Completing a sale in construction does not have to be a lengthy and complicated process. From receiving an order to delivering the materials all the way to receiving the payment, there are always ways to improve and optimize the entire order-to-cash cycle.
- What is an order-to-cash process or OTC?
- Why is the O2C cycle important?
- What is the typical order-to-cash process flow?
- How do you optimize the order-to-cash process?
- Credit management concerns in the OTC cycle
- Is your order-to-cash process efficient?
- Order-to-cash challenges and issues
- Optimizing your order-to-cash process through technology
- How to leverage technology in the O2C process?
- Best practices for order-to-cash optimization
What is an order-to-cash process or OTC?
The order-to-cash cycle, also referred to as O2C or OTC, is a series of steps that details the entire process of making and completing a sale. The concept may seem straightforward, but digging deep into the details would show the complexities involved in receiving, fulfilling, and closing a sale.
In construction, for example, the OTC begins the moment a material supplier receives a request for quotation or RFQ. At this stage, a potential client asks the supplier how much it would cost to get a certain amount of product and how long the supplier would take to deliver and fulfill such an order.
After the supplier responds with a quote, a client would then decide if they want to place an order or not. If they choose to place an order, the supplier must then fulfill and deliver the order as promised in their agreement. The supplier issues an invoice, which the client has to pay before the transaction is formally completed and recorded in the ledger.
Why is the O2C cycle important?
Every stage of the OTC process can expose both the client and the supplier to multiple risks. For instance, a material supplier can suffer major cash flow issues if all their clients fail to pay an invoice. A client can also experience serious drawbacks if they go with an unreliable supplier who cannot deliver the materials on time.
Issues in a company’s O2C processes can be concentrated in just one stage. Even if a company has excellent data management and they are able to flag outstanding payments before they turn to significant cash flow bottlenecks, they can still have loopholes in other stages of their O2C cycle.
No matter how streamlined their payment collection systems are, they can still lose clients if, for instance, they are not able to respond to RFQs right away or they consistently deliver the wrong orders to their clients. This is why the O2C cycle is very important, especially for industries like construction, where the sales process is not as simple as exchanging immediate cash for every product.
What is the typical order-to-cash process flow?
Different companies have different O2C process flows, but almost all O2C cycles consist of the steps shown in the table below:
In the construction sector, the first stage of the OTC process will always be receiving, managing, and responding to requests for quotations. This is a crucial first step in making a sale. A company must know the products that they sell, and they must know how long it would take them to fulfill a sale.
Part of fulfilling an RFQ is also letting the clients know the terms and conditions of the sale. In construction, most sales are made on credit, which means the payment does not have to be exchanged right away. At this stage of the order-to-cash cycle, a client must also know what they need to do if they have to go through a credit approval process.
Order management happens once a client chooses to place an order. They are happy with the quote that they received, and they agree with the terms and conditions that a company sets forth. At this stage, a material supplier must demonstrate a thorough knowledge of their inventory and project management efficiency.
Managing multiple orders from multiple clients can be a daunting task. A misplaced order can mess up your entire process, and asking a client to resend their orders does not make a good impression. An efficient company should have a centralized ordering system where orders can be tracked and monitored, not only for internal purposes but also for client satisfaction.
At this stage of the order-to-cash cycle, a company must fulfill and deliver the order that was placed by their clients in the previous step. As in the previous steps, clean and reliable data management is imperative to complete this stage successfully. A poor data management system can cause a company to bungle the orders, and they might deliver the wrong goods and materials to the wrong customers.
When fulfilling orders, material suppliers can run through problems with inventory. If they have poor inventory management, they will end up short of supplies and will not be able to deliver the orders on time. A company with an efficient O2C cycle is, therefore, one that is able to complete the correct orders on time.
After fulfilling an order, the next stage in the order-to-cash cycle is to send and deliver the invoice. An invoice is issued for every sale made on credit, and it details the amount that needs to be paid, the payment terms and conditions, as well as the available modes of payment.
Issuing an invoice is not as straightforward as sending a piece of paper with a specific dollar amount. There are a series of steps involved, including the following:
- Generating the invoice
- Delivering the invoice
- Sending reminders to pay
- Receiving the payment
- Applying credits and discounts
- Recording the transaction in the books
Every step listed above is important, and one wrong move can unravel a company’s entire order-to-cash cycle. When generating an invoice, for example, a material supplier must take into account all purchase orders that have already been settled and also all change orders that were made. Failing to send a reminder after issuing an invoice can also result in payment delays, which can lead to bigger cash flow problems.
Once an invoice has been issued, the next stage would be to collect the payment. Part of optimizing your order-to-cash processes must involve standardizing the available payment methods that your company offers, the payment terms that you set for your clients, and also the discounts and benefits that your customers can take advantage of for settling their invoices before the deadline.
Payment collection must be proactive. An efficient order-to-cash process must therefore see into the future and put up safeguards in case a client fails to pay up. In construction, having a mechanics lien policy is one way to ensure that customers are able to recover payments from their respective clients. By serving a preliminary notice, a construction participant preserves their right to filing a mechanics lien if payment disputes arise.
A transaction is not officially closed even after payment is received. The payment must be recorded in the accounting books, and a receipt must be issued to officially signal that a sale is complete. This stage of the order-to-cash cycle should be straightforward, but it is still just as important to make timely records of every closed transaction.
