- Better customer experience: A smooth order-to-cash cycle ensures a seamless buying experience. Orders are processed efficiently, invoices are accurate and timely, and payments are easily satisfied. This contributes to a positive customer-supplier relationship.
- Faster delivery: Efficiency in the O2C cycle often translates into faster delivery. Orders are processed more quickly and deliveries are made more efficiently. As a result, customers receive their products or services sooner, contributing to their satisfaction.
- Better communication: A well-functioning order-to-cash process includes clear communication about orders, billing, and payment information. Customers know exactly what to expect. This builds trust and transparency.
- Fewer errors: A smooth O2C process minimizes errors, such as incorrect invoices or deliveries, or delays in order fulfillment. This reduces inconvenience and costs for customers and contributes to their satisfaction and trust in the company.
- Customer focus: A well-functioning O2C cycle shows customers that the company takes their needs seriously. Efficient and timely order fulfillment and invoicing demonstrate that the company values customer convenience.
Strengthen relationships with supply chain partners
Strengthen relationships with supply chain partners
A well-oiled order-to-cash process strengthens the relationship between you and your supply chain partners. It not only provides operational benefits to your business, but also creates a positive and rewarding experience for the customer. This helps build loyalty and trust, which is ultimately a critical factor in attracting and retaining your customers.
