Does your sales team know about what Order-to-Cash entails? They might feel successful because they generate many orders. Fine. But, do you believe that’s all you want?
Successful sales orders are only those converting into cash. So, to achieve that you must work through all the intermediate stages of the process called order-to-cash.
To ensure everything goes as smoothly as it should, sales, supply chain, production and credit departments must all work in harmony. And to make it happen it’s better to know what to do at each of the order-to-cash stages.
What Is Order-to-Cash?
Order-to-cash starts the moment you receive an order from an existing or new customer. You then process it and start evaluating your customer. You assess risk and decide whether to extend/grant credit or not. Finally, it ends once you fulfill the order, issue your invoice, collect payment and apply cash.
Who Deals With Order-to-Cash?
In a successful business, all departments co-operate to achieve the same goal. Growth. But, this doesn’t mean that sales only seek new business deals and send your credit department orders with no concern who the customers are. The exact opposite!
Sales and credit people should work together to maximise safe sales, not just their quantity. That’s the ideal scenario. This co-operating approach should dwell throughout the company’s departments. For instance, if you train sales people vet credit applications from customers your credit granting process will accelerate.
Said that, who does make sure that an order equates to cash?
How do you know your customer can and will pay?
In other terms, how long will you be without the cash revenue of your sale?
It’s the credit department that’s responsible. It must answer these questions and be able to turn them into concrete actions.
In fact, it ensures to make an educated risk assessment on the probability of receiving payments. Thus, you must have a well organised management of the order-to-cash cycle.
You might think to reduce your credit risk by choosing a convenient method of payment. For example, a Letter of Credit (L/C). But you are still exposed to commercial risk unless your business only accepts cash payments. If you are an seasoned exporter you will agree.
So, your credit department task is to check your customers. It carries out credit investigations, risks assessment and credit approval. Its mission is to protect your organisation’s most valuable assets, accounts receivable.
A Walk Through Of The Order-to-Cash Process
First, an order involves you and the buyer to agree on your sales contract. In general, a sales contract will involve a proforma invoice, a purchase order and the sales agreement itself. Thus, before entering into a contract buyers will have to accept your proforma invoice or send you their purchase order.
In all cases, a sales contract should include various elements. Among others, it’ll have description of goods, prices and INCOTERMS. Also, the documentation required for shipping, insurance and customs checks.
So, if the sales contract is complete in all its parts you will be able to manage it from the start.
Once you receive your customers’ order the next step is to enter them into your order processing system. Here it is a must to ensure entries are accurate from the start. If not, all sorts of problems may arise even from the smallest error and managing the contract becomes difficult. Inaccuracies may affect billing, collections and your cash flow.
The fulfillment of the order depends in part on this stage. Good entries prevent disputes, delays, wrong shipments and delinquency.
So, ensure you plan for appropriate procedures and responsibilities.
One way to streamline the order-to-cash cycle is to use order automation solutions. The benefit is to have complete control over all the stages. Besides, interrogations and data extraction is immediate. And you can detect issues before they become unmanageable. Thus, you should consider adopting one.
Billing and Disputes
If the orders entry procedure is well thought out, you must also organise the next stages. Yet, note that a cascade effect from wrong order entry will produce unforeseen troubles down the cycle.
Billing is a major stage of the order-to-cash cycle since it relies on all the initial entries. Any inaccuracies, unapplied order changes, mistakes or other order inconsistencies will affect it.
So, your customers may contest the invoice if billing is incorrect, inaccurate or lacks clarity. Then, they’ll start disputing the order.
Disputes do occur and you must know how to handle them. If wrong entries are one of the main causes for sales order disputes, there’s more to that.
Inaccuracies and causes may derive from:
– changes in prices, taxes and shipping quotes
– different INCOTERMS and other sale conditions
– inconsistent goods description, typing mistakes, missing information
– bad or different quality of goods
– delivery delays and issues
Handling disputes well is important to ultimate customer satisfaction. You don’t want your customer to yell at you not only for the dispute itself but also for the way you handled it.
