While Procure-to-Pay (P2P) is widely recognized as a key process in managing organizational spend, its counterpart on the revenue side, Order-to-Cash (O2C), often raises the questions: what’s the difference and how does it fit into the bigger picture? Procure-to-pay (P2P), the downstream part of the end-to-end supplier management and procurement process, focuses on the expenditure side of the business. Order-to-Cash (O2C) focuses more on the revenue side. But both are vital to cash flow and the financial health of a company. Automating both, and achieving frictionless integration with ERP systems, contributes to optimized operational efficiency. 

 What is Order-to-Cash?  

The order-to-cash (O2C) process involves receiving and fulfilling a buyer’s request for goods or services. An inefficient order-to-cash process delays order processing, fulfillment, shipping, invoicing, and cash flow. By contrast an efficient O2C process ensures a smooth logistical flow of operations, but more importantly, it serves as the foundation for customer satisfaction.  

A typical O2C cycle starts when a customer places an order and ends when the business is paid. In between, the cycle generally includes credit, invoicing, AR portfolio management, collections, and cash application. 

Order-to-Cash and Procure-to-Pay 

In many ways, O2C is the mirror image of P2P from a supplier’s perspective. For this reason, it’s a good idea for procurement professionals to understand who the stakeholders in O2C are, what their goals are, what technology they are using – and what keeps them awake at night! Historically, the buyer-vendor relationship was seen as adversarial. A zero-sum game in which one side was out to get the better of the other. But in a healthy buyer-vendor relationship, both parties are winners. Today, the relationship is collaborative, and it will become increasingly so as we move towards autonomous commerce. O2C and P2P should be the best of pals! 

There is a further similarity. In the past, procurement was regarded as a cost rather than a driver of value. Much the same can be said about O2C. Companies that have already recognized O2C’s strategic potential and made smart investments in cloud and automation technology, have more efficient order-to-cash processes than peers still reliant on older tools that are often focused more narrowly on accounts receivables (AR). O2C takes a more holistic approach to revenue generation, including the extension of credit. 

Who is Responsible for O2C?  

Ultimately the buck stops with the Chief Finance Officer. The CFO ensures business success by safeguarding cash flow, supplying financial and performance information to leadership, and ensuring compliance with applicable laws and regulations. The CFO also manages risk by guarding the business against the effects of mounting macroeconomic financial pressures from inflation to supply chain disruptions to wrestling with new international e-invoicing requirements. Data is key to staying on top of all this, so the CFO has an interest in closing the efficiency and knowledge gaps created by fragmentation in both the O2C and P2P cycles. Transparency into both ensures that relevant, timely and accurate information is used for providing strategic, financial and operational feedback to understand how a business is performing – also known as ‘record to report’ (RTR). A lack of transparency in RTR is the cause of sleepless nights for CFOs and their teams. 

Among the challenges faced by the Finance Team are the proliferation of customers’ accounts payable portals, delays in payment cycles and debtor management. Time-consuming manual processes and reliance on spreadsheets make their job much more complicated than it should be. These teams don’t have the time or resources to spend their days managing uncoupled remittances or calling customers to track the status of invoices or resolving issues such as late payments. 

Technology solutions can ease these challenges by transforming and accelerating the entire order-to-cash cycle.  

Keeping P2P and OTC in Lockstep 

Again, transparency is key. Buyers and suppliers negotiate terms and conditions, including payment terms. Of course, there is an advantage for a supplier to negotiate immediate payment, or ‘net zero’ as some finance departments call it. On the other hand, they may need to extend credit to get the business in the first place. Conversely there is a cash-flow advantage for buyers to delay payments to 14-day or 28-day terms, or to secure advantageous credit terms. However, what’s really important is that both parties have full transparency on the terms, and that these terms are then adhered to. This is vital to good relationships.  

In doing so, the supplier can free up extra working capital and deploy it in the company, for example to pay the company’s own suppliers (creditors) or to avoid interim financing. 

Supplier Management and Credit Management 

Just as supplier management is an important element of P2P, so too is credit management for O2C. Likewise, customer intelligence or ‘know your customer’ is the flip side of supplier intelligence. Credit managers work closely with customers. This may involve trying to find out why certain customers have trouble paying and trying to find a way around this. Perhaps by proposing different payment conditions or adjusting the payment period.  

Credit management is also about optimal communication between different departments within the supplier’s company. It starts with sales, among others, who must try to assess whether the potential customer is doing well as a company and whether they can pay. But it can also involve functions such as inventory management or ‘how much inventory must we hold in order to meet orders on time’? 

In recent years, the credit management process has moved up on the list of companies’ priorities. With effective credit management, the suppliers wants to get the accounts receivable balance as low as possible and ensure that important KPIs such as DSO (days sales outstanding, i.e., the average number of days that it takes for a company to collect payment after a sale has been made) are in good shape and remain that way. 

Larger companies have furthermore invested in O2C analytics. In credit management, a company incorporates all kinds of risks into the daily workflow. The challenge is to identify any risks in advance so that action can be taken in time. After all, a customer who does not pay is a waste of time, money and resources that could be put to better use. Therefore, suppliers regularly check the creditworthiness of customers, limit credit terms if necessary and set credit limits. These simple steps can significantly reduce risks to cash flow. 

Moreover, just as procurement professionals may use external data sources to assess supplier risk, suppliers may use references from other suppliers and data on historical payment behavior to assess creditor risk. With the appropriate software that integrates information from third-party agencies and credit insurers, a supplier can assess these risks very efficiently.  

The Importance and Benefits of Automation 

Automated O2C platforms can simplify transactions, unify payment ecosystems, and eliminate or reduce many of the error-prone manual tasks that eat up time in the finance department, for example by automatically sending payment reminders. They also give customers and staff a better experience. When manual tasks are reduced, teams have more time to service customers and pursue strategic initiatives with more flexible workflows tolerant to sudden change.  

As with P2P, frictionless integration with ERP systems and other business functions creates efficient workflows and greater operational efficiency. 

Finally, as is the case with P2P, new technologies such as artificial intelligence and blockchain are playing an increasingly important role in O2C. Blockchain could even be the key to unifying the two in an autonomous commerce environment. With blockchain, all data related to a transaction is stored in the blockchain, is visible to all parties, and cannot be changed. The underlying code of smart contracts is also anchored in the blockchain and cannot be changed unilaterally. All parties have agreed in advance what that code entails, so no disputes can arise. In short, no human intervention is necessary, and approvals follow at lightning speed according to the terms and conditions.