Order to cash management: Examples and tips

An efficient order-to-cash process can make or break customer satisfaction and, therefore, your business’s cash flow and overall financial health.

In this guide, we’ll explore what order to cash management is, along with some best practices to keep cash flowing and customer satisfaction growing.

 

Understanding order to cash management

Order to cash (O2C) management encompasses maintaining each step of the O2C process, from order processing to dispute management.

Key components of the O2C process include the following:

• Order processing: Your system adds the customer’s order and captures product specifications such as quantity, price, and delivery date. Anyone involved with the order management process is notified to begin working on completing the order.
• Credit management: Customers who qualify for credit go through an approval process, and once approved, payment terms and credit limits are set.
• Invoicing and billing: An invoice containing order details, including pricing and payment terms, is made and shared with the customer.
• Payment collection: The accounts receivable team shares reminders to encourage prompt payment. In some cases, your business may have to take legal action for extended non-payment.
• Cash application: Payments are matched with incoming invoices and applied to the corresponding customer account.
• Dispute management: Any issues related to payments or invoices are handled through investigation, communication, and a clear solution to ensure accurate pricing and cash flow.

 

Traditional O2C management depends on manual processes. However, automated O2C management uses technology to optimize the process between order placement and payment collection to produce greater efficiency and fewer errors, resulting in better cash flow and a more satisfied customer base.

 

Best Practices for Effective Order to Cash Management

Now that you understand the order to cash management process, let’s cover some best practices to help keep the process moving along.

• Streamline order processing and approvals: Reduce unnecessary manual steps where possible and document each team member’s role and responsibilities within each step of the process to eliminate any confusion. 
• Implement credit risk assessment tools: These tools identify potential risks with lending to a borrower and analyze other factors related to a person’s financial history to determine their creditworthiness.
• Automate invoicing and payment collection: Automating some of the invoicing and payment collection processes will save your team time and minimize errors while improving cash flow through quicker payments and fewer payment disputes.
• Integrate ERP, CRM, and payment gateways: Integrating enterprise resource planning (ERP) and customer relationship management (CRM)  systems grant visibility across your teams into an order’s status, customer data, and inventory levels, allowing for more efficient order processing and a more personalized customer experience.
• Monitor KPIs: Keep an eye on key performance indicators, such as order fulfillment time, days sales outstanding (DSO), and dispute resolution time, to identify areas of improvement and create the most efficient O2C cycle.

 

With proper order management from the start and the automation tools in place to get payments through the finish line on time, your financial team can rest assured knowing the order-to-cash cycle is in good shape.

 

Order to cash management example

Zuora customer Zendesk needed a billing platform that could manage subscriptions, provide them with analytics, and keep up with their rapid growth. Their previous billing system couldn’t carry out upgrades, expansions, and downgrades that customers requested.

This situation made maintaining customers a challenge and kept the finance team tied up searching through invoices and updating information. Anytime the company wanted to add new packages or features, they had to depend on the engineering team to help out, costing the company valuable time that could have been spent on creating new products.

The solution was to turn to Zuora as a third-party billing system. Zuora provided them with a system that managed their billing and gave them the flexibility to continue expanding their product catalog, marking initiatives, pricing options, and promotions. The team has easy visibility into transaction details, which helps the financial team feel at ease. From there, Zendesk added more than 30,000 subscribers in three years.

 

Order to cash management in SaaS

Software-as-a-service (SaaS) businesses deliver software applications to customers online and typically follow a subscription model rather than requiring users to install and manage the software on their own. With subscription-based pricing comes the need for management of billing cycles, pricing changes, and customer relationships to ensure long-term success.

SaaS businesses must handle upgrades, downgrades, and cancellations efficiently to maintain customers and continue to build a reliable reputation. Automation removes some of the manual, tedious tasks that come with running a SaaS business and reduces churn by enabling proactive customer engagement and resolving many potential issues before they happen. With a more efficient process from the order placement to the payment collection, you are more likely to receive payments faster and improve revenue recognition.

 

Order to cash management in subscription businesses

In a traditional O2C model, businesses focus on individual transactions or sales, and revenue is recognized at the point of sale, meaning a business is paid once for a service or product. There is typically a one-time interaction with a customer.

