Order-to-cash explained

Order-to-cash is the process from a received order to the money in your bank account: recording the order, checking it, delivering or carrying out the work, invoicing, collecting and processing the payment. It is the operational heart of every trading, manufacturing or service company and is usually well organised in an ERP. The revenue lost here disappears mainly in one place: between what was delivered and what is invoiced.

How does order-to-cash relate to the other chains?

Order-to-cash is the middle and most concrete of the to-cash processes. Quote-to-cash starts earlier, at the quote, and is mainly about price and discount. Contract-to-cash is about recurring billing throughout the term of a contract. Order-to-cash revolves around the transaction: something is ordered, delivered, invoiced and paid.

For wholesalers, manufacturers, installation companies and many service providers, this is the process that carries the largest volume. Precisely because of that volume, small errors vanish in the total.

What are the steps of order-to-cash?

1. Receiving and recording the order

The order comes in through a web shop, EDI, email, phone or from a signed quote. It is recorded in the ERP: customer, items, quantities, prices, delivery date, delivery address. With manual entry, typing errors and wrong item numbers arise here. With automatic entry, errors from the source are carried over unnoticed.

2. Checking the order

Does the price match this customer's price agreement? Is the customer creditworthy? Is the item available? Many ERPs check the credit limit and stock automatically. The price is more often left to the person entering the order, who can overwrite it manually with a different price.

3. Delivering or carrying out the work

The product is picked, packed and shipped, or the service is carried out. A delivery note, job sheet or timesheet is created. Partial deliveries, substitute items and extra work on site make this messier than it looks.

4. Invoicing

Invoicing is based on the delivery. In a well-configured ERP this happens automatically once the delivery is confirmed. The risks are in the exceptions: the delivery is not confirmed, so no invoice goes out. The order line was changed by hand. Something extra was delivered that was not on the order.

5. Collecting

The invoice is sent, the payment term runs, reminders go out. Outstanding items are monitored. In most companies this step is visible and well organised.

6. Processing and matching the payment

The payment is matched to the invoice. Differences are investigated: a customer who pays less because of a complaint, an early payment discount that was never agreed, a double payment. Small differences are sometimes written off without anyone looking at why.

Where does order-to-cash leak?

Delivered, not invoiced. The most common and most expensive form. Causes: delivery notes that do not come back, job sheets left in a pile, partial deliveries of which only the first part is invoiced, urgent deliveries handled outside the system. See how to find forgotten invoices.

Invoiced at the wrong price. The order had the right price, but the invoice takes the item price from the ERP. Or the other way round: the item price was increased, but the customer-specific price was not. Or someone typed in an old price by hand when entering the order.

Extra delivered, not on the order. An engineer uses extra material, a driver delivers an extra pallet, the customer asks on the spot for an extra service. If that does not make it onto the job sheet or the order, it is free.

Costs that should have been passed on. Shipping costs, rush surcharges, small-order surcharges, packing costs. They are in the terms and conditions, but are not applied to many orders.

Differences written off. A customer pays EUR 180 less than invoiced. Someone writes it off as a payment difference. If that happens often, with the same customers, it is not a difference but a pattern.

Credit notes without root-cause analysis. Every credit note has a reason: wrong delivery, damage, pricing error. If nobody collects the reasons, the same errors keep coming back.

Order-to-cash for services and projects

At a wholesaler an order is a list of items. At a service provider or installation company an order is often an assignment, and delivery consists of hours, materials and extra work. That makes the comparison between delivered and invoiced harder, because delivery does not come from a warehouse system but from job sheets, timesheets and project administration.

Three differences to take into account. First, invoicing often happens in instalments, not per delivery: you then have to check whether the sum of the instalments plus extra work matches what was actually done. Second, there is a time gap between doing the work and recording it: an engineer who fills in the job sheet on Friday has forgotten half of it by Monday. Third, the line between the original scope and extra work is often vague, and that vagueness almost always works out in the customer's favour.

A useful check is to set the hours and materials booked per project against the quoted budget and the amounts invoiced. Projects where booked hours are well above budget without an invoice for extra work deserve a question to the project manager.

Who owns order-to-cash?

Order-to-cash touches sales support, logistics or delivery, and finance. The handover from delivery to invoicing is the seam that leaks most often. Make one person responsible for the delivered-but-not-invoiced list, with the agreement that the list is cleared every week. Without an owner it grows quietly. Why these seams leak is set out in why silos cause revenue leakage.

How do you check order-to-cash?

Checking order-to-cash is a line-level comparison between three lists: what was ordered, what was delivered and what was invoiced.

1. Orders against deliveries. Which orders have not been delivered in full after the promised delivery date? That is not a leak, but often a customer who is becoming dissatisfied.
2. Deliveries against invoices. Which delivered lines have still not been invoiced after a fixed period, for example five working days? This is the most important check.
3. Invoiced price against price agreement. Per line: does the invoiced price match the customer-specific price or the current list price?
4. Surcharges. On which orders should a surcharge have applied under the terms and conditions that was not invoiced?
5. Credit notes and write-offs. Group them by reason and by customer. Where does the same thing keep coming back?

The article how to check sales orders against invoices works through the second and third checks in detail.

Worked example

Worked example: suppose a technical wholesaler processes 25,000 order lines a year with an average line value of EUR 320. A comparison of deliveries with invoices over the past twelve months shows that 0.5 percent of delivered lines were never invoiced, mainly urgent deliveries that were handled by hand.

That is 125 lines of EUR 320, so EUR 40,000. On top of that, it turns out that the EUR 15 small-order surcharge in the terms and conditions was not applied to 2,000 orders below the threshold: another EUR 30,000. Together EUR 70,000 a year, in a process everyone considered "well organised". The percentage in this example was chosen for the calculation, not as an average: at one wholesaler it is much lower, at another higher.

Checklist

• Is every delivery invoiced automatically, or does it depend on a manual confirmation?
• Is there a list of delivered but uninvoiced lines, and does someone look at it every week?
• Can staff overwrite a price by hand when entering an order, and is that recorded?
• Are surcharges from the terms and conditions applied automatically?
• Are engineers' job sheets processed digitally and in full?
• Are credit notes and write-offs tracked by reason and discussed periodically?

Order-to-cash is one of the chains that come together in a single source of truth for revenue: the question of whether what you deliver is also what you invoice.

Frequently asked questions

Isn't order-to-cash fully handled in my ERP?

The process is, the exceptions are not. An ERP, whether SAP, NetSuite, Dynamics or Exact, invoices what has been confirmed as delivered, at the price on the order. It does not flag that a delivery was never confirmed, or that the price on the order differs from the agreement.

What is the most important check in order-to-cash?

Delivered against invoiced, at line level. That is where the most direct damage sits: the work has been done, the costs have been incurred and the revenue does not come in.

How quickly should a delivery be invoiced?

As quickly as your process allows, preferably within a few working days. The longer a delivery stays uninvoiced, the smaller the chance it will still happen, and the harder the conversation with the customer.

How does this differ from order-to-cash in accounting?

In accounting, order-to-cash ends with matching the payment. For revenue control it goes further back: does the chain actually start with a complete order, and has everything that was delivered also made it onto the order?