Optimising the Order-to-Cash Cycle
The Order-to-Cash Cycle (O2C) covers all the processes from taking the order through to banking the payment receipt, see figure below. The main working capital management objective in O2C is to minimise the average number of days taken by a company to collect payments after the sale is completed (Days Sales Outstanding - DSO) whilst minimising administration processing and other costs.
Order-to-Cash Cycle and EBPP / EIPP Services
Source: J&W Associates Copyright© 2011
Effective management and automation of the order-to-cash cycle can produce huge strategic cost savings and release large amounts of working capital.
There are a wide range of individual services available for improving the order-to-cash cycle working capital and process efficiency including:
- order management systems and services
- e-invoicing: systems and services to automate paper invoices and cut the supplier costs from around €11 to €5/payment[Source: Billentis 2011] and open up opportunities for invoice discounting.
- dynamic discounting of invoices and invoice discounting to raise working capital
- factoring
- financial supply chain finance for a source of low cost working capital
- payment and remittance services.
There are two types of integrated platforms for O2C processing: the EIPP (Electronic Invoice Presentment and Payment) / EBPP (Electronic Bill Presentment and Payment) platforms, and the platforms covering the whole O2C cycle.
EBPP/EIPP
In these solutions invoice presentment is combined with payment. Solutions have been developed for the consumer market - Electronic Bill Presentment and Payment services and for the commercial market - Electronic Invoice Presentment and Payment. These have not been very successful yet, the O2C solutions - described below - have proved to be much effective and attractive.
Order-to-Cash Cycle Platforms and Reducing DSO
The order-to-cash cycle platforms combine the order systems and services with accounts receivable management processes.
In accounts receivables the key ratios for measuring accounts receivable management performance are:
- average total credit days/invoice (Days Sales Outstanding - DSO)
- average granted credit time (average accounts receivable not overdue)
- hidden credit time (average number of days between delivery and invoicing)
- cash discounts (correctly and incorrectly utilised)
- payment reminders required
- penalty interest billed and received.
Reduction in the DSO can be achieved in many different ways including cutting payment terms for buyers, granting discounts for early payment, speeding up and improving invoicing and receivable processes, tightening collection policies and procedures, and introducing more efficient methods of payment collection.
Receivables are an important source of working capital. Techniques for releasing working capital include dynamic discounting of invoices, invoice discounting and securitization, factoring and supply chain finance.