Maintaining sufficient cash flow to support operations is critically important to most companies. But even in cases where negative cash flow is built into the business plan, such as a software startup, controlling cash burn is still a top priority. Although issues like seasonality, economic conditions and political tensions can affect cash flow and are beyond any company’s control, there are many internal factors that, if managed effectively, can help organizations improve cash flow.
Among those, accelerating the order-to-cash cycle may be the single most important step a business can take.
The Order-to-Cash Cycle Explained
Every organization, regardless of size, industry or business model, must have a way to generate revenue. For a business, this means selling goods and services to customers, either directly or via a third-party. When a customer is ready to make a purchase, a company must have a way to capture the order, deliver good or service, and receive payment for the order. The steps required to complete that process are known as the order-to-cash cycle.
For a retailer with a physical store, the order-to-cash cycle may be as simple as a customer paying for an item at the point of sale. In most industries, however, the process is more involved and, as a result, the amount of time between making the sale and receiving payment is much longer.
At a high level, order-to-cash typically involves the following steps:
- Order Entry
- Fulfillment
- Shipping
- Invoicing
- Collections
- Payment Processing
- Reconciliation & Reporting
Of course, not every order requires every step. For instance, shipping wouldn’t be included in the order-to-cash cycle of a service business. And collections wouldn’t be required for a customer who pays on time. But while the process may require fewer (or more) steps than the ones listed, and different terms might be used to describe them, every company has an order-to-cash cycle, whether they realize it or not.
Order-to-Cash Challenges
When order-to-cash runs smoothly, companies are better able to forecast revenue and cash flow. A slight miscue at any point, however, can delay the process, extending the length of time between order entry and receipt of payment. Such delays, if they happen frequently, not only make accurate cash flow projections difficult, they also affect customer satisfaction. And poor service often results in late payments, further disrupting cash flow.
While no process runs perfectly all of the time, the order-to-cash cycle is particularly susceptible to problems because it requires coordination among multiple internal departments and, in some cases, external partners as well. As a result, there are several potential points of failure. While partners can be difficult to work with at times, internal issues are more likely to cause problems.
To accelerate the order-to-cash process, companies must address five common challenges:
1. Order management
Everything that happens in an order, from capture to shipment, has a direct impact on the order-to-cash cycle. After all, the faster orders are filled, the sooner they can be invoiced. Internal disconnects can disrupt the process, extending the lag time between taking an order and getting it out the door.
For instance, sales and customer service teams often use one system for order entry, while warehouse personnel use a different system to manage fulfillment. A lack of integration means orders are emailed from one department to another, or worse, printed out and either hand delivered or faxed to the warehouse, where they sit in someone’s inbox waiting to be filled. If orders must then be entered into another system, to generate pick lists for instance, there is an additional delay.
A similar delay may occur once the order reaches the loading dock, as information must once again be entered to create a shipping manifest. The use of disparate systems prevents information from moving efficiently between departments, extending the order to cash cycle.
2. Inventory visibility
A lack of insight into inventory levels can result in orders being entered for items that are out of stock. This has a direct impact on the order-to-cash cycle because orders that can’t be shipped can’t (or shouldn’t) be invoiced. More importantly, it affects the customer relationship, especially if they aren’t notified of the situation promptly.
3. Data quality
The use of multiple, disconnected systems also creates data quality issues. Data entry is an inherently error-prone process. The more times a given bit of information is entered, the greater the risk that an error will occur. Maintaining data in more than one place also makes it difficult to keep information in synch. Even with integration, editing a record in one system may not update every other application where the data is stored. For instance, changing a contact’s mailing address in a customer relationship management system won’t ensure orders are delivered on time if the change isn’t captured in the shipping system as well.
4. Manual processes
Manual processes, like data entry, not only increase the risk of errors, they are also time-consuming and inefficient. Manual billing processes, for instance, are a significant drag on the order-to-cash cycle. Simply printing, stuffing and mailing invoices can take anywhere from one day a month to a week or more, depending on the number of customers. Complex billing scenarios, such as invoicing customers based on project milestones or completion percentage, take even longer.
5. Payment collections
Ideally, customers should pay on time every time. Since that’s rarely the case, however, companies need a process for collecting delinquent accounts. Unfortunately, collections efforts are often performed ad hoc and only focus on accounts that are long-past due, making it much more difficult to secure payment. More consistent collections efforts can significantly reduce days sales outstanding (DSO), which ultimately improves cash flow.
NetSuite Automates Order-to-Cash
As a suite of business management solutions, NetSuite automates the entire order-to-cash process, eliminating manual bottlenecks, minimizing data errors and improving the flow of information from order entry to fulfillment to invoicing.
NetSuite improves visibility across the organization. Sales and customer service representatives can quickly check inventory levels before before taking orders. If an item is out of stock locally, they can check to see if it is available for fulfillment from another location. A unified data platform connects all departments, so information added by one person, such as a change of address, is instantly available to the rest of the organization. This reduces the risk of errors by avoiding duplicate data entry.
The combination of shared data and automated workflows eliminates the lag time between order capture, fulfillment and invoicing. Each step in the process flows smoothly from one department to the next. And because NetSuite also eliminates time-consuming manual billing and collections processes, accounts receivable becomes much more efficient, further compressing the order to cash cycle and reducing DSO.
NetSuite’s order and billing management capabilities integrate your sales, finance and fulfillment information —improving accuracy, eliminating billing errors, strengthening revenue recognition processes and driving fulfillment accuracy and efficiency.
Blog by Scott Beave, NetSuite