O2C – Order to Cash

Definition of O2C
Order to Cash, is a strategic wing to wing accounting function covering Order
Management and Receivables Management, triggered with the receipt of
customer’s order and concludes with the reconciled customer accounts.
O2C – Commonly called as Accounts Receivable.
Commences with Order Receipt from the customer for Goods and
Services.
Ends with realization of Cash (selling on credit).

O2C STEPS
1. Create a demand by sales and marketing demand.
Credit Management Team Analyse whether the customer is
creditworthy or not.
2. Quotation is created and sent.
3. Negotiation.
4. Creation of Customer Account. (CMD Team)
5. Creation of Sales Order.
6. Goods Delivered.
7. Invoice Sent.
8. Cash Collection Team – if a customer doesn’t pay within the Due.
Dispute Management Team – in case of any dispute.
9. Payment Received.
Step 1 to 7 is covered by the Order management
ORDER to INVOICE.
Step 8,9 is covered by the Receivable management
INVOICE to CASH.

O2C is broadly classified into 2 categories:

 Order Management.
 Receivable Management.
 O2C – Order to Cash
Subset to Order Management:
 Order management.
 Credit management.
 Billing.
Subset to Receivable Management:
 Collections.
 Cash Applications.
 Dispute Management.
 Customer Master Data.
 Control and Reporting.

Order management:
Order management is the process of order capturing, tracking, and fulfilling
customer orders. The order management process begins when an order is
placed and ends when the customer receives their package.
It offers visibility to both the business and the buyer.
It is a digital way to manage the lifecycle of an order.
SCOPE OF ORDER MANAGEMENT:

Sales Team
Order Promotion
Management Management

Scope of
Order order Master Data
Processing management Maintenance

Price Contract
Management Management
 O2C – Order to Cash
Receivable Management:
Receivables management is the process of making decisions relating to
investment. in trade debtors. If you want to increase sales turnover and profits
of the firm, you. have to sale goods on credit basis, which includes the risk of
bad debts
It refers to planning and controlling of debt owed to the customer on
account of credit sales.
1. Sales team and promotion management team (Quotation)
A quotation is a document that a vendor provides to a customer which
includes Offer, Terms and Conditions of payment and delivery.
It includes Supplier Name and Address
Product Description.
Unit Price.
Tax Application.
Freight Terms.
Availability.
2. Contract – After Discussion with the credit management (Check Financial
Position of the Customer)
CONTENTS OF CONTRACT:
 Terms and Conditions-Name and Address of the Vendor and
Customer.
 Description and Price of the Goods and Services.
 Shipping/Freight Terms.
 Payment Terms.
 Timelines and validity of the Contractual Term.
 Tax and VAT applicable.
 Legal Obligation.
 Legal action against either of the parties on non-complying the
terms.
MASTER DATA MAINTENANCE
What is Master Data?
Most software systems have lists of data that are shared and used by several
applications that make up the system.
Master Data is often one of the key assets of a company.
 O2C – Order to Cash

Components of Master Data Management:

 New Customer Setup.
 Item Master.
 Price Master.
 Credit Limits Updation.
 Maintenance/changes of Master Data.
Vendor Master Data Team Does Customer Master Data Team Does
1. Create vendor A/c. 1. Create Customer A/c.
2. Modify or Update the Existing 2. Modify or Update the Existing One.
One.
3. Delete vendor A/c. 3. Delete Customer A/c.
4. Block vendor A/c. 4. Block Customer A/c.
Item level block-specific Invoice Item level block-specific Invoice or
or Document. Document.
Account level block-blocking the Account level block-blocking the
entire vendor account. entire vendor account.
Block Customer Master Record
Customer Master can be blocked at various stages:
 Sales Order Processing Level.
 Delivery Processing Level.
 Billing Processing Level.
 Posting Block.
 Payment Block.
 Dunning Block.
Block at Customer Master Record can be put two different level:
 Account Level.
 Document Level.
Block Customer Master Record.

New Customer Credit Control

Block/Unblock
 O2C – Order to Cash
CREDIT MANAGEMENT:
Functions of Credit Management Team:
A. Establishing a Line of Credit (LOC):
For new customers by analysing financial data new customers need a
Line of Credit which vary according to their- creditworthiness, financial
strength & annual purchases. Credit Analysts analyse the various
financial statements of the customer to set up an appropriate LOC
thereby minimizing risk to the business.
Some Common Techniques Applied in setting Credit Limits:
 Trade Reference.
 Bank Reference.
 Payment Performance.
 Past Performance.
 Financial Statement Analysis through various ratio.
 Credit rating or scores from credit rating agency.
TYPES OF CREDIT POLICY
Liberal Credit Policy- AAA, AA, A, AN – High risk of bad debts.
Restrictive Credit Policy-AAA, AA – Low risk of bad debts.
Moderate Credit Policy-AAA, AA, A – Medium risk of bad debts.
Some of the Credit Rating Agencies are:
 Equifax
 Trans Union
 Experian
 The Dun and Bradstreet Corporation

The following rating codes can appear in D and B Rating Report:

 AAA – Maximum credit rating
 AA – Good credit rating
 A – Creditworthy
 AN – Newly started company
 (-) – No credit rating established
 B – Credit with provided security
 O2C – Order to Cash
 C – Credit not recommended

Cash Collection
Credit and Collector Role
Collecting on past due amount is the utmost priority for many companies to
manage the cash flow. Better the cash flow, Stronger the company. However,
in Accounts Receivable it is not only about collecting past dues but also
managing the payments closer to the terms agreed. It is a business to
business/ customer collection, hence building rapport with the customer
becomes critical. Collector is aligned with a set of accounts called a portfolio
and their responsibilities is to resolve and collect payments on due balances.
Monthly targets are given to track collections done by the agent.

