You want your buyers to get their orders as quickly as possible, don’t you?
And you want to get paid on time… don’t you?
The order-to-cash (OTC or O2C) process comprises all the steps to make that happen — it begins when a customer orders a product or service and ends when you receive the payment.
Every time a new or existing buyer places another order, the process starts all over again, which is why it’s so important to have an efficient, reliable, and (most importantly) repeatable system that your sales, customer success, fulfillment, and receivable teams can rely on.
Healthy cash flow, long-term customer relationships, and internal business productivity hinge on having a streamlined O2C process. And for that, you need the right software.
Financial Flow: Unraveling the Order-to-Cash Cycle
The O2C cycle is typically broken down into eight steps, each with its own nuances, challenges, and inherent complexity.
1. Order Management
Order management is the first step in the O2C process, but it is actually carried out throughout the whole cycle. Since you have numerous customers placing orders at different times, order management is a continuous function your business carries out on a daily basis.
Tasks involved in order management include:
- Order entry
- Order processing
- Inventory management
- Tracking customer orders
- Billing, invoicing, and payment processing
- Managing returns, exchanges, and refunds
- Customer service/customer success
Order management processes begin when the customer places an order (or the sales team verifies the order). Not to be confused with order fulfillment, order management solely focuses on the administrative aspects of orders and customer data.
Therein lies the challenge: How can you manage multiple orders, billing, and customer service efficiently and accurately while delivering the best possible customer experience?
Since some order management processes take place in the billing department, others in customer success, and many on the warehouse floor, they’re often siloed and disconnected, which makes sales channels nearly impossible to keep up with.
2. Credit Management
Credit management refers to the process of assessing and authorizing credit limits for existing and potential customers. Companies use credit management procedures to determine customers’ ability to pay based on their credit history and financial information (i.e., their creditworthiness).
Bad debt is the main risk associated with poor credit management. It accounts for as much as 5% of a company’s revenue, the impact of which increases dramatically as companies scale. Although some bad debt is a helpful part of a profit maximization strategy, too much revenue loss from bad debt can be devastating.
To prevent bad debt and maximize flexibility for customers who deserve it, credit professionals look at multiple data points for each customer (e.g., credit history, payment data, current debt load) and set payment terms accordingly.
Of course, there are a few inherent challenges with credit management.
- Which customers deserve flexible payment terms?
- How should we evaluate customer creditworthiness?
- How often should we review customer credit information?
- What can we do to reduce bad debt?
- How do we manage different pricing rules for customers based on creditworthiness?
Using the right software to automate credit management and sync with pricing rules in CPQ can help you assign credit limits and payment terms with precision.
The order fulfillment process is all about making sure that customers get exactly what they ordered as quickly and accurately as possible.
Fulfillment activities include:
- Picking the products based on the customer’s product configuration
- Packaging them for secure shipping
- Documenting the shipment
- Sending out shipping notifications
Fulfillment processes become more complex as your business grows in size and customer base.
For online retailers, the average order costs 70% of the company’s average order value because order fulfillment is difficult to scale. Since it requires manual labor, it’s difficult to maintain high efficiency levels while also providing fast and secure shipping.
Fulfillment time is another critical factor for customer satisfaction. A new study from Voxware found that 69% of customers would abandon a company completely if their order didn’t show up within two days of its estimated delivery date.
In B2B buying cycles — which entail higher lead times and intricate product configurations — customers are willing to wait longer (and plan most of their supply chain operations around lead time), but overdue deliveries are still a terrible look.
Once an order is fulfilled, the next step is to make sure it’s shipped correctly.
Shipping involves several key tasks:
- Choosing the right carrier and service level based on customer requirements
- Generating shipping labels, packing slips, invoices, etc.
- Tracking packages in transit until they’re delivered (and providing customers with detailed tracking updates)
Using software to automate shipping processes — from creating labels and manifests to tracking shipments in real-time — ensures orders are shipped accurately, on time, and at the lowest cost while customers receive all the information they’re looking for.
