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 Order to Cash Cycle:

Order Management - The order to cash cycle kicks at the moment the system receives an order from the customer. The order can have multiple forms, it could be an online order from the customer directly on your website, or through your sales team over an email, however, the best practice is to automate your order management for an efficient order to cash process.

Order Fulfillment and Shipping - The next step in the cycle is order fulfillment and shipping. This part of the cycle largely applies to businesses dealing with physical goods where the inventory personnel should be notified with the accurate details of the order to proceed with fulfillment and shipping. 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.

Invoice Generation and Payment - The third step in the cycle is invoice generation and payment. The customer should receive an invoice for the order that includes all the details about the order as individual line items along with additional information such as taxes and discounts if applicable. The customer should also have the means to make the payment for the invoice raised. The best practice is to provide multiple payment options to minimize delays and payment failures.

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 order to cash process in principle is the same for any kind of business, but the actual mechanics of it change significantly for a subscription model particularly SaaS businesses.

The order to cash automation is inevitable for subscription or 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 a year depending on your subscription cycle.

There are additional nuances of complexities that a subscription model brings in to the order to cash cycle such as set up cost, discounts, proration based on usage, refunds, write-offs, upgrades, downgrades, etc.,

The contract period also dictates how the order to cash cycle process work. If it is a monthly recurring order, the cycle repeats for every order and that’s pretty straight forward. But in scenarios such as annual contract paid upfront or annual contract paid monthly, the process should be tweaked quite a bit to ensure accurate revenue recognition through appropriate deferred 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: