Key Metrics to Measure Order to Cash Cycle Performance

An order-to-cash process (OTC) or an order-to-cash cycle process, refers to the set of processes that involves receiving customers’ requests and fulfilling their orders which is also a part of accounts receivable services. Businesses need to frequently monitor their OTC processes to ensure that they are working properly. They need to analyze how a process is running: whether it is efficient or whether it can be improved and offered at a lower cost. Finance and accounting outsourcing could make the work much more easier.

This can be done by using certain metrics, which provide information on the performance of the process. Businesses can take the help of a high-quality CFO service provider for measuring the performance indicators (KPI)s of the Order-to-Cash cycle.

Following are the key metrics to measure the order-to-cash cycle performance.
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Keys Metrics to Measure Order-to-Cash Cycle Performance

1. Revenue Percentage:

This metric provides information on the value of the order-to-cash management process in terms of the percentage of revenue contribution. This will inform the managers if the income generated from this process makes up a sufficient proportion of the earnings of the company or whether there are earnings coming from other sources. Ideally, the values obtained should indicate that the process measured is contributing significantly to the overall revenue. It then means that the company is earning income from selling products rather through other non-core areas.

2. Individual Productivity:

Another ratio that provides important information on the efficiency of the OTC is the one comparing the total order-to-cash process to the order-to-cash process per FTE. This is a measure of the productivity of each individual. This will tell the managers how productive each FTE is; whether the process needs more associates because there is a lot of work, or whether there are too many of them and hence some of them need to be dropped.

Monitoring this ratio helps to reduce cost significantly and helps the process function at optimum levels. This also helps in future planning as the company can analyze how much more work they can take on and carry out based on whether they have enough associates to handle the workload if more projects are in the pipeline.

3. Calculation of DSO:

One of the biggest problems faced by sales departments everywhere, especially if they are carrying out a considerable amount of business on credit, is the management of revenue collections from customers. That is why the calculation of Days Sales Outstanding or DSO is a vital part of the measurement of the order-to-cash process.

This measurement can be used for not just analyzing the process, it also enables the finance teams to keep a check on the revenue that the company is earning and the bad debts that it is faced with. The collections team can plan its strategy based on this ratio. The order-to-cash process affects the entire company in one way or the other and this is just one of those ways.

4. Regular Reports:

The smoothness of the operating cycle needs to be constantly assessed. The complex nature of this process that begins from order taking and works its way through the supply chain impacting inventory management, productions, and logistics requires that a considerable level of resources are allocated to it.

Are the resources used satisfactorily and does the cycle needs more costs to be allocated to it? Regular reports must be prepared that provide an accurate picture of the discounts given, the error rate on order fulfilment, the volume of ageing accounts, and so on. A number of KPIs should be used to give a wholesome picture of the success of the operating cycle.

5. Automation:

Automation and process improvements are big keywords these days. What is the extent of the automation, how much of the process is done manually, has the error rate decreased, are the orders being fulfilled faster, and is the cash being collected quicker-all these questions need to be regularly answered so that improvements can be made.

The continuing development and availability of newer and better technology imply that processes can be made to work faster, repetitive work can be automated, FTEs can be reduced, operations can be systemized, and customer handling can be improved. If automation is not being done, it is a black mark on the process. That is why this metric has to be constantly worked on.

The order-to-cash process affects the functioning of the entire company. An efficient and streamlined order-to-cash process would enhance the financial activity of the company. Therefore, businesses regularly need to use these metrics to ensure that the cycle operates smoothly and rectifications can be made as soon as deficiencies are spotted.