Much like the phrase procure-to-pay, order-to-cash can mean different things to different people. The biggest point of contention is for those who take a purely financial perspective on the process, focusing on the elements of credit, invoicing, collections, and payment. There’s a big customer service and fulfillment piece as well, and it’s a good idea to keep that in mind as well. To provide a good foundation, a comprehensive view of O2C should be mindful of:
- Credit analysis
- Order management
- Customer Service and Support
- Dispute Resolution (for genuine issues)
- Collections (for unjustified payment delays)
- Reconciliation and Cash Application
Key Performance Indicators
Perfect Order Rate
You’re more likely to hear this term in supply chain than in finance, but it’s important to everyone. It answers the question of what percentage of orders arrive to the right customer location at the right time in the right quantities at the right quality (i.e. non-defective). For the finance folks, you can add on that they were billed at the right prices, with the right tax calculations, freight charges, and miscellaneous fees applied.
Task-Specific Cycle Times
This is a category of measures, rather than one specific calculation. That said, they all look to answer the question of how long it takes to complete one step of the overall process: average time for a credit decision, average time to input an order, average time from order entry until manufacturing, etc. Putting them all together is what you’d look to do to quantify steps outlined in process mapping — and when you want to get to the root cause of delays in the overall cycle of order (or quote!) to cash.
Days Sales Outstanding
This one’s straight-forward: it’s your total accounts receivable balance divided by credit (i.e. not paid in advance) sales, divided by 365. In other words, how much credit do you grant on an average day, and how many days does your current AR balance equate to? This is a big one when it comes to working capital management, as it signals how quickly you’re able to get cash in the door for those products or services you’ve sold.
AR Past Due Percentage
Because a lot of different things affect DSO, it doesn’t tell you a lot about why things are going well (or poorly). If your DSO is increasing, one big culprit could be late payments. Looking at a past due percentage takes the current total amount of late payments (say, those at least one day past their stated due date) and divides that by the total AR outstanding. Most companies will look at this in a few different buckets (1-30 days late, 31-60 days late, 61-90 days late, etc.) in addition to the overall number.