Credit and Collector Responsibility

 Sending statements to customers on due invoices
 Collecting past dues
 Co- coordinating with internal / external personnel to resolve any
queries / disputes raised by a customer
 Reconciling customer’s account being billed, payment received, yet
to receive
 Working in conjunction with customer, Sales Department, Cash
Application and Dispute
 Facilitator for resolution on due and delinquent accounts.

Collection Process/Dunning Process

 Intimation Email – It is simple Reminder Email (Invoice due in few days

or on same day).
 Reminder Email – If an invoice is not paid after due date, then reminder
is sent and will be waiting for 2 or 3 days.
 Warning / Dunning Email – It is sent when the customer doesn’t make
the payment even after reminding them several times. Here the vendor
will ask the customer to pay. As per the company’s policy to block
customer A/c or charging interest / penalty.
 Collection Call – It done to know why the customer still hasn’t paid.
 O2C – Order to Cash
 Legal action or Factoring – Here the vendor involves the THIRDPARTY to
pay the customer’s invoice.
 Writing off bad debts – Finally, if the customer doesn’t pay after
reminding him, then it is identified as bad debts
Two methods
1.Direct Method
Bad debts A/c Dr
To Accounts Receivable A/c
2.Principle of Conservatism/Prudence Method
Bad debts A/c Dr
To Provision for doubtful debts A/c

Vendor Statement
It is prepared more invoices; The vendor will send to the AP Helpdesk for the
collection of invoices.

Vendor Recognition Statements

This Statements is reply from the AP Helpdesk to vendor, Vendor Statement
sent to the AP Helpdesk every to 15 to 30 days.

Cash collections:
Collection on pats due amount is the utmost priority for any company to
manage the cash flow. Better the cash flow, the stronger the company.
However, in accounts receivable, it is not only about collecting past dues but
also managing the payments closer to the terms agreed. It is a business to
business/ customer collection, hence, building rapport with the customer
becomes critical. collector is aligned with a set of accounting called portfolio
and their responsibilities is to resolve and collect payment on due balances.
Monthly targets are given to track collections done by the agent.
 O2C – Order to Cash
Credit & collector responsibility:

 Sending statements to customer on due invoices.

 Collecting past dues.
 Co-operating with internal /external personal to resolve any queries
/dispute raised by a customer.
 Reconciling customer account being billed, payment received, yet to
received.
 Working in conjunction with customer, sales department, cash
application and disputes.
 Facilitator for resolutions on due and delinquent accounts.

Collection management:
DSO-Days SALES OUTSTANDING RATIO
The DSO in a business (Sometimes called Debtors Days Outstanding) is a
measure of the average number of days taken to collect revenues after sales
has been made.
 DSO ratio = Accounts Receivable / Average sales per day, or
 DSO ratio = Accounts Receivable / Total Amount Sales / 365 Days
 The DSO is only a guide, but it can be used to determine whether a
company is trying to disguise weak sales, or is generally being
ineffective at bringing money in. Reducing DSO, even slightly, can go
a long way towards improving the health of a business.

DSO ratio =Accounts Receivable / Average sales per day, or

DSO ratio = accounts receivable
Total annual sales / 365 days.
 O2C – Order to Cash
Collections management – DSO
Cash collections
 Basics of a collection call.
 Opening.
 Identifying yourself.
 Articulate reason for the call.
 Active listing.
 Negation techniques.
 Build rapport with customer.
 Empathize (if required).
 Summarize PTP details.
 Closing.
Dispute Management
 Supply or service is incomplete
 Quality of the delivery or service is deficient
 Price and service do not match
 Delivery date is exceeded
 Deduction because of trade promotion
 Misunderstanding between the business partners.
Some common reasons for disputes:
 Return good issue.
 Sales order made to another customer.
 Invoice and sale order do not match.
 Delivery issue.
 Delivery issue.
 Pricing issue.
 Discount issue.
 Quality issue.
 O2C – Order to Cash
CASH APPLICATION
Cash application:
Applying of cash to appropriate customer invoices is one of the major
functions performed by the cash applications team, cash application accuracy
and turnaround directly impact customer satisfaction, days sales outstanding,
collector productivity, and financial reporting integrity.

Cash application Different payments:

 Allocated / Applied payment.
 Unallocated / Unapplied payment.
 Unidentified / Unknown payment.
 Under / Short payment.

FUNCTIONS PERFORMED BY CASH APPLICATIONS TEAM

A. Application of cash to the correct open invoices
Download the bank statement received from the bank or through
website. Application of payment received from customers to the
respective customer account. The AR, thus, is cleared.
B. Close Unidentified Payments & Reconcile Payments
Payments coming from unidentified sources are first taken to a
Suspense A/c, reconciled & subsequently closed. Applying Unapplied
cash which was assigned by Cash App Analyst after researching the
customer account.
C. Excess Payment received from customer, will be refunded on
customer request after obtaining necessary approvals.
In certain cases, the customer service/cash collection team may also
involve itself in the refund of excess payments. It may not always be
the cash app team doing the refunds.
D. Interface with bank and other cash receipt agencies
Apply the cash received from sources of uploads, interfaces, and
agencies to the respective customer A/c.
E. Write Off
Customer account balances that cannot be collected is written as
write offs. There is a specific provision accounted.
 O2C – Order to Cash
CASH APPS POSITIONED IN AR

Sales

Credit Management

Customer Data Creations /

Maintenance

Delivery

Billing

Yes
Payment
received from Cash Applications
customer

No

Collections

Yes
Payment
received from
customer

No

Agency Liaison