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Mastering Order to Cash Processes: A Comprehensive Guide

In today's fast-paced business environment, efficient order to cash processes are critical to a company's success. A streamlined order to cash cycle can improve cash flow, enhance customer satisfaction, and ultimately contribute to higher profitability. For IT managers, CIOs, and consultants, understanding and optimizing this vital business process is essential. Enterprise Resource Planning (ERP) systems play a central role in managing and integrating various aspects of the order to cash process, from sales orders and invoicing to collections and customer relationship management.


In this guide, I will cover the key components of the order to cash process in Business Central and discuss best practices for streamlining the cycle.



Introduction: The Importance of Order to Cash in an ERP System

A well-orchestrated order to cash process is vital for organizational efficiency and growth. The advent of Enterprise Resource Planning (ERP) systems and the fast digital adoption followed by the exponential growth of E-commerce and multi-channel has paved the way for companies to streamline these processes while simultaneously centralizing and integrating their core business functions like finance, marketing and fulfilment.


As managers, executives or consultants helping organizations with an ERP implementation, it is essential that we understand the significance of order to cash in the broader context of ERP systems; not just as a set of company functions owned by the sales team.


Defining Order to Cash: An Overview

Order to cash, often abbreviated as O2C or OTC, is a critical business process that encompasses the entire cycle of receiving, processing, and fulfilling customer orders, followed by invoicing and collecting payments.


This end-to-end process includes several stages, such as order entry, order fulfilment, shipping, invoicing, and payment receipt. The efficient management of these stages is crucial for organizations to maintain healthy cash flow, customer satisfaction, and overall business success.


The Role of Order to Cash in Business Success

The order to cash process is the lifeblood of any business, as it directly affects revenue generation and customer experience. By streamlining the O2C cycle, organizations can achieve faster order processing, accurate invoicing, timely collections, and improved cash flow. Furthermore, efficient order-to-cash processes can lead to enhanced customer satisfaction, increased customer loyalty, and a competitive edge in the market.


In contrast, a poorly managed O2C cycle can cause delayed order fulfilment, inaccurate billing, and inefficient collections, ultimately causing cash flow issues, dissatisfied customers, and a weakened financial position. Consequently, optimizing the order to cash process is vital for any organization seeking long-term success and growth.


When it comes to order to cash, Business Central facilitates seamless coordination among relevant departments, ensuring that each stage of the process is executed efficiently and accurately. However, efficiency is not the only benefit of implementing an ERP system in an organisation.


Centralized business processes mean companies can execute the O2C processes to serve the needs of other departments. For example, introducing a customers categorization in the order creation process allows the finance team to report on such categories later.

By designing and optimizing the O2C cycle as an element of the broader operating model, IT managers and CIOs can unlock the full potential of their organization's operations and lay the foundation for sustainable growth.

Key Components of the Order to Cash Process: Sales Orders, Invoicing, and Collections


The O2C lifecycle can be complex in large organizations. Companies operating in multi-channels, for example wholesale and retail, tend to operate with significantly different O2C processes. In this post, I focus on the four major components of the processes: Order creation, fulfilment, invoicing and billing and collection.


1. Sales Order Creation and Management

The sales order creation process in Business Central can start in different ways:

The most common is to create a new sales order using the action shortcut on the role centre page.


One of the best Business Central features is the ability to create and register new documents in different ways. For example, users can create a new order, starting from a list of customers or from the customer page. This is particularly useful if the O2C process starts with a salesperson or a member of the customer service team who needs to create a new order after checking the customer balance or the past orders history. In this case, we can find the action to create a new sales order on the customer page.


Companies that provide bespoke product and services often require a quotation before the sales order creation. Sales quotes in Business Central provide the same capability of a sales order with one crucial difference. Sales quotes do not affect planning because a quote is not committed demand. I will discuss more about planning in Business Central in upcoming posts.


Users can create a new Sales Quote like a sale order, using an action of from the customer card.


Another critical element of the O2C process's first stage is the approval.

Approvals in Business Central are managed through workflows. This functionality allows complex approval stages and different workflows based on many variables like customer credit limit, total order amount or the ship-to country.


In the example below, you can see an approval workflow for orders in a specific currency, in this case, is USD.


Sometimes, companies require a prepayment, partial or in full, before shipping a sales order. Business Central allows setting up default prepayment percentages that can apply to customers or specific items. For example, you can request a prepayment for the entire order value that always applies to orders from selected customers.


