Order to Cash

Key Concepts
E-Book By: Ankit Yadav
CorporateWala
 • Order to Cash Process • Payment Collection Process
Table of Overview
• Credit Management
Content • What is Order to
Cash Process? • Dispute Management

• Upstream and • Collection and

Downstream of O2C Process Dunning Process

• What is Accounts Receivable? • Cash Application Process

• Order to Cash Cycle • Reporting and Analytics

• Steps Involved in O2C Process • Key Challenges in Order to

Cash Process
• Order Entry Process
• Order to Cash
• Order Validation Process Process Automation
• Order Fulfillment Process • Key Performance Indicators
(KPIs)
• Invoicing Process
• Other Important O2C Terms
Order to Cash Process

• Overview: The order to cash process is

a critical business process that
encompasses all the steps involved
from receiving a customer order to
receiving payment for the goods or
services provided. It plays a crucial role
in generating revenue for companies
and ensuring customer satisfaction.
What is Order to Cash
Process?

• Definition: The order to cash process refers to the end-to-end

workflow that starts with receiving a customer order and
ends with the receipt of payment for that order. It involves
multiple departments and activities across the organization,
such as order entry, order fulfillment, invoicing, and
collections.
• Importance: An efficient order to cash process ensures
smooth operations, minimizes errors, improves cash flow, and
enhances customer experience. It enables businesses to fulfill
customer demands effectively and generate revenue.
 Upstream and Downstream
of Order to Cash Process

• The order to cash process can be divided into upstream

and downstream activities. Upstream activities include
order entry, order validation, and order fulfillment.
Downstream activities include invoicing, payment
collection, and accounts receivable management.
• Example: When a customer places an order, the order
entry team captures the order details (upstream). Once
the order is validated and approved, the fulfillment team
processes it by picking, packing, and shipping the
products (upstream). After the products are delivered, the
invoicing team generates an invoice and sends it to the
customer (downstream). Finally, the accounts receivable
team manages the collection of payment from the
customer (downstream).
Definition: Accounts receivable refers to the amount of
money owed by customers to a company for goods or
services delivered on credit. It represents the company's
short-term assets and is a vital component of the order to
cash process.

Role: Accounts receivable management involves tracking

What
customer payments, managing outstanding balances, and
ensuring timely collections. It helps maintain healthy cash
flow and supports financial stability.
is Accounts
Receivable?
If a customer purchases goods worth $1,000 on credit,
the company will record $1,000 as accounts receivable
until the customer pays. The accounts receivable team
tracks the payment status, follows up with customers,
and updates the records accordingly.
 Order to Cash Cycle
• The order to cash cycle represents the complete journey of an order from initiation to fulfillment and
payment. It typically includes order capture, order validation, order fulfillment, invoicing, and
payment collection.
• Key Steps: Let's take a closer look at the key steps of the order to cash cycle:

Order Capture: Customer Order Validation: The company Order Fulfillment: The company Invoicing: An invoice is Payment Collection: The
places an order through verifies the order for accuracy, processes, picks, packs, and generated and sent to the company collects payment
various channels (e.g., online, availability, and ships the ordered products. customer for payment. from the customer through
phone). creditworthiness. various methods (e.g., credit
card, bank transfer).
 Order to Cash

Cash Application Order Entry

(Booking the receipts) (Receiving Order)

Collection O2C Order Processing

(Receiving Payment)
Cycle (picking, packing &shipping)

Invoicing Delivery
(Generating Invoice) (Directly or Third Party)
 Steps Involved in O2C Process
Order Entry: The O2C cycle begins with the receipt of a customer order. This may
occur through a variety of channels, such as online, phone, or email. The order is
entered into the company's order management system.
Order Processing: Once the order has been entered, it is processed by the company's
fulfillment team. This may involve picking, packing, and shipping the product, as well
as generating invoices and other documentation.

Delivery: The product is shipped to the customer, either directly from the company or
through a third-party logistics provider.
 Steps Involved in O2C Process

Invoicing: Once the product has been delivered, the company generates an invoice
and sends it to the customer.

