Order To Cash (O2C)

05 Jan 2024

Accounts Receivable

Significance: How your business receives, processes, manages, and completes orders. Begins from the time an order takes place and includes each step of the delivery and payment process. right up till recognition of revenue Process Stakeholders: supply chain management, inventory management and workforce, account receivable

Stages in O2C Cycle

1. Pre-invoicing activities
2. Order Management
3. Post-invoicing activities
4. Other activities
5. Accounts Receivable
6. O2C Automation

Pre-invoicing activities

a. Credit Management b. Customer Master

Credit Management reduces chances of running into cash flow issues later. Maintaining customer master helps in accurately and exhaustively capturing details of all customers the entity deals with. Accessing Customer a. Ability to pay on time b. Willingness to Pay.

Credit review is done by the credit department or the receivables team. Factors to review of credit terms: ➢ Whether payment performance of the customer within acceptable standards or not ➢ Financial strength of the customer has improved or deteriorated significantly ➢ Customer has requested enhancement of credit terms/credit limit as the business has grown ➢ Customer’s competitive position within its own industry has witnessed significant shift upwards or downwards ➢ Other competing vendors have offered better credit terms to the customer ➢ The industry, the customer belongs to, is experiencing a major upturn/downturn

Customer Master Customer needs to be setup in the customer master before transactions can be started with him. Each customer is usually assigned a unique id which is used to identify them for future transactions. Data entered in the customer master should be reviewed frequently and amended post taking confirmation from customers.

Data required to setup:

1. Credit Terms
2. Address
3. Payement Terms
4. Contacts within the customer organization
5. Tax-id information
6. Discount and penalties

Order management

Check duplicates Purchase Order(PO) Check the inventory position whether the order can be supplied in time Verify the PO terms with the overall contractual terms of the customer Check whether the source documentation is complete for revenue recognition.

Invoice Reconcile the invoice terms with the existing contractual terms and quotation provided to the customer. Check whether any benefits are not being passed on that the customer may not be entitled for. Informations contained in an invoice:

1. Name, address, and GSTIN of the Company and Customer
2. Delivery Address
3. Invoice number, PO number and date
4. Itemized description for goods and services
5. Rate of tax and amount of tax charged
6. Payment terms and available transaction methods
7. Signature of the authorized personnel

Post invoicing Activities

a. Cash Application b. Collection Follow-ups

• Cash application involves recognizing and applying the payments received to the respective customer invoice.
• The payment receipt is usually accompanied with other remittance details like the invoice number, payee’s bank account details, date of payment etc. This accompanying information is used to identify the customer account and the invoice against which to apply cash.

High amount of unapplied cash indicates poor managerial control of the Account Receivable activity.

Publish the reconciliation reports everyday reconciling cash received against cash applied, applied to account and not applied.

Other Activities

a. Customet Query Resolution b. Customer Account Resolution c. Quality Checks and Audits

Transactions in a vendor account in the customer’s books and the respective balances should match. differences may arise due to the following reasons: ➢ Invoice was raised by the vendor but was not received by the customer. ➢ Invoice received but not recorded in customer’s books yet. ➢ Invoice is “on hold” pending clarification. ➢ Goods not received or received in damaged condition by the customer, but the same was invoiced by the vendor. ➢ Goods returned to vendor, not acknowledged by them. ➢ Discounts that the customer was eligible for were not passed on to him. ➢ Any late payment or other penalties that should have been paid by the customer were not actually paid. ➢ Payment made to vendor but not recorded in his books. ✓ Cash not applied ✓ Cheque did not reach the vendor ✓ Payment being made to wrong party.

O2C Automation

Improve O2C process performance, agility, and SLA adherence, with features like document storage, email-based order capture and approval, real-time exception alerts, and interactive dashboards.

Most common software used includes – SAP S/4HANA Cloud, Oracle NetSuite etc.