What’s Order-to-Cash?
It’s incredible to see just how much a small team can accomplish at an e-commerce company. One person can grow a single product into a multi-million dollar company with little more than a Shopify store and a dream.
Many e-commerce businesses focus on keeping their businesses as lean as possible for as long as possible. The breaking point often comes when the sheer volume of transactions exceeds what the team can manage. As the business grows, a company needs to ensure that it’s wholly and accurately tying sales to payments - after all, sales are good, but cash in your bank account is better. This process is known as “Order-to-Cash” and is one of the most critical workflows at a successful e-commerce company.
What is Order-to-Cash?
Order-to-Cash (or OTC, or O2C) is the process of reconciling a single order from when a customer hits “checkout” to cash landing in the company’s bank account. This process touches nearly every aspect of a business, from sales and marketing to backend engineering, warehouse logistics and fulfillment, transportation and delivery, and accounting.
The journey of an order begins when the customer first places their order.
Order-to-Cash for Operations Teams
Fulfillment Push
When a customer places their order, the e-commerce platform logs that order in its data and begins transmitting the order to the company’s warehouse. Typically this process happens almost instantaneously so that no time is wasted in getting the order to the customer. Sometimes this functionality is native to the e-commerce platform (as is the case with Shopify); sometimes, the company uses an order management system (OMS) to add more complicated logic to the fulfillment process (e.g., maybe they need to route the order to the correct warehouse based on not just where the customer lives, but what items are in the order, and what items are in stock at the warehouse).
Shipping
Once the company’s warehouse receives the order, they will push it into their warehouse management system (WMS) and dispatch it to the actual warehouse teams. The team will then “pick” the units in the order from the right locations within the warehouse, “pack” them into a box, and “ship” them out the door.
Delivery
Once the order is shipped, it lands on a truck bound for the shipping carrier’s sortation center. Those trucks typically depart at the end of the day after the carrier’s “cutoff” time before going through the all-night sortation process and eventually being routed to the carrier’s warehouse closest to the customer’s address. From there, the carrier will attempt delivery to the customer.
Order-to-Cash for Accounting Teams
Payment Authorization
When the customer first clicks checkout, the company’s e-commerce platform typically “authorizes” payment. During authorization, they check that the payment method is valid and has enough funds available to complete the transaction. If everything goes smoothly, the authorization will place a hold on the customer’s payment method.
Payment Capture
Payment capture is the process of actually completing the payment with the customer. For many stores, this happens immediately after the payment is authorized. Sometimes, payment is only captured once the order actually ships. When this happens, customers may see a “pending” charge on their account.
Payout
Payout is the last step in the payment process. Payouts typically occur on a regular cadence (e.g., weekly) and aggregate all payments through the payment provider into one transaction that goes into the company’s bank account. The payout process significantly reduces the number of transactions the company has to manage - instead of seeing one bank transaction for every order, they’ll see just one per payout. The downside is that the payout complicates the Order-to-Cash process for a single order - one payout can include thousands of payments, and the payout can consist of other fees and charges that don’t tie to a single order.
Why is the Order-to-Cash Process Hard to Manage?
The process itself seems simple:
Customer places the order
E-commerce platform authorizes payment
E-commerce platform pushes the order to the warehouse
Warehouse fulfills and ships the order
E-commerce platform captures payment
Carrier delivers the order
Payment provider pays out the order
But as any e-commerce professional will tell you, the Order-to-Cash process is rarely straightforward. Let’s break down how things can go wrong in each step.
Order Placement
Order placement should be the easiest part of the Order-to-Cash process, but that doesn’t mean it’s perfect. Occasionally, issues with the customer’s browser or the e-commerce platform’s backend can mean a customer clicks checkout, but the order never actually goes through. Robust e-commerce platforms like Shopify have all but eliminated these types of issues, but they still pop up occasionally.
