O2C cycle

 ORDER TO CASH (O2C) CYCLE – COMPLETE EXPLANATION

The Order to Cash (O2C) cycle is an end-to-end process that starts when a customer places an order and ends when the company receives payment and records it in accounts. It directly impacts revenue, cash flow, and customer satisfaction.

🔹 Steps in O2C Cycle:

1. ORDER MANAGEMENT

- Customer places order for goods/services.

- Order details recorded: product, quantity, price, delivery date, customer data.

2. CREDIT MANAGEMENT

- Customer’s credit history checked before approval.

- Reduces risk of bad debts.

3. ORDER PROCESSING / FULFILMENT

- Approved order is picked, packed, and shipped from warehouse.

- For services, schedule and delivery is confirmed.

4. SHIPPING & LOGISTICS

- Goods dispatched with delivery note and tracking details.

- Proof of delivery recorded.

5. BILLING / INVOICING

- Invoice sent to customer with product, price, taxes, due date, payment terms.

- Accuracy in invoicing avoids disputes.

6. ACCOUNTS RECEIVABLE (AR) RECORDING

- Invoice entered in AR system.

- Outstanding balance tracked through AR aging report.

7. PAYMENT COLLECTION

- Customer pays as per agreed terms (e.g., 30 days credit).

- Modes: bank transfer, cheque, online, card.

- Collection team monitors and follows up for overdue payments.

8. PAYMENT APPLICATION

- Payment matched and applied to correct invoice.

- Adjustments made for discounts, short payments, or returns.

- Ensures accurate AR balance.

9. DEDUCTIONS & DISPUTE MANAGEMENT

- Customers may raise disputes (wrong quantity, damaged goods, wrong price).

- Issues investigated, resolved, and credit notes issued if needed.

10. REPORTING & RECONCILIATION

- Finance prepares reports on collections, outstanding AR, bad debts, and cash flow.

- AR reconciled with General Ledger.

- DSO (Days Sales Outstanding) reviewed for efficiency.

🔹 IMPORTANCE OF O2C CYCLE

- Ensures continuous cash inflow for business operations.

- Improves customer satisfaction via timely delivery and accurate billing.

- Helps reduce credit risk and bad debts.

- Provides management clear visibility on revenue and working capital.

 IN SHORT:

The O2C cycle starts with order received ➝ credit check ➝ order fulfilment ➝ shipping ➝ invoicing ➝ AR recording ➝ payment collection ➝ payment application ➝ dispute handling ➝ reporting & reconciliation. A smooth O2C process means faster cash flow, fewer disputes, satisfied customers, and healthy financial performance.