What is order to cash (O2C)?

The O2C process spans multiple departments including sales, customer service, credit management, distribution and logistics, accounts receivable and more. Order to cash optimization aims to cut down on the time between when an order is received and when the business is paid, and the O2C system is a critical part of maintaining a healthy cash flow. The health of an O2C system can directly impact supply chain management and inventory management procedures.

The order to cash process shouldn’t be confused with quote to cash (Q2C or QTC), which is a broader, end-to-end business process. Q2C starts before the initial sale, and includes earlier steps such as quote preparation, price negotiation, and the creation and finalization of terms and contracts. Once the deal closes and becomes and order, it flows into the order to cash process.O2C processes are thus a subset within the Q2C process.

Procure to pay (P2P) represents the opposite-side: an end-to-end process that manages how a company buys from suppliers. Rather than focusing on revenues and inflows, P2P focuses on expenses and outflows.

Businesses might have great sales and satisfied customers, but an inadequate planning of the order to cash process can tie up revenue and leave businesses without adequate working capital. The US Chamber of Commerce cites cash flow problems as the primary reason why small businesses fail, citing data from the US Bureau of Labor Statistics. 

Fragmentation of the order to cash process, which might include multiple redundant platforms, teams without clear lines of communication, multiple sources of truth and manual data entry, is a huge issue for maintaining trustworthy and accurate books. Optimizing O2C can address cash flow problems, while enhancing customer experience, lowering operating costs and increasing an organization’s financial health.

A 2024 BlackLine survey found that nearly 40% of CFOs “do not completely trust their organization’s financial data,” and the survey identifies manual processes, lack of cash flow visibility, wasted time, increased errors and inaccurate forecasting data as key issues. A modern, efficient order to cash system can help address these issues.

An optimized (often automated) O2C system can accelerate many of the steps in the ordering process. Invoices are created and sent instantly; collection alerts are sent automatically and regularly in accordance with best practices for securing payment; optimized credit management enables faster verification of viability. Such optimizations help ensure that payments are made faster and more reliably, with more robust documentation.

Revenue leakage, which refers to income a business has earned but has failed to collect, can arise from payment processing issues, invoicing errors, pricing discrepancies and other problems. Manual entry and human error are common causes of revenue leakage, and automations and other order to cash cycle improvements in the order to cash process can help address these issues.

For example, an optimized order to cash lifecycle automatically updates price lists to ensure that clients aren’t under- or overcharged. Expired promotional offers are removed when they expire, without the risk of human error keeping them alive. Shipments automatically and immediately trigger the creation and delivery of an invoice.

Automated systems can replace tedious and repetitive manual data entry practices and recue labor costs. Reduced error rates (due to the elimination of manual entry) and increased operational efficiency can also reduce the costs that come with finding and correcting errors; a survey of CFOs found that millions of dollars can be saved with this sort of automation.

Streamlining and automating the O2C process can also benefit the customer, drive new customer acquisition and enhance the business-to-customer relationship. A better process can drive faster processing of invoices and other paperwork, faster shipping times, more efficient shipping processes, and a reduction in errors such as billing mistakes, late deliveries and inaccurate notifications.

The core steps of O2C enable an organization to efficiently sell, track, ship, invoice, bill and record sales. The order to cash cycle generally includes the following steps:

The O2C process begins with an order. That order can come from various sources: salespeople, an online order through an ecommerce platform, emails and even phone calls. Order management includes several vital elements:

• Recording the customer’s order, delivery address, order date, intended delivery date and pricing
  
  
• Checking the pricing against the item master, a single source of truth for product information, to ensure consistency
  
  
• Applying any discounts or promotions
  
  
• Determining shipping methods to align with customer needs and budgets

Order management systems are sometimes stand-alone software applications, but are often part of larger ERP SaaS suites. Organizations might choose specialized OMS platforms if their industry requires specific privacy or security authorizations (government or healthcare work, for example), or if the organization relies on legacy software or processes.

Credit management assesses a customer’s financial viability to help ensure that payments are made in an appropriate time frame. For some businesses, this step is not necessary: cash-only businesses have no need for credit checks, nor do many retail businesses which require immediate payment.

However, for many other businesses managing credit viability is an essential part of monitoring and minimizing risk. Credit management typically includes:

• Collecting and evaluating customer data for financial security
  
  
• Establishing guidelines for interest, payment terms and maximum credit allowed
  
  
• Enforcing collections and debt recovery

Order fulfillment is the process of selecting, packing, shipping and delivering the item or service in question. Depending on the type of product or service involved, the fulfillment process can include:

• Warehouse management (determining which distribution center will fulfill the order, and how)
  
  
• Quality checks and product verifications
  
  
• Physically packing a product
  
  
• Updating inventory to reflect any sales and changes

Order fulfillment has undergone extensive evolution in recent years owing to centralization and automation. Today, warehouse management might involve robotics, automated conveyors and other equipment and sophisticated software to maximize efficiency. Artificial intelligence tools and automation are often used to optimize inventory levels in accordance with historical data, automatically scan and evaluate objects with cameras and sensors and bundle customer purchases together to reduce costs.

The shipping process can be complex and vary depending on product specifications and logistics. Some organizations maintain their own delivery fleets, but many use larger services including national postal services and international private shippers such as FedEx and DHL. Therefore, the shipping process begins with selecting the shipping solution. Criteria for this decision includes cost, speed and reliability.

The O2C system records shipping dates, quantities, partners and tracking numbers. Updates are sent to customers and to internal stakeholders, such as customer relations and support teams.

Invoice generation and payment are critical steps in O2C. In modern systems, invoices are often automatically generated. An accurate invoicing system pulls order details, including line items of the order, pricing, shipping charges, taxes or tariffs and any applicable discounts or deals.

Invoicing processes can be customized according to the business and customer needs, as well as any regulations that might apply to the order. Many organizations rely on electronic data interchange, or EDI: a set of systems and standards used to transmit documentation including invoices. Different industries often require specific EDI standards.

Once the service or product is delivered and the invoice is generated, the invoice is added to the accounts receivable ledger. This step notes that money is owed to the company, creating a current asset on the balance sheet.

Accounts receivable also involves tracking the pace and consistency of payments, noting any potential late or delinquent payments and processing any customer queries about payments.

Much of the accounts receivable process can be automated, and AI tools can be used to help predict customer payments and note elevated risks, send automated follow-ups to customers and automatically match payments to invoices to ensure that no documentation goes missing. Any discrepancies or uncertainties can be escalated to an accounts receivable team member for review.

Payment can be collected in various ways. Common options include cash, bank transfers, wire transfers, checks, credit cards, and mobile payment services such as Apple Pay and Google Pay. Payment can be up front, financed with outside lenders, paid in installments and more. The specific method of payment should be determined at the time of purchase.

To track orders and ensure that payment is made, an order reference number is assigned to the order and given to the customer. This helps with customer satisfaction and limits confusion and issues with accounts payable or the general ledger.

Payment reminders or notifications can be sent either manually or, more commonly, automatically by O2C software. Software platforms typically send automated confirmation emails once payment is received.

The final step of the O2C process involves collecting and logging metrics and analyzing data. This step can reveal inefficiencies, errors, trends and opportunities. Common metrics analyzed include:

• DSO (days sales outstanding), the average number of days it takes to collect payment on a sale made on credit
  
  
• Perfect order rate: the percentage of orders delivered on time, undamaged and without other issues
  
  
• Customer satisfaction scores, often obtained through surveys or follow-up contact
  
  
• CEI (collection effectiveness index), showing how efficiently a team collects its outstanding invoices
  
  
• CCC (cash conversion cycle), indicating how long it takes an organization to convert its inventory into revenue

Modern sales platforms use AI and machine learning to predict trends, detect anomalies and losses, model potential future scenarios and provide pattern recognition, which can lead to recommendations.

For example, these systems might notice that, in the past, increases in purchase orders beyond a certain point—say, 25% year over year—have been correlated with an increased risk of defaulted payments. Modern platforms can pick up on such patterns, note any accounts that fit the pattern and alert the customer relations team if necessary.

The order to cash process involves many steps, and the gaps between those steps are often where revenue leakage and other issues arise. Automation and integration combine to craft the secret sauce that transforms a set of manual, often disconnected, processes into a streamlined and efficient O2C system.

There are many different platforms and applications used in the O2C cycle, including customer relation management (CRM) platforms, ERP systems, warehouse management systems, payment processors and more. Integration of these systems enables information to flow from platform to platform, securely and automatically.

For example, after the completion of a sales call, sales data is automatically sent to an ERP, triggering price and inventory checks, confirmation of the most efficient fulfillment option and initiating a shipment. The fulfillment of the shipment automatically generates and sends an invoice, and receipt of payment triggers recording in accounts receivable. In an integrated system, this all happens in near real-time.

Automation and integration together combine to reduce O2C completion time, effort and errors. Leaders can move away from reactive oversight and focus on guiding strategy and growth.

The current business environment requires CFOs, finance professionals and the functions they lead to be open to learning new approaches to financial management. This includes adopting and harnessing the power of artificial intelligence (AI). The AI-driven innovations on offer can improve order to cash system credit scoring, pricing decisions and aid in the prevention of fraudulent payments.

Leaders should consider new technology tools like generative AI (gen AI) as a way to improve finance processes and optimize operational costs for their business. Specific to order to cash, generative AI can help recover cash by validating customer claims and deductions, which can result in a cut to revenue loss by 60 to 70%. A performance improvement such as this can be a major boost to a company’s bottom line if finance teams are trained to use the technology responsibly.

The many different acronyms involved in the ordering process can be confusing. O2C refers to the ordering of a product of a service, from the placement of the order to the receipt of payment and logging of the sale.

OMS, or order management system, is a software tool used to track orders from inception to fulfillment, and manage the people, processes, and data connected to the order.

ERP, or enterprise resource planning, is a broader overall business suite that connects departments including, but not limited to, sales, human resources, manufacturing, supply chain, finance and customer relations. Many ERPs include O2C and OMS capabilities.

Enhancing the order to cash process is important for cash inflows and the overall operational efficiency. Here are four best practices to optimize your O2C cycle.

Quote to cash is a broader system with more initial steps leading up to the order. Whereas O2C begins at the point of sale.

The billing step in O2C refers to the request of payment from the customer. This is typically done through an invoice.

The typical steps include order management, credit management, order fulfillment, order shipping, customer invoicing, accounts receivable, payment collection and reporting and data management.

Procure to pay (P2P) is end-to-end process that manages how a company buys from suppliers. Rather than focusing on revenues and inflows, P2P focuses on expenses and outflows.

Accounts receivable is the step within the O2C process focused on documenting customer purchase and ensuring payment is collected.

The O2C process becomes more complex as sales volume increases. It’s important that a business manage complexity to prevent relatively minor issues from cascasding through a system and causing additional harm.  A simple example: If a customer is late to pay an invoice, incoming cashflow is affected, and this might impact the ability to run employee payroll.

Customers want to trust the business they are buying from and vice versa. A transparent and efficient O2C process can ensure an almost-seamless buying experience and a streamlined customer service process. Employees can also benefit from an automated O2C system that relieves them from mundane tasks and gives them more time to work on strategic projects.