“Order to cash” is a broad term. It captures every process and activity from order receipt to fulfillment and payment collection – a virtual catch-all bucket that is notoriously tough to measure. Getting an accurate pulse on OTC in terms of effectiveness and efficiency is important – but how do you assess it with a single metric?
The short answer is, “You don’t.” While the idea of one magic number that tells you everything you need to know is alluring, it simply does not work when applied to OTC. Measuring and tracking a series of metrics is the better way. However, the mix of the ratios you choose must be customized for your company. Only then can you hope to obtain a meaningful and actionable analytical result.
If a blend of metrics is the goal, where's the best place to start? Here are a few to consider along with underlying processes.
1. Order Management
When it comes to measuring the efficiency of order management, you want to capture how well your investment in the process is working. If you can isolate the costs of sub-processes, you can also track their relative contributions to the company's bottom line.
Three key ratios to track for order management include:
- Total OTC process cost as a percentage of revenue (this can be calculated for order entry costs as well, if data is available);
- Total OTC process cost per OTC full-time-equivalent (or order entry); and,
- Number of days between product shipment or service delivery and billing.
2. Accounts Receivable
Accounts receivable is meant to be a pass-through account: the sooner you can get the cash in the door, the greater flexibility you have in terms of working capital.
The three ratios to consider here are:
- Total accounts receivable sub-process cost as a percentage of revenue;
- Average days unapplied cash; and,
- Percentage of errors in posting receipts.
3. Credit and Collections
Credit and collection ratios tell the other side of the AR story. How good are the company’s credit policies? What does the collection effort cost the company every month, and how does that metric trend over time?
Here are the metrics to track:
- Total credit and collections sub-process cost as a percentage of revenue;
- Bad-debt expense as a percentage of revenue;
- Average days of past-due accounts;
- Percentage of invoices paid within bill period (value and volume); and,
- Average number of days until an invoice is placed for collection/written off.
Order To Cash: Searching For A Silver Bullet
Now that you have a list of ratios to consider for your analysis, think about which ones make the cut for your company. In our experience, more numbers does not always equal more meaningful or effective analytics. While it may be tempting to track every possible metric, in reality that approach diffuses management attention. Choose the ratios that you are committed to tracking, and resist the temptation to bulk up the analytical reports to create volume.
Once you have selected your mix of important ratios, keep in mind that trends are more valuable and informative that any one number taken as a snapshot. Monitor the impact of changing your policies and procedures, and look for software that will make calculations and tracking easy.
Lastly, we recommend that you track the percentage of key controls that are automated across the OTC process. By minimizing the possibility of human error and deliberate wrongdoing, you can make your process more accurate and less susceptible to fraud. If the process of choosing the right ratio mix is daunting, give our team at YayPay a call – we can walk you through the options and help you create a customized set of analytics that are informing and actionable.