Order to Cash Process: Understanding O2C

By Lexi Wood • Updated on July 29th, 2022

There’s more to a customer ordering system than just making a sale. You need to ensure your business processes go smoothly to avoid missed revenue and disappointed customers. The order to cash process is one way of optimizing your sales.

What is Order to Cash?

Order to cash, also shortened to either O2C or OTC, refers to how customer orders are processed by your company. Unlike traditional retail and eCommerce environments, where a customer enters a store and leaves with goods a short time later, the OTC cycle is aimed more at purchases which may take a significant amount of time or offer a high return on investment. As such, the process isn’t as simple as ringing up a product’s barcode and putting cash in a register. It requires everything from lead management to accounts payable to ensure your business gets paid for providing customers with goods and services. Usually including some reporting tools to measure performance metrics, a comprehensive O2C can optimize your sales order process and cash flow.

The O2C Cycle Explained

You might expect the O2C process to be very simple: a customer contacts a company to purchase goods or services. Yet the order to cash cycle begins far before any customer gets directly involved with your business. The exact amount of steps may vary depending on several factors, such as your industry and the kinds of goods and services you sell.

Here’s how it works:

Lead or Quotation Management

Before any sale can be made, customers need to know your product or service exists and what it costs. In some instances, this means your sales team has to approach them to pitch a sale. Some companies do heavy research into the best prospective leads while others rely on cold calling. Regardless of method, determining a quote for a lead or opportunity is the first step of the order to cash cycle.

In the event of recurring sales, you’ll need good customer relationship management (CRM) in place to ensure you keep in touch with the right contacts at the right time. You don’t want to come across as pestering by sending too many emails for reorders, nor do you want to miss their restocking deadlines and appear incompetent.

Note: At some companies, this step falls more into a quote-to-cash cycle. Learn the difference between the two below.

Order Processing

Once a customer has decided to make a purchase based on your quote, your company has a few directions before the sale can be made. If you operate at a high level, you might undergo a credit management process to prove the customer can actually pay for your goods and services.

Once credit is confirmed, your company will create either an approved quotation or other confirmation of sale. Depending on your exact business, this might involve negotiation with the customer to reach an agreement on costs, quantity, and delivery.

At this point, your company has to start processing the order, and the exact cycle will need to be customized to fit your style. This is where the bulk of the work is, as your team has to determine what exactly is necessary for your sale to meet the customer’s expectations.

Order Fulfillment

Once the order is processed, the final product can be delivered or shipped to the customer. If you offer a service, the circumstances for it to be fulfilled may be different. For example, if you operate a consulting business, your order might only be considered finished after the customer has seen and approved results from your work.

Whether an product is shipped internationally or goods are personally delivered, many companies now use order tracking to allow customers to know when to expect fulfillment. The expected delivery window might change based on supply chain factors or other variables within your company. Finally, successful order shipping means the invoicing process can proceed.

Invoicing

Invoicing is when a bill of sale or similar document is sent to the customer confirming how much they owe and when payment is due. Custom invoices can detail exactly what the customer ordered, how much it costs, and when it is to be delivered. Of course, the most important information is how and when payment needs to be made.

Depending on the industry, customer invoicing can be done upfront as soon as a sale is initiated or it might only be sent during the processing and fulfillment stages. In some service-based industries, it is sent after a service is completed. The process might also vary for returners as opposed to first time customers who have not built a relationship with your business yet. Regardless of when it is sent, the document will contain details on when and how payment will be made by the customer and if there are any alterations to the original price.

Separate invoicing software or modules can help you track outstanding invoices which have not yet been paid or recognized as revenue in your workflow.

Payment Collections

Finally, if the invoice has not already been paid earlier in the process, customer payment is collected. This might be through an electronic payment or an in-person exchange of cash. For the former, you’ll want an online method such as three-way matching to ensure the funds are correctly received into your accounts payable. For the latter, you just need trustworthy employees and a ready accountant to balance the books once the cash is in hand.

In some industries or when dealing with recurring orders, you might offer credits to repeat customers. A loyalty or reward program within your OTC can help you keep track of what benefits various customers have.

Revenue Recognition

Revenue recognition is when your company identifies when funds from potential customer payment have arrived into your own accounting system. Essentially, this is when they pay off their invoice and you get the money for the sale. Like invoicing, this can occur in a different order than listed here depending on the nature of your sales process. For most straightforward sales, revenue recognition happens whenever the customer pays in full and the sale is considered complete or closed by your company.

For instance, construction contractors might charge clients on a percentage basis, meaning they receive regular payment installments whenever certain work is completed. Revenue recognition might occur as each payment is made in real-time or once 100% of funds for an entire order have been received.

Reporting and Performance Management

This last stage of the OTC process is optional though highly popular: record data on your sales in order to analyze key performance indicators (KPIs) to know how your business is doing and how it can improve to limit inefficiencies. For example, you might identify bottlenecks which slow down your order processing system. Or you can measure customer satisfaction to find ways to optimize your services.

Additionally, you can oversee changes to your account receivable with each paid invoice for real-time updates on your cash management.

Order to Cash vs Quote to Cash: What’s the Difference?

The quote-to-cash cycle includes all the above steps for order to cash yet also include the quoting and negotiating process between your company and the customer. However, these are partially covered by the initial lead and opportunity management stages. With so many sub-processes in common, many quote-based businesses use the terms interchangeably.

Use Software to Perfect Order to Cash Processes

Creating an order to cash system for your company can take a lot of time and effort. And manual processes can lead to piles of paperwork for every individual sale. Fortunately, most major ERP systems include tools and modules for O2C processes. Some features might not technically be OTC specific, but they cover the same key steps, such as invoicing in accounting and opportunity management for sales. Similar modules are often included with procurement software, though these are focused more on managing the purchases your company makes, rather than outgoing sales.

Other software can help provide complete OTC automation as well. Order management software can help streamline your OTC cycle. Another popular tool is a customer relationship management (CRM) system to keep tabs on new and returning buyers to ensure a positive customer experience. Finally, basic software containing a general ledger, accounts payable, and accounts receivable module can all make it easier for you to manage cash flow from sales.

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