At the end of the day, all the data on completed transactions must add up. They must align with the number of orders received and the current supply inventory, and they must be audited to ensure that there are no major inefficiencies in a company’s full OTC process.
How do you optimize the order-to-cash process?
Take advantage of technology
Automating your order-to-cash cycle is strongly advised, especially in the digital age. It is much easier to manage and process your client’s orders, send and monitor invoices, and collect and record all payments if all the data and updates are stored and tracked electronically.
Standardize timeliness and processes
An optimized O2C process means that all stages are completed within a specific period of time and are done to a specific set of standards. When standardizing your order-to-cash process flow, you can ask yourself the following questions:
- How long should it take you to respond to a request for a quotation?
- How long should it take you to fulfill an order?
- How long should it take you to record received payments?
Once your timelines and service-level standards have been set, you should design and manipulate your O2C cycle, so you are able to meet the thresholds that you set for your company.
Review and audit your OTC practices regularly
It is very important that you regularly review and improve your current practices, no matter how efficient they already seem. When conducting regular evaluations, keep in mind that there is always potential to do better and to eliminate even the smallest inefficiencies.
Credit management concerns in the OTC cycle
Digitize all paperwork
Going paperless is not only environment-friendly, but it is also more efficient. Some of the paperwork that you can start migrating to the electronic media include proof of deliveries and issued invoices. By digitizing these documents, credit managers can quickly review and flag outstanding payments.
Implement a stricter credit approval system
Companies have different credit policies, and one effective way to reduce your DSO is to ensure that you only work with clients who have good credit scores. Note that this is not the only way to get your clients to pay quicker, and there are different methods you can explore to reduce your DSO.
Conduct a regularly scheduled audit
A scheduled audit is important because it ensures that your current order-to-cash processes are reviewed and reconciled on a regular basis. An audit can catch potential holes in your accounting system, and it can also flag bigger issues with how you handle and fulfill orders.
Is your order-to-cash process efficient?
If you want to measure the efficiency of your order-to-cash process, you can consider using the following metric:
- Day sales outstanding or DSO
This metric lets you gauge how fast you are able to collect payment from your clients after issuing an invoice. A lower DSO is generally considered to be a good sign.
- Order fill rate
This metric refers to the percentage of orders that you are able to immediately deliver based on your current stock. A high order fill rate is good, but note that it can also be a sign of overstocking.
- Client retention
This metric tells you how many customers you continuously work with within a given period. It is a measure of client loyalty, and you should try to aim for a high client retention rate.
Order-to-cash challenges and issues
There are a variety of risks that come with every stage of the order-to-cash, and some of the challenges that every company must address include the following:
- Order cancellation
Sometimes a customer can cancel their order due to circumstances that are beyond your control. Depending on how robust your O2C cycle is, a canceled order can spell trouble for your company. You should therefore have a standardized process for dealing with canceled or returned orders, so you don’t get caught off guard when they happen.
- Supply chain management
Supply chain management can be vulnerable to different issues. If a company relies on a single source, for example, a major bottleneck can prove fatal to your entire inventory. Developing a reliable supply chain system is therefore just as important as having an efficient O2C process.
- Payment collection
The construction sector is itself notorious for delayed payments. A good O2C process, therefore, must be able to address potential payment delays and flag them as necessary before they evolve into serious cash flow issues.
Optimizing your order-to-cash process through technology
Taking advantage of the current and emerging technologies is imperative if you wish to optimize your order-to-cash process. In fact, going digital is arguably the best step you can take to build a robust O2C cycle and ensure consistent customer satisfaction.
Almost every stage in the O2C process flow can be improved by leveraging technology. Orders can be made and confirmed in real-time, for example, if customers have access to an online ordering system. Deliveries can also be monitored easily through electronic gadgets, and payment collection can be made more efficient if done with the help of technology.
How to leverage technology in the O2C process?
Digitize your order management system
Your customers should be allowed to enter and confirm their orders electronically. They should also be able to see on a dashboard if their orders have been delivered, if there are payment deadlines approaching, and if they have successfully settled a transaction. These are conveniences that every client should be able to have, which makes digitizing your entire order management system worth the investment.
Use an electronic system to manage your inventory
Managing your inventory can be an onerous, if not impossible, task. If you wish to optimize your O2C processes, you should therefore consider investing in an electronic inventory management tool. This way, you will be able to track the availability of your supplies in real-time. You will also have the data that you can analyze to help you understand your clients’ needs better.
Use a mechanics lien filing software
Filing a mechanics lien is arguably easy, but filing multiple mechanics liens for multiple clients is not as simple as it seems. To ensure that you serve valid preliminary notices and file proper mechanics liens on time, you are strongly advised to take advantage of available mechanics lien software run by lien and credit experts in the field.
Best practices for order-to-cash optimization
Build a sound credit management policy
Every construction company must have a robust trade credit policy that aligns with its business goals and values. Some of the risks that come with every stage of the O2C cycle can be addressed by simply developing and implementing an airtight credit policy.
Ensure constant communication throughout the O2C cycle
Constant communication is important, not only between you and the client but also among the internal departments in your company. If the group that manages the orders is not in tune with the department that handles payment collection, your company could be vulnerable to crucial inefficiencies that could drive customers away.
Implement a proactive payment collection process
Payment collection should not be done passively, which is to say that you should not just wait for payment delays to ensue before taking action. Your O2C process must include sending payment reminders to clients, and you must also ensure that you have the ability to recover payment in case payment delinquencies happen.