Subscription-based models, on the other hand, focus on long-term relationships with customers via recurring access to services and products. This model generates recurring revenue through regular payments and emphasizes building customer loyalty through ongoing services.

The subscription model uses automation features that have algorithms to calculate and apply any changes to renewals or modifications to contracts to ensure accurate billing. The subscription model can significantly reduce involuntary churn through automated payment retries. Instead of the subscription immediately canceling after the payment fails, an automated retry allows your business to attempt to collect payment again at a later time.

The subscription life cycle success largely relies on data analytics, which allows your business to create a more personalized customer experience through customer demographics, engagement patterns, purchase history, and more. Data analytics can improve your subscription lifecycle in the following ways and more:

• Predict churn: Data analytics can note patterns that show which customers are at risk of churning, which allows your business to make proactive efforts to retain them.
• Personalize experiences: Your business can create custom offerings for each individual customer based on their behaviors, which leads to greater customer satisfaction and loyalty.
• Measure success: Analytics dashboards show real-time updates on sales performance, allowing you to monitor KPIs.

 

Common challenges in order to cash management and how to overcome them

Even the most efficient O2C management processes can see some challenges. The following are some common challenges and ways to get the process back on track:

• • Delayed payments and high DSO: Late payments can disrupt cash flow, which impacts your business’s financial stability. By establishing clear payment terms up front, following up promptly once an invoice is past due, offering flexible payment options, and automated payment reminders, you’ll more likely see prompt payments and improved cash flow.
  • Manual errors and inefficiencies: Implementing an automated invoicing system can reduce errors and ensure timely payments. An invoice management software records and stores invoices for easy organization and the most up-to-date data.

• Integration issues with existing systems: Define integration needs from the start and document processes along the way. Automate repetitive tasks where you can to improve efficiency and minimize errors.

• Customer disputes and deductions: Prompt responses can prevent minor issues from turning into major ones. Clear, consistent communication is the key to a happy customer base. Communicate what’s happening every step of the way and continue asking for feedback.

 

Features to look for in an order to cash management tool

An efficient, effective O2C management tool will minimize manual processes and create a positive customer experience. The following are some key features to look for in an O2C management tool.

• End-to-end automation: From order capture to payment reconciliation, having automation tools throughout the entire process gives you plenty of flexibility with what tasks can be automated and what to delegate across your team.
• Seamless ERP and CRM integration: Ensure the O2C management tool works with existing business systems to prevent payment delays.
• Automated invoicing and payment processing: This reduces manual errors and quickly moves an order through the O2C process, allowing for quicker payments.
• Credit risk management: AI-driven credit checks and approvals allow for quicker approvals and improved cash flow.
• Real-time analytics and reporting: This data helps monitor customer behavior to provide a more personalized experience and easier cash flow management for your team.
• Dispute resolution and deduction management: The right tool streamlines issue handling by proactively addressing potential concerns before they arise.
• Scalability and flexibility: As your business continues to grow, your O2C management tool should support business growth and the evolving needs that come with scaling.

 

How Zuora can help with order to cash management

With a unified platform that hosts order management, billing, and more, managing your entire O2C process is easier than ever. Zuora supports numerous pricing models, including one-time fees, recurring charges, and usage-based charges. The platform has advanced billing automation capabilities, taking the load off your teams and allowing for accurate pricing and more timely payments.

Zuora Revenue allows your business to automate the revenue recognition process, which ensures compliance with accounting standards such as ASC 606 and IFRS 15. Using Zuora to manage your subscriptions can improve customer retention by creating a more positive customer experience through personalized interactions. With real-time data, you can make data-driven decisions and improve customer retention.

As said by AIMS360 President Shahin Kohan, “It is actually quite difficult to monetize subscriptions. But the data that comes out of Zuora makes monetization easy. We can change our prices and offer new subscriptions and packages whenever it makes sense to do so to help subscribers to grow into new offerings.”

You’ll convert quote to cash in no time. Check out Zuora CPQ today to learn how you can easily and accurately create quotes and provide the best service throughout the entire subscriber lifecycle.