Accounting and Taxes

What is Order to Cash?

Order to Cash also known as O2C or OTC is the business process that covers the entirety of the order processing system right from receiving the order to up until the point the payment is made and an entry is logged in your accounting books.

The sales cycle is important to your business. But if you want to stand out from the competition, you can't underestimate the importance of an efficient order-to-cash process. 

But what is order to cash?

We're here to answer that question, plus break down this crucial process step-by-step. Understanding the order-to-cash cycle  — and doing it right — can have a huge impact on cash flow, customer satisfaction, and ultimately, revenue growth. Let's dive in.

What Is Order to Cash? 

Order to cash, also known as O2C or OTC, is the business process that covers the entirety of the order processing system. This includes everything from receiving the order to logging the entry into your accounting systems.

The O2C process isn't to be confused with the quote-to-cash process

Quote-to-cash (QTC) is the end-to-end business process that includes all sales processes, the reviewing of contracts and payment terms, order management, invoicing, and the accounts receivable process.

Here's the main difference:

O2C activities are a subset of the quote-to-cash process — whereas QTC starts with customer purchase intent and ends with realizing revenue, O2C starts with the moment the order is made

The Order to Cash Cycle

Are you struggling with constant billing issues? Delayed fulfillment times?  Outstanding invoices? Dissatisfied customers?

You might be able to blame your O2C processes. If your team doesn't fully understand it (or it's just plain inefficient), that can lead to these problems and more. 

Here's your ultimate step-by-step overview of the process, so you can make sure everyone is on the same page.

1. Order Management 

The O2C cycle kicks in the moment your system receives an order from the customer. It might be an online order placed directly on your website, or through your sales team over an email.

Either way, if you want to improve your O2C performance, make sure you have order management software with automation capabilities. 

2. Order Fulfillment and Shipping

The next step in the cycle is order fulfillment and shipping. If you're a business that deals with physical products, then this includes inventory management and the fulfillment process. 

In cases of digital services or Software as a Service (SaaS), this could mean granting access to the product or service for which the order is raised.

3. Invoice Creation and Payment

The third step in the cycle is invoice generation and payment. The customer should receive an accurate invoice for the order that includes individual line items, as well as applicable taxes and discounts.

The customer should also have multiple options for making a payment. This is the best way to ensure a great customer experience, plus minimize credit card failures and payment delays. 

4. Account Receivables and Reporting 

The cycle is completed once the payment is logged in your accounting books as part of the accounts receivable against the raised order.

Order to Cash for Subscription Businesses:

The O2C process in principle is the same for any kind of business. However,  the actual mechanics change significantly in asubscription business model

There's huge O2C automation potential for subscription and SaaS businesses. In a subscription model, a sale or order is never complete. There is always a recurring order the next day, week, month, or year — without automation, you can't realistically scale. 

There are also many other complexities including setup cost, discounts, proration based on usage, refunds, write-offs, upgrades, downgrades, and beyond. 

In a SaaS or subscription-based business, the contract period also dictates how the O2C process works. If it is a monthly recurring order, the cycle repeats for every order and that’s pretty straightforward.

But if it's a one-year contract paid upfront, or a yearly contract paid monthly, that makes a big difference. In that case, the O2C process must be adjusted to ensure accuraterevenue recognition through appropriatedeferred revenue reporting.

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Additional Reads

More reads on the Order to Cash process, and how it impacts the Finance operations of subscription businesses: