Order-to-Cash Process

Order-to-cash process consists of financial transactions with the customers in a supply chain. Order-to-cash process starts with the customer placing the order and ends with receiving the payment from the customer. The steps involved in the order-to-cash process are explained below.

The order is placed by the customer directly through phone, fax, or the internet. Then, the inventory is checked for the availability of the product in the quantity required by the customer. The firm then checks the customer credit status to decide whether or not to extend credit to the customer. For this, the customer’s credit limit and the status of receivables from the customer are checked. If the customer has placed the order within the credit limits and has nil or permissible receivables, then the product can be delivered to the customer. If not, the firm has to evaluate whether to fulfill the order or to reject it or put it on hold. If it is a new customer, the firm has to establish a new credit line for the customer. If the customer is an existing one and has high credit risk, then the order may be rejected. If the order is placed by an existing customer having low credit risk, then the order may be put on hold for farther analysis.

After delivering the goods, the customer is billed and the invoice is sent to the customer. The disputes that are raised by the customer are then examined and resolved. Finally, the collection of the payment is done either at the convenience of the customer or as per rules and norms set by the firm.

Order-to-Cash Process

By expediting the order-to-cash process, cash flows can be improved. Some of the steps that can be carried out to expedite the order-to-cash process are as follows:

  1. Review of processes and procedures
  2. Identifying the processes fit for automation
  3. Developing appropriate performance metrics
  4. Developing an effective reporting system

1. Review of Processes and Procedures

B2B firms generally provide goods on credit to the customers. In most of the cases, credit is interest free and the firm has to bear the credit costs. Firms, therefore, have to carefully evaluate and set guidelines for providing credit to the customers. Firms may have to provide credit on liberal terms. Yet, at the same time, they have to make sure that the bad debts generated on account of those liberal policies are kept under control. While developing the credit policy and procedures, several factors have to be considered. Credit policy needs to take into account the industry within which the firm is operating and its size. Big retailers wield more power, thus forcing the suppliers to make their policies towards such firms liberal. The firm should also consider customer preferences and requirements. It has to evaluate its competitive environment and develop a credit policy that differentiates it from its competitors. It also needs to develop credit risk analysis guidelines, which enable it to evaluate a customer while providing the credit.

There are four key types of credit policies which a firm can adopt. The first type of credit policy puts high credit risk limits and stringent measures of collection. In such a policy, the firm only accepts those customers who have a good credit history and high credit ratings. At the same time, the firm may also have strict collection policies such as imposing penalties and fines, for late payments. Such a policy enables the firm to obtain payments faster and reduces the risk of high bad debt. But such a policy is not customer friendly. The second type of policy is to be liberal in providing credit but strict in collecting dues. In such a policy, the firm accepts customers with even low credit ratings but the collection will be strict and no kind of lenience towards the customers is allowed in the collection policy. Such a policy is customer friendly but it increases the collection costs and the risk of bad debts. The third kind of credit policy allows only customers with high credit ratings, but has liberal collection policies. In such a policy, only customers who have high credit ratings and ‘good track record are allowed. But the collections are made liberally. The idea behind such a policy is that a customer with a good track record will pay the dues promptly; therefore, making the collection process liberal will not have any impact on the receivables. But such a policy is not advisable for firms which handle large orders. The fourth kind of credit policy allows customers with low credit ratings and a liberal collection policy. Such a policy may increase the risk of bad debts and the collection process may take a long time and become tedious. Such a policy is advisable when the firm wants to increase its market share. The firm has to choose an optimal credit policy, which while being customer friendly, should not impact the collection and quality of the receivables.

2. Automating Receivables Management

Another important step in enhancing the efficiency of receivables management is the automation of a part, or whole of the process. By automating receivables management a firm can track and monitor the receivables and evaluate as to how the receivables process can be improved. Automation helps in faster and more accurate risk assessment of customers. Firms can easily distinguish between the customers with low credit profiles and customers with high credit profiles. This enables the firm to decide upon the customers to whom credit can safely be extended. Activities like payments and credit analysis can be automated, to reduce time and costs and to improve the receivables collection and management.

3. Developing Relevant Performance Metrics

Developing relevant performance metrics helps the firm assess the effectiveness of the receivables management process. It can also help the firm identify opportunities to improve the process. Performance measures are needed for all the elements of order-to-cash process, and should be developed in line with organizational objectives. They should also be based on industry standards. By matching the measures to the industry standards, a firm can analyze its position in relation to its competitors, and take necessary action to improve upon those measures. Days Sales Outstanding (DSO) is the key measure that is generally used to evaluate the order-to-cash process. But there are other metrics, related to each step in the order-to-cash process, that can be measured for better performance analysis. They are;

  • Percentage of invoice errors
  • Percentage of bad debts
  • Average time taken for credit approval
  • Percentage of orders executed perfectly
  • Percentage of cash collected within the stipulated credit terms
  • Percentage of invoices issued manually
  • Percentage of invoices issued electronically

4. Developing an Effective Reporting System

Information needs to be shared between different departments for efficient receivables management. Proper information sharing enables the departments to have accurate and up to date information, which in turn helps them to take timely action. For example, suppose a customer holds back payment due to quality or quantity issues. This information is first received by the accounts receivables department. If this information is communicated to the manufacturing department then it can take timely action to improve the quality of the products. This would help the firm collect receivables and also resolve customer grievances faster. This information needs to be shared with the other supply chain partners like logistics service providers and financial institutions as well. As customers expect timely and accurate order delivery, any deviations can delay the payment process. Supply chain partners help in providing the right product to the right customer at the right time. An effective reporting system would help provide accurate information to the supply chain partners, so that the right order can be delivered to the customer, on time.