Payment Authorization
If the customer enters their card number incorrectly, their account is frozen, or they are over their credit limit, the authorization will fail. Platforms like Shopify typically ensure that payment authorization happens as part of order creation, but in other tools, it’s sometimes possible to place an order without first verifying payment information.
These issues are often caught during the Order-to-Cash process after the fact, when an order may have been shipped with no payment associated with it.
Order Push
The order push process is often a struggle for companies as they grow and decide to bring on a third-party logistics provider (3PL). 3PLs typically have strict rules on how order data should be sent to them, which can lead to errors if the data isn’t formatted correctly.
A common issue is mismatched SKU details (e.g., maybe the Shopify store calls the SKU “blue-xl-sweatshirt,” but the warehouse has the SKU stored as “blue_xl_sweatshirt”), which often arise when the 3PL maintains a different item dataset than the company. Orders can also fail to be pushed if the warehouse does not have enough inventory to fulfill the order.
Order Fulfillment
Once the order is pushed to the warehouse, the potential issues become more operational. A warehouse associate could pick the wrong item or miss an item altogether. During the pack process, an entire order could be sent to the wrong customer if the warehouse associate applies the wrong shipping label (this sort of issue is especially bad when the order contains a customized gift message).
Most warehouses have quality control checks in place to catch these types of issues in real-time, but it’s always possible for defects to slip through.
When things go wrong, it’s essential to ensure that your Order-to-Cash process accounts for these sorts of issues so that customers get what they paid for and any potential misships are reconciled.
Order Shipping
The shipping process can also have operations issues, such as missorts (e.g., when a UPS package accidentally makes its way onto the USPS truck) and lost shipments. When shipping issues are flagged during the Order-to-Cash process, Operations teams must know where the problem lies - is it on the warehouse or the carrier? This is typically a gray area of responsibility, where the warehouse will claim that they loaded an order onto the right truck, but the carrier will claim that they never received it.
Payment Capture
For e-commerce platforms that wait to capture the payment until the order has shipped, a payment can fail even after authorization. This can happen when the time between authorization and capture is long enough that the customer’s card has since hit its credit limit or the customer has had to cancel the card due to fraud.
Payment capture is another place where the Order-to-Cash process can help companies flag orders that may have been shipped without ever receiving payment.
Delivery
Delivery is the last operational leg of the order journey. As anyone who’s bought something online can attest, carrier delivery issues will always find a way to pop up. Wrong addresses, “Customer not home,” or orders that were “delivered” and then stolen from the customer’s doorway can all lead to hiccups in Order-to-Cash, with the need for replacement orders or refunds slowing down the reconciliation process.
Payout
Payouts are typically straightforward, but Accounting teams need to reconcile them to the payments they represent. Payouts can contain additional refund costs, transaction fees, or disputes that change the amount that lands in the company’s bank account.
How Can Companies Improve Their Order-to-Cash Process?
Better Process
Like any process, Order-to-Cash benefits from clearly understanding precisely what should happen with each transaction. Creating a process map or SOP is a great way to improve your Order-to-Cash reconciliation process and save time when you do find issues.
Better Data
All of the issues mentioned here occur in systems that generate massive amounts of data (for a single order, you might capture ten-plus data points across multiple sources). To run an efficient Order-to-Cash process, it’s essential to format your data to allow your teams to reference an order across all these systems, no matter what piece of the flow you’re looking at. This can involve both data engineering and better reporting and relies on having a solid understanding across Accounting and Operations teams of what each transaction represents.
Better Tools
At Turbine, we’re building financial technology for companies with physical inventory to better serve both Accounting and Operations teams with cross-functional workflows like Order-to-Cash. We believe these problems deserve a product that benefits everyone - not just one set of users.
If your Order-to-Cash process feels like it’s a never-ending journey, we’d love to chat. Sign up for our waitlist or drop us a note at hello@helloturbine.com, and take a step towards making Order-to-Cash truly simple.
