What is Order to Cash Cycle (O2C Cycle)

Oliver Lee
August 26, 2022
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4
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Order to Cash, also known as O2C or OTC, refers to the set of business processes for receiving and processing customer sales orders for goods and services and their payment. These processes are at the heart of all businesses and unless they are managed efficiently and accurately, organizations would not only face financial problems, but also reputational issues. Every department in a given company is affected either directly or indirectly by the Order to Cash process.

Steps of the Order to Cash (O2C) Cycle

  1. The cycle begins with the system receiving orders from the customer. This could be via email, Internet, salesperson, fax, or by some form of Electronic Data Interchange. In some businesses, the order could be a simple purchase request for a particular product, while in other service-oriented or wholesale businesses, the customer and the company would enter into a long-term or short-term contract.
  2. The company might even conduct a credit review of the customer before accepting the order, especially if they have plans of offering the customer deferred payment options.
  3. The order is documented and the company begins the task of fulfilling the order.
  4. Once the product has been shipped and delivered, or the service has been fulfilled, the most important stage of the cycle begins with regard to cash management. The invoice is created and sent to the customer for payment.
  5. After the customer has made the payment, the accountants note the entry in the general ledger.

[caption id="attachment_1279" align="align center" width="499"]

Diagram depicting order to cash cycle

Order to cash (OTC or O2C) is a set of business processes[/caption]

In an ideal world, this would be the simple chain that ensures that the customer gets his product and the company gets their payment. However, there are always glitches in every system, and unless companies deal with them quickly, they could hamper the smooth flow of business and profitability.

Related Reading: Cash Management Tips for Startups

Impact and Challenges of Order to Cash Management

  • During the process of order to cash services, when the sales orders are not noted accurately, then the first stage of the cycle itself would be in peril, and this is not an unusual event when the orders are taken manually. When the wrong product is made or the wrong specifications are used, the reputation of the sales department is at risk and the subsequent purchase returns cause losses for the production unit.
  • Creating manual invoices takes time, as does sending the bill by courier or post. This delays the payment process and increases the possibility of errors. This also creates additional work for the accounting department.
  • The logistics department is heavily involved in the process as their ability to transport the goods efficiently, safely and on time plays a major role in the time taken for the cycle to be completed. Last-minute requests, unforeseen transportation changes, or damages to cargo can throw the entire cycle out of gear.
  • When customers are dissatisfied with the product or service, they could refuse to make a payment, or at other times they would just default on their payments. This increases the workload on the collections department and the customer service teams.
  • The importance of the company realizing the payment in cash is fully understood when they sell their goods on credit. The company does not have liquid cash to spend even though they would have recorded the sale of goods as a revenue item in their books. The lack of cash inflow affects their working capital and in large enough amounts to the overall finances of the company. Thus, the credit policies of the company have a considerable impact on the Order to Cash cycle.

Conclusion

A significant portion of the operating costs is therefore spent on managing the Order to Cash cycle. The greater the inefficiencies in the cycle, the greater the risk of potential losses. That is why many companies are now venturing towards outsourcing for industry best practices in Order to Cash management. A specialist provider of Order to Cash Outsourcing Services will be able to manage sales order management, Finance and Accounting, invoice data entry and management, and customer service for collections, to enable businesses to streamline this cycle and optimize the process.

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Article by
Oliver Lee

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