Payment Collection: The customer reviews the invoice and makes payment. Payment
may be made through a variety of channels, such as credit card, check, or electronic
funds transfer. If payment is not received on time, the company may need to follow up
with the customer to collect payment.
Cash Application: Once payment has been received, the company applies it to the
appropriate customer account.
 Order Entry Process
The order entry process involves capturing and recording customer
orders accurately and efficiently. It is crucial to ensure the correct
products, quantities, and pricing information are captured.

Best Practices:
• Use standardized order forms or systems to capture consistent
information.
• Implement validation checks to ensure order completeness and
accuracy.
• Provide training to order entry staff to understand product codes,
pricing, and discounts.
Order Validation Process

The order validation process verifies the customer order against various
criteria, such as product availability, credit limits, and pricing accuracy.
• Importance: Proper order validation reduces errors, prevents
overcommitment of inventory, and ensures credit limits are not exceeded.
• Example: The order validation team checks the inventory levels and confirms
if the ordered products are available. They also review the customer's credit
history and credit limit to ensure the order can be fulfilled.
Order Fulfillment
Process
 The invoicing process involves generating
accurate invoices and delivering them to the
customer.

Steps:
Invoicing
Process • Invoice generation: Creating an invoice with the correct
order details, prices, and applicable taxes.
• Accuracy checks: Reviewing the invoice for any errors or
discrepancies.
• Delivery methods: Sending the invoice electronically (e.g.,
email, customer portal) or through traditional mail.
• Invoice tracking: Monitoring the status of invoice delivery
and receipt by the customer.
Payment Collection Process
The payment collection process focuses on receiving
payments from customers in a timely manner.

Methods:
• Credit card payments: Allowing customers to pay using their credit cards.
• Bank transfers: Providing bank account details for customers to transfer
funds.
• Checks: Accepting payments in the form of checks.

Strategies:
• Sending timely payment reminders to customers.
• Offering discounts for early or on-time payments.
• Implementing automated payment processing systems.
 Credit Management
Importance: Credit management involves assessing the creditworthiness of customers,
setting credit limits, and managing credit risks. It is crucial to minimize bad debts and
ensure timely payments.

Activities

Credit evaluation: Analyzing Credit limits: Determining Risk mitigation: Monitoring

a customer's credit history, the maximum amount of and managing potential
financial stability, and credit that can be extended credit risks, such as late
payment behavior to a customer payments or defaults
 Dispute Management

Disputes may arise regarding Strategies --> Establishing a dedicated Documenting and tracking Communicating with
order accuracy, pricing, or dispute resolution team or disputes to ensure prompt customers to understand their
delivery issues. Efficient process. resolution concerns and finding mutually
dispute management ensures beneficial solutions
timely resolution and customer
satisfaction
Collection and Dunning
Process
The collection and dunning process focuses
on proactive follow-up with customers
regarding overdue payments.
Activities:
• Collection calls/emails: Contacting
customers to remind them of outstanding
payments.
• Dunning letters: Sending formal letters to
customers indicating overdue payment and
potential consequences.
• Payment negotiation: Discussing payment
options and potential resolutions
Cash Application Process
Steps
The cash application process involves
matching customer payments with
their respective invoices and
updating the accounts receivable
records.​

Importance: Accurate cash

application prevents payment PAYMENT RECONCILIATION:
MATCHING CUSTOMER PAYMENTS RECEIVED
UPDATING ACCOUNTS:
RECORDING THE PAYMENT AND UPDATING THE
misallocation, maintains proper WITH THE CORRESPONDING INVOICES CUSTOMER'S ACCOUNTS RECEIVABLE BALANCE

customer balances, and enhances

financial reporting accuracy.
 Reporting and
Analytics
Reporting and analytics play a crucial role in the
order to cash process, providing insights into
performance, trends, and areas for improvement.
• Importance: By analyzing data, businesses can
identify bottlenecks, track key metrics, and
make informed decisions to optimize the order
to cash process.
• Examples: Reporting on metrics like Days Sales
Outstanding (DSO), Collection Effectiveness
Index (CEI), and aging of accounts receivable.
Key Challenges in Order
to Cash Process
The order to cash process presents several challenges that organizations must address to ensure
efficiency and effectiveness., some of the Common Challenges are:

Order errors and inaccuracies

Delays in order fulfillment and delivery

Disputes and customer disagreements

Cash flow issues and delayed payments

Complexities of international transactions

Order to Cash Process
Automation
Automation can streamline the order to cash
process by reducing manual efforts, minimizing
errors, and enhancing overall efficiency.