Disputes Resolution System
So, in general you must have a dispute resolution system in place that:
– involves all the departments and individuals responsible for the issue and its resolution
– classifies the type of dispute and provides a resolution timescale
– sets procedures to resolve each dispute and identifies who has to fix it based on its classification
For example, an incorrect invoice is an administration mistake.
After, you fulfill the order upon delivery of goods or rendering of services. It’s good practice to track shipments to prevent delays, custom issues or missing documentation. Also, ensure you receive delivery notification by the forwarder so that you can start the collection process.
Credit Collections – What to do
Things might not work well all the times. Disputes may arise before shipping the goods/servicing the customer or after.
If you already fulfilled the order, it’s important to send reminders about invoice payment before the due date. This is not only part of a well organised collection process. It’s also a way to prevent payment delays due to disputes yet to be notified by customers.
However, it’s not an easy nor a pleasant task when you must call the customer to request payment. There could be different reasons why customers didn’t pay you.
We saw that it shouldn’t be a surprise if they haven’t paid you because they had cash flow difficulties, for example. In reality, your credit assessment should have already informed you of this. More if you got the order wrong and the customer is disputing it.
Yet, calling to collect payments is part of the job and you must plan for it.
So, before calling make sure you prepare all the information about that customer. Know what you want to achieve with that call.
Do you want to understand their situation or want to get paid immediately?
Whatever your end goal make sure you have all the bits and pieces in place. Your call should produce a concrete result in your collection efforts. This even if you know you will call again.
Furthermore, don’t be aggressive and try to be supportive and understanding. Again, there could be a genuine reason why the customer didn’t pay you. And you must find out about it. It’s part of your end goal. Use the same approach if they are disputing the order.
During the call, make sure your customer received all the documents and invoice. Talk to the right person and get the name. If they say the payment is on its way, find out when this was made. Get the wire date or the cheque number. If payment is in the queue, make sure they confirm when they will send it.
Although it seems obvious, remember to take notes of everything you and they say during the call. It’s important because if you must make that second call you know where to start from.
Knowing what has been said during a collection call is crucial. This helps you speed up the process of reaching your end goal. You’ll avoid wasting everyone’s time on things already discussed. Also, your notes may help you start straight from exactly when they committed to pay you by a set date.
Another thing to be ready for is objections. Customer unwilling to pay will come up with one to prolong the waiting. Have responses ready for objections you feel they will raise. This way you’ll show you are serious about the order, the payment and the customer standing.
How To Prevent Delinquency
Organising an adequate order-to-cash process helps ensuring business profitability. This is also part of reducing payment delays and delinquency. If you are ready to handle every disputes, collection calls and objections, you can detect troubles as early as possible. And prevent damaging your cash flow.
However, delinquency is a business fact (to some extent) and even if you experience it in rare occasions it will occur at some point. No matter how effective you are in handling disputes. Delinquency will occur for other reasons beyond your control.
Any successful business strives to have all solutions in place. This is because it faces constant challenges, whether they are common or not. Said that ask yourself if you are ready to face delinquency with the appropriate procedure and tools.
If you haven’t set a procedure yet, decide when an invoice is overdue. Go back to our question about how long you can stay without the cash revenue of your sale. Is it 30, 60, 90 days past due?
Once you have set this limit, move forward. Do request a professional collection service to recover your debt. If you let your receivables age, the probability to recover them decreases as time passes. Moreover, collectors will charge you more as accounts become harder to collect.
Therefore, make sure you have your solution ready. Remember that accounts receivable are your main assets. Your goal is to protect them by making sure they convert into cash. If you don’t, what you thought were successful sales are in fact losses.
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This article contains general legal information and material for informational purposes only which are not intended and should not be taken as legal advice. Recoupera is not a collection agency and it is not a law firm or a substitute for an attorney or law firm. All informational material provided may not reflect changes in the law. For legal advice, contact a lawyer.