What is an Order to Cash (O2C) Process?
The Order to Cash (O2C) process refers to the series of steps a business takes to process customer orders, deliver products or services, and receive payment for those orders. It is the entire lifecycle of a customer order, starting from order creation and ending with the collection of payment.
Let’s understand this with an example of company XYZ, which receives an inquiry from a customer, regarding an Item. After providing a quotation, customer places a sales order specifying requirements of the item. The warehouse team then picks the item from inventory, and items are issued. Following this, the finance department generates an invoice against which customer pays according to the terms, completing the O2C cycle.
Detailed breakdown of the O2C Process
Inquiry
The inquiry serves as the starting point for the O2C process.
An Inquiry refers to the initial communication from a potential customer expressing interest in a product or service offered by a company. It typically involves the customer seeking information about pricing, availability, specifications, or other details related to the product or service.
No Accounting Impact
Quotation
A quotation is a formal document issued by the seller to the potential buyer in response to an inquiry. It serves as a formal proposal outlining the terms of the proposed transaction, allowing the customer to review and consider their purchase decision.
The quotation provides detailed information about the products or services requested by the customer, including their descriptions, quantities, prices, terms and conditions, delivery options, and any applicable taxes or discounts. The quotation is typically prepared based on the customer's specific requirements as outlined in the inquiry.
No Accounting Impact
Sales Order
A Sales Order is a document that initiates and manages a sales transaction between a seller and a buyer.
It includes detailed customer information, specific order details such as product descriptions, quantities, and prices, and terms and conditions of the sale. It provides a reference point for customer service, handling inquiries, and managing returns.
No Accounting Impact
Goods Issue
A Goods Issue refers to the point at which products are physically removed from the seller's inventory and shipped to the customer, signifying the transition from order fulfillment to delivery.
It reduces the seller's inventory levels and triggers the accounting processes necessary for revenue recognition. The Goods Issue involves several activities, including picking and packing the ordered items, updating inventory records, and generating shipping documentation.
Accounting entry made when item from inventory is issued to fulfill a sales order: This typically involves a decrease in inventory and the recognition of cost associated with the inventory being issued.
Cost of Goods Sold A/c Dr
Inventory A/c Cr.
Customer Invoice
A Customer Invoice is a critical document issued by the seller to the buyer after goods or services have been delivered.
This invoice specifies the amount due for the purchased items, including detailed information such as the product descriptions, quantities, prices, any applicable discounts, taxes, and the total amount owed. It also outlines the payment terms, such as the due date and accepted payment methods.
Accounting entry made when customer is billed: The Account Receivable (Asset) is increased, it means the company expects to receive payment from the customer in the future and crediting revenue reflects that the company has earned this income from sale of goods or service.
Customer A/c Dr.
Revenue A/c Cr.
Customer Payment
In this stage the seller receives payment from the customer for goods or services delivered.
This step occurs after the order has been processed, the goods or services have been delivered, and an invoice has been issued. This step not only completes the transaction cycle but also provides valuable data for financial reporting and analysis, helping businesses monitor their revenue streams and manage outstanding receivables efficiently.
Accounting entry made when Customer Payment is received: Here Increase in Bank account, when a payment is received the company's bank balance increases and crediting Customer account reduces the asset, reflecting that the customer has settled their obligation.
Bank A/c Dr.
Customer A/c Cr.
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Please correct the heading 'Detailed breakdown of the P2P Process' with 'Detailed breakdown of the O2C Process'. The step-by-step explanation is really easy to understand. Thank you