Order-To-Cash Cycle: Definition,An Overview, Benefits, KPA and KPI
GO TO MAIN PAGE COVERING ALL TOPICS ON CASH CONVERSION CYCLE/CASH OPERATING CYCLE
The Order to Cash Cycle is a tedious process, which might take about 30% of the total finance costs. If this process is overlooked & becomes inefficient, we can see the following symptoms:
- high order-taking time,
- high order-fulfillment error rates,
- high DSO rates,
- high costs of dispute resolutions,
- inefficient collection processes.
If this has being resolved the company can build up a competitive advantage by:
- reduced receivables and DSO rates hence optimizing cash flows ultimately lead to better working capital management,
- help a company improve its debt-to-equity ratio,
- reduce its external financing needs and enhance its credit ratings,
- enhance customer relationship by higher customer satisfaction to the extent of increasing sales,
- freedom to focus on other business-building core capabilities,
- lower Order to Cash processing costs.
Order to Cash cycle is a comprehensive process which encompass broadly Order management, invoicing, collections/credit management, cash application and sometimes relating to posting and reporting.
Let’s us try to define the process flow in Order-To-Cash:
Order management: fulfillment of orders from customers, invoicing:the preparation and mailing of invoices, interfacing of billing status, and handling of customer inquiries.
Collections: the account analysis and reporting, outbound calls, collection letters, and coordination with other collection efforts, credit management: the management of credit applications, integration with credit reporting agencies, coordination of credit status, and generation of acceptance and denial letters.
Cash application: including receipt, reconciliation, and application of cash and credit card payments as well as charge-backs.
General Ledger posting and reporting: account review and analysis, write-off preparation, and reporting.
To simplify Order to Cash cycle, we can break it into 2 stages:
- order-to-invoice (also called revenue accounting in some industries) and
- invoice-to-cash. (The term “order-to-payment” is generally used to describe A/P processes.)
To the financial executive, it is indeed a big challenge as they needs to balance interdepartment boundaries and at the same remain highly sensitive to customer satisfaction metrics because many A/R processes directly touch customers and the revenue they deliver.
We should constantly review the organization’s order-to-cash cycle and compare its performance with industry benchmarks such as percentage of disputes, percentage of non recoverable disputes and days sales outstanding (DSO).
Appended below are some suggestions for the KPA & KPI of the Order to Cash Cycle.
| Key Performance Areas | Key Performance Indicators |
| Order to Invoice |
|
| Order management | · % of orders received electronically · % of customer calls taken on initial contact · number of order input error |
| Order fulfillment | · % of orders delivered to customers in full quantity at the specified time |
| Invoicing |
· % of invoices issued electronically |
| Invoice to Cash |
|
| Credit management | · Average credit approval cycle time · % of debt · Targeted DSO · % of targeted disputed debts · % of over dues debtors |
| Cash Collection |
· % of cash collected electronically |
- Cash Conversion Cycle Definition And Overview
- Topics Covered In This Heading:Cash Conversion Cycle(CCC)/Daily Working Capital(DWC)Cash Operating Cycle
- Credit Management:What is the KPA and KPI of a Credit Manager?
- How To Compute Cash Conversion Cycle & Example
- What is Cash Operating Cycle And Ways To Improve Cash Flows
- KPA/KPI: Identifying Your “Customer”
- Product Life Cycle Costing-Its Importance, Characteristics,Benefits and Stages
March 22, 2006
Tags: Cash Conversion Cycle, Order to cash cycle
Posted in: CREDIT MANAGEMENT/CONTROL, Cash conversion cycle, Finance Role/KPA/KPI, Financial Operations
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Topics Covered In This Heading:Cash Conversion Cycle(CCC)/Daily Working Capital(DWC)Cash Operating Cycle | FMAccounting - March 10, 2008
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