Depending on the situation, companies may send customer invoices before, during, or after the shipment. This is a crucial part of the O2C process because it shows customers exactly what they owe and how to make payments and provides a payment gateway for doing so.
Although customer invoicing seems relatively straightforward, there’s still a right and wrong way to do it. And the wrong way results in delayed, missed, or inaccurate payments.
Most companies use an invoicing platform to generate itemized invoices and purchase orders, which is a good start. But it comes with its own set of pitfalls:
- No help with dunning management
- Inability to sync with CPQ pricing rules
- Lack of support for multiple payment terms and flexible pricing models
- Can’t spot revenue leakage or predict revenue churn
- Doesn’t support subscription revenue models (without a specialized feature)
In most cases, failed payments and invoicing errors are more likely to cause involuntary churn than reach a resolution. Automating the invoicing process with billing software is the logical next step for companies that want to reduce their involuntary churn rates and maximize time-to-revenue.
6. Accounts Receivable (AR)
The accounts receivable (AR) function handles all the bookkeeping and accounting for the order-to-cash cycle. It’s responsible for tracking customer invoices, payments, and any other outstanding amounts due from customers—regardless of their payment terms.
Accuracy in customer invoicing is critical for AR, as it’s the foundation of successful collections management. The more problems there are with the invoicing process, the less organized accounts receivables are on financial statements.
The AR department is also responsible for revenue recognition according to ASC 606 (for US companies) and IFRS 15 (for multinational enterprises). For B2B companies generating most of their revenue from large contracts (e.g., equipment vendors, manufacturers, service agencies), a huge part of O2C efficiency is whether or not revenue is recognized in the right period.
About 50% of accounting tasks can be fully automated, including plenty of AR functions. Revenue recognition automation is perhaps the most valuable, since it’s the greatest source of AR reporting errors.
7. Payment Collections
Payment collections should be automatic — the customer receives the invoice, they pay, you receive the deposit, your AR department records the payment, your software updates customer balances and payments in the system.
But it’s rarely that simple.
Customers may dispute invoices and slow down their payments or stop paying altogether. Invoices may get lost in the mail or customers may not have enough cash to pay.
All of this leads to slow payments and bad debts — both of which can hurt a business’s bottom line. And if you have late payment contingencies (e.g., “If a customer is late with a payment, we charge them an additional 1.5%”), these rules become difficult to manage throughout the collections process.
There are a few ways to minimize late or missed payments:
- Automating customer collections through programmatic dunning emails
- Outbound calls for high-value invoices
- Using e-invoicing solutions to reduce invoicing errors
- Integrating with payment processors to automate ACH and credit card payments
Basic invoicing tools won’t offer these features and manual collections processes can’t scale with businesses, so having billing software as part of your collections process is a must.
8. Reporting and Data
Reporting is a critical last step in order-to-cash because it provides your company’s stakeholders with the data they need to make better business decisions. It gives insights into current customer balances, overdue invoices and payments, revenue recognition cycles, and business KPIs like customer lifetime value (CLV) and retention rate.
To continually manage O2C efficiency, you need accurate data that helps you manage your own sales processes, gives you supply chain visibility, and helps you forecast future sales, revenue, and demand.
CPQ and billing software both play integral roles in reporting and data collection throughout the O2C cycle. When buyers configure product bundles and place orders, order amount, product configurations, and other data points are captured and stored. In billing, you can track customer purchase and payment trends, find missed payments, and understand your bottom-line financial health using invoice data.
Benefits of Integrating CPQ and Billing for Efficient Order-to-Cash
To help you understand just how CPQ and billing contribute to complete order-to-cash efficiency, here’s a look at the O2C workflow post-implementation:
- After configuring their order, the buyer places their order with a streamlined checkout process.
- The CPQ and billing software generate the invoice for that order, including tax calculations and any discounts or surcharges associated with it.
- An automated shipping label is generated and sent to the order management system.
- The fulfillment team is notified of the order and picks, packs, and ships it.
- The customer receives an email with their invoice, payment instructions, and tracking information.