Benefits:
• Faster order processing and fulfillment
• Improved accuracy in invoice generation and
payment posting
• Enhanced visibility and real-time tracking of
orders and payments
• Reduced administrative costs and improved
productivity
Key Performance Indicators (KPIs)
Key Performance Indicators (KPIs) help measure the performance
and effectiveness of the order to cash process.
Examples of KPIs:
• Days Sales Outstanding (DSO)
• Collection Effectiveness Index (CEI)
• Percentage of on-time payments
• Order fulfillment cycle time
• Invoice accuracy rate
Key Performance Indicators (KPIs)

Days Sales Outstanding (DSO):

• Definition: DSO measures the average
number of days it takes for a company
to collect payment after making a sale.
It indicates the efficiency of the
accounts receivable process.
• Example: If a company's DSO is 40 days,
it means that, on average, it takes 40
days from the time a sale is made to
receive payment from the customer.
Key Performance
Indicators (KPIs)
Collection Effectiveness Index (CEI):
• Definition: CEI measures the
effectiveness of a company's collections
efforts by comparing the actual cash
collected to the total amount of
outstanding receivables. It shows the
ability to convert receivables into cash.
• Example: If a company's CEI is 90%, it
means that they were able to collect
90% of the total outstanding
receivables during a given period.
Key Performance
Indicators (KPIs)

Percentage of On-Time Payments:

• Definition: This KPI measures the
percentage of customer payments that
are received within the agreed-upon
payment terms or within a specified
timeframe.
• Example: If a company has a 95%
percentage of on-time payments, it
means that 95% of their customers
consistently make payments within the
designated payment period.
Key Performance Indicators
(KPIs)

Order Fulfillment Cycle Time:

• Definition: Order fulfillment cycle time measures
the time it takes for an order to be processed,
picked, packed, and shipped to the customer. It
reflects the speed and efficiency of the order
fulfillment process.
• Example: If the average order fulfillment cycle
time is 2 days, it means that, on average, it takes
2 days from the time an order is received to
when it is shipped out for delivery.
Key Performance
Indicators (KPIs)
Invoice Accuracy Rate:
• Definition: Invoice accuracy rate indicates the
percentage of invoices that are error-free and do not
require any corrections or adjustments. It reflects the
precision and quality of the invoicing process.
• Example: If a company has an invoice accuracy rate of
98%, it means that 98% of the invoices issued are
error-free and do not need any revisions or
corrections.
Purchase Order - Purchase order is a
Purchase Requisition - Purchase requisition is a
document generated by purchase department to
document generated by the user department to
the vendor of goods/services. Purchase order contains
purchase department. Purchase requisition contains
details like po number, po creation date, supplier name,
details like what products/services are required, their
what products/services are required, their quantity, by
quantity and by when they are required.
when they are required.

Sales Order - It is a document generated during the

UAC - UAC stands for Unapplied/Unallocated Cash. It
order-to-cash process that captures the details of a
refers to the funds received from customers that cannot
customer's request to purchase goods or services from
be immediately matched or applied to a specific
a company. It typically includes information such as the
customer account or invoice. UAC typically arises in
customer's name, contact details, requested items,
situations where a payment is received from a customer
quantities, prices, payment terms, and delivery
without a clear reference to a specific invoice or when
instructions. It triggers subsequent steps in the order-
the received amount exceeds the outstanding balance
to-cash process, such as inventory allocation, picking
on a particular invoice.
and packing, invoicing, and shipping.
PO & Non PO Invoice

PO Invoice – Where PO is available, The purpose of a PO invoice is

to ensure that the goods or services received match what was
ordered and agreed upon.

Non PO Invoice – Where PO is not available, generally it is used for

small or one time purchase that do not require a PO.
Journal Entries

Accounts Receivable
Invoice Creation Account DR.
To Sales Revenue Account

Bank Account DR.

Payment Collection To Accounts Receivable
Account
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Ankit Yadav
Corporate Wala
Corporate Wala
Corporate Wala
Corporatewala.in