Likewise, users can set up a default prepayment percentage on a product. This is often used by companies that trade expensive machinery and require a partial prepayment from their customers before confirming the order and start the production process.


Another element of the order to cash process is the ability to create special orders. A special order responds to a customer request outside of the standard commercial agreements. Sometimes, companies use special orders to manage custom products or services. Such orders are often linked to corresponding purchases or production order so that managers can report on costs and traceability.


In Business Central, the special order functionality allows users to link sales to purchases. Managers can control who can create and edit special orders through permissions.


2. Order Fulfilment

The second phase of the order to cash process covers the order fulfilment.

There are many ways to fulfil orders in Business Central and I cover all in this other post: The Complete Guide on how to Ship Items.


Availability

Checking availability is one of the primary tasks of a well-designed O2C process and it often sits before the order fulfilment. In Supply Chain Management, (SCM) there are two concepts that define availability: available to promise and capable to promise.

Available to Promise (ATP) is a concept that refers to the quantity of a product that a company can promise to deliver to a customer at a specific point in time, based on the company's current inventory levels, production capacity, and existing customer orders. In other words, ATP represents the amount of a product that is available for sale to customers, given the current state of the company's operations.


Capable to Promise (CTP), on the other hand, is a concept that refers to the company's ability to promise a certain quantity of a product at a specific point in time, taking into account not only the current inventory levels and production capacity but also any planned changes to those levels or capacity in the future. CTP is therefore a more forward-looking concept that considers plans for production and inventory.


To summarize, ATP focuses on what is currently available for sale, while CTP considers both current availability and future production and inventory plans. Both concepts are important for managing customer expectations and ensuring timely delivery of products, but they differ in their scope and time horizon.


Both the ATP and the CTP functionalities in Business Central provide a clear picture of what is available to sell. This allows businesses to make accurate promises to customers regarding delivery times and quantities, while avoiding stock-outs and overstock situations.


The functionality runs on the sales orders page under the Order Promising action and shows the original and the earliest shipment date for all the order lines


3. Efficient Invoicing and Billing Processes

The invoicing and billing processes are the third element of a well-designed order to cash lifecycle, and automating these processes can help businesses improve efficiency, accuracy, and customer satisfaction. Enterprise Resource Planning (ERP) systems offer a range of features and functionality to help businesses automate invoicing and billing, streamline payment collection, and improve data accuracy.


Automating Invoicing and Billing

Business Central can take automation of these tasks further by combining two powerful functionalities: the Email integration to send invoices and the Job Queue Entries to bill customers on an automated schedule.


Job queue entries are Business Central scheduling tool. Companies use this tool mainly to schedule reports, but they can use it to schedule and automate tasks like batch posting sales orders. In the example below, I have a daily job queue that invoices orders from 4 to 5:30 in the morning. Scheduling recurring tasks outside office hours help improve system performance and user experience


Companies operating with complex fulfilment processes typically need to merge multiple orders or shipments into one invoice. In this case, the Combine Shipment functionality in Business Central allows users to create a consolidated invoice.


Streamlining Payment Collection

Efficient payment collection is essential to the success of the Order to Cash process. By streamlining payment collection, businesses can significantly improve cash flow, reduce the risk of late or missed payments, and enhance customer satisfaction. IT Managers and CIOs should consider the following strategies to optimize payment collection:


1. Offer Multiple Payment Options: Providing customers with a variety of payment methods, such as credit cards, debit cards, digital wallets, and electronic bank transfers, can help increase the likelihood of timely payments. By accommodating customers' preferred payment methods, businesses can make the payment process more convenient and frictionless.


Business Central can handle multiple payment methods and allows users to default payment methods for specific customers.


2. Implement Automated Payment Reminders: use software to send automated payment reminders to customers via email or text message. This can help ensure that customers are aware of upcoming payment deadlines and reduce the likelihood of late payments.


The reminders functionality in Business Central can handle multiple levels and allows calculating interests or finance charges to late payments.


3. Implement Electronic Invoicing: By adopting electronic invoicing, businesses can streamline the billing process, reduce manual errors, and expedite payment collection. Electronic invoices can be easily shared with customers via email or online portals, allowing them to access their invoices and make payments quickly.


Users can generate and send PDF invoices from Business Central without the need to download and attach files to an email. Users can even automate the sending task when they post the invoice.


4. Use Analytics to Monitor Payment Behaviour: IT Managers and CIOs can leverage analytics tools to track payment patterns and identify customers who are consistently late with their payments. This information can be used by credit control and customer service to prioritize collection efforts and develop targeted strategies for addressing payment issues. While a standard aged debtors report is available in Business Central, the out of the box connector of Power BI offers more flexibility for payment analytics.