- AR processes are handled automatically per ASC 606 and IFRS 15 standards for revenue recognition, and an aging report is automatically updated.
- The buyer receives an update when the payment is near-due.
- At the end of the month, each team looks at its respective analytics data to understand how the process worked and where it can be improved.
Let’s take a look at the benefits of CPQ and billing more in-depth.
The most critical benefit of CPQ and billing software is its integration with other business systems.
CPQ software integrates with ERP, CRM, and other tools to ensure accurate product information (e.g., configurations, bundles, upsells, and add-ons), availability data, customer details, pricing rules, and discounts are applied consistently throughout the order-to-cash process.
Automated billing platforms do the same for accounting software and payment processors. If billing is integrated with CPQ, the sales team doesn’t even need to send an invoice anymore — it’s all taken care of automatically.
For the customer (who statistically wants more self-service options), kicking off the O2C process with an accurate and frictionless order means fewer headaches and higher satisfaction.
For the business, it means no more manual invoice configuration or follow-up, less guesswork regarding financial health and forecasting, and easier customer relationship management.
Although the CPQ process precedes order-to-cash in most instances, O2C performance depends on the sales team’s (or customer’s) ability to configure the right products or bundles for their orders. Constant back-and-forth due to inaccurate product data or configurations can lead to delayed orders, incorrect shipping information, and manual revenue recognition — all of which bog down the O2C process.
Accurate fulfillment is only possible when the customer orders something your business can actually deliver. Integrating CPQ with your company’s website and inventory management system guarantees they’ll order something they can actually receive without someone on the warehouse floor needing to double-check.
Fewer Revenue Leaks
Revenue leakage is a huge (and largely avoidable) issue for businesses. For most companies, it’s practically guaranteed, but knowing where it’s coming from can help you prevent as much of it as possible.
CPQ can help you eliminate revenue leakage through price optimization. The pricing engine on CPQ’s backend helps you configure dynamic pricing rules and discounts, so you don’t have to rely on manual overrides or guesswork when it comes to setting prices.
Billing software also plugs up revenue leaks stemming from manual customer collections processes. Automated dunning emails, payment reminders, and other collection methods help ensure you collect payments faster, while advanced reporting and aging reports help you spot the customers who aren’t paying what they owe.
Order-to-cash entails significant operating costs across every department. Sales, customer success, fulfillment, billing, and AR are all involved in making sure your buyer gets what they need.
Of course, some processes — like picking, packing, and shipping — need to be carried out manually. But those carrying out the manual tasks shouldn’t have to spend most of their time creating documents and inputting information that could easily be auto-populated.
Most IT leaders agree that process automation initiatives save businesses between 10% and 50%. Given the manual labor involved in O2C and the financial implications of every mistake, CPQ and billing software implementation generally yield an even greater ROI.
Higher Customer Retention
A 5% increase in customer retention can increase your company’s revenue by almost 100%. And if you lose your loyal customers, it’ll cost as much as seven times as much to find and close new ones. CPQ and billing help businesses achieve higher customer retention rates by preventing both voluntary and involuntary churn.
About three-quarters of your customers will walk away after one or more bad experiences, and the overwhelming majority of the buying process is carried out without the help of a sales rep. Today, a customer defines a “bad experience” with a product as one where they couldn’t order and pay for it themselves. Buyers enjoy the convenience CPQ integration offers them — they no longer need to contact customer support or wait for a sales rep to call them back.
Billing software is integral in preventing involuntary churn (e.g., payment delinquency, lost invoices). Automated reminders and collections processes ensure customers don’t forget about their responsibilities, while automatically-applied late fees and other penalties incentivize prompt payments.
Even companies that don’t have issues with getting orders to their customers struggle with bookkeeping. Generally, the period they carry out their contractual obligations and the collections period are misaligned, and recognizing revenue at the right time is practically impossible without billing software to automate it.
For future sales and revenue forecasts, CPQ and billing systems offer visibility into customer trends, repeat purchases, and buyer behavior patterns, all of which are data points that can inform your next marketing campaign, sales goals, or product line expansion.