5. Establish Clear Payment Terms: Clearly outlining payment terms on sales orders, contracts, and invoices can help minimize confusion and ensure that customers are aware of their payment responsibilities. This includes specifying due dates, late payment penalties, and any applicable discounts for early payments.


6. Integrate Payment Collection Systems: Integrating payment collection systems with other business applications, such as accounting and ERP software, can help streamline payment processing and improve the visibility of financial data. This integration enables businesses to better manage their cash flow, identify potential issues, and make informed financial decisions. Business Central supports multiple payment integrations with two already available out of the box, WorldPay and PayPal.


More payment integrations are also available, for more details check the Microsoft guidelines here: Enable Customer Payments with Payment Services - Business Central | Microsoft Learn.


4. Manage Exceptions

Properly managing exceptions within the Order to Cash process, such as sales return handling, issuing credit memos, and processing refunds, is crucial for maintaining customer satisfaction and ensuring accurate financial records. IT Managers and CIOs should establish processes together with the finance and customer service team and implement systems to handle these exceptions effectively and efficiently:


1. Sales Return Handling: Develop a clear returns policy that outlines the circumstances under which customers can return products, including timelines and conditions for returns. A return policy should also include return reasons that can be incorporated into the company's analytics. In Business Central, sales returns can be easily linked to shipments and invoices for better traceability.

Return reason codes are line-specific allowing users more granularity on why items are returned.

2. Issuing Credit Memos: Create standardized procedures for issuing credit memos, which serve as documentation for any adjustments made to a customer's account because of issues like pricing errors, damaged goods, or short shipments. Ensure that your financial systems can accurately track and apply credit memos to the customer accounts, thus maintaining up-to-date account balances and minimizing the risk of disputes. Business Central allows direct application of the credit memo to an invoice.


3. Processing Refunds: Develop a consistent process for handling customer refunds, whether because of returns, overpayments, or other valid reasons. Ensure that your refund policy is transparent and easy to understand, clearly outlining the criteria and steps for customers to request a refund. Users can issue refunds in Business Central using a journal and apply the refund to a sales invoice.


Streamlining the Order to Cash Cycle: Best Practices

Efficient order to cash processes are essential for businesses to operate smoothly and maintain customer satisfaction. IT managers and CIOs play a crucial role in ensuring that these processes are streamlined and optimized. Here are some best practices for IT managers and CIOs to consider:


Automating Key Processes for Efficiency

One of the most effective ways to streamline the order to cash cycle is to automate key processes wherever possible. This includes automating invoicing, payment collection, order processing, and other tasks that can be time-consuming and prone to errors if done manually. Automation not only speeds up these processes but also reduces the risk of errors and frees up staff to focus on higher-value tasks.


Implementing Strong Data Validation Measures

Another key aspect of streamlining the order to cash cycle is ensuring that the data used in these processes is accurate and consistent. IT managers and CIOs can implement strong data validation measures to ensure that data is clean and error-free. This includes implementing data quality controls, using data validation tools, and integrating different systems to ensure that data is consistent across the order to cash cycle.


Fostering Cross-Departmental Collaboration

The order to cash cycle involves multiple departments and teams, from sales and customer service to accounting and finance. To streamline this process, it's important to foster collaboration and communication between these different departments. IT managers and CIOs can help facilitate this collaboration by implementing cross-departmental workflows, providing access to shared data and systems, and encouraging regular communication between teams.


Closing Thoughts

In conclusion, mastering the Order to Cash process is essential for organizations looking to optimize their financial performance and enhance customer satisfaction. As IT Managers and CIOs navigate the complex world of Order to Cash, they should focus on understanding its importance within an ERP system, the key components of Sales Orders, Invoicing, and Collections, and the best practices for streamlining the cycle.


By adopting efficient processes and leveraging technology, IT Managers and CIOs can significantly improve the Order to Cash process, ultimately contributing to their organization's financial success and stability. Implementing a robust ERP system, offering multiple payment options, managing exceptions, and integrating payment collection systems are just a few strategies that can be employed to optimize the O2C cycle.


As the business landscape continues to evolve, it is crucial for IT Managers and CIOs to stay informed about the latest trends and technologies in the Order to Cash process, ensuring that their organizations remain competitive and agile. By doing so, they will not only foster a more efficient and streamlined O2C cycle but also create an environment that supports long-term growth and customer satisfaction.


Regards

Alfredo Iorio

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