Reviewing and correcting incoming orders is essential to avoid creating costly Accounts Receivable issues. On the plus side, promptly processing orders and avoiding unnecessary credit holds raises customer satisfaction. Fulfilling a customer’s order according to customer expectations of quality and timeliness of delivery, then invoicing it promptly and accurately is critical to unimpeded cash flow and minimizing bad debt and collection costs.
Problems in the order-to-cash process start when customer orders get passed along without a comprehensive order review. These problems include slow payments, partial payments, a dissatisfied customer as well as extra costs should the order need to be reworked, a return processed, credit issued, or re-invoiced. In other words, a costly fire drill. The long term effect involves driving customers to the competition and lower volumes of sales to those accounts that remain.
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What Not to Do . . .
A medical device company had no formal review of orders. They accepted orders phoned in by their sales force “on behalf” of its physician customers. The underlying belief was that their medical practice customers knew what they wanted and posed little risk. The result was a real disaster.
Customers refused and/or returned shipments stating they never ordered the products. Sub-optimal pricing was rampant. Payment terms were frequently extended or never mentioned. The company suffered from swollen AR, the high cost of returns, and excessive price discounts.
Clearly, an illustration of “what not to do.”
The Order Approval Process & Best Practices
There are a number of best practices that go a long way towards preventing downstream problems in the order-to-cash process. They are outlined below as they relate to the three primary steps in approving an order.
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1. Confirm that order details are within acceptable parameters:
Can you physically fulfill this order and satisfy the customer? Or, are there provisions or specifications you cannot meet? Are the commercial terms and conditions acceptable? If you cannot meet your customer’s expectations, you need to address the potential discrepancies before approving the order. Here’s a list of issues to check:
The unit price, quantity, and total price — Clearly stated including all volume discounts
Applicable sales or use tax
Freight/delivery — Actual vs. allowance — Who pays freight?
Payment terms — When is payment due? Is their an early payment discount?
Issuance of the invoice — Upon shipment, at the start or completion of a project, or upon reaching a milestone?
If the discrepancies with the customer’s Purchase Order (PO) are significant, seek an Amended PO from the customer. For example, if your quote states payment terms of Net 30 days, and the customer PO stipulates Net 60 days, unless you secure an amended PO, you will be paid in 60 (or more) days. If the discrepancies are minor, you may want to accept the order, while issuing an order acknowledgement that addresses the discrepancies (see #3 below). The discrepancies that will cause the most damage vary by business, but generally they are:
Performance standards related to the product/service and warranty
Unit pricing and volume discounts
Payment terms
Packaging and delivery requirements
Once an amended PO is secured, reviewed and found acceptable, you can proceed to the next step of order fulfillment.
2. Check the Credit of the Customer:
If and when the customer’s credit rating and receivable status is acceptable, only then should you proceed with processing the order. For a more extensive discussion of credit evaluations, go here.
If the customer’s credit rating is such that you require payment in advance, secure the payment and ensure it “clears” your bank before fulfilling the order. In the past, this meant waiting for a check, which could always be sent by overnight courier or in the US via an ACH transfer — again taking two or three days before payment will hit your bank. Today, RTP (Real Time Payments) provide same day account-to-account transfers for customers of participating banks, as will the Federal Reserve Banks’ Fednow service, which is set to go live by July 2023.
Readers of Your Virtual Credit Manager can now access sharply discounted business credit reports from D&B, Experian, or Equifax through our partner accredit.
Should the customer pose a moderate amount of risk, is there a way to mitigate that risk? This is where a personal or other guaranty, filing a security statement under the UCC (Uniform Commercial Code), getting a standby Letter of Credit, or purchasing credit insurance can bring the risk within acceptable parameters. If you are selling goods that are easily identified and won’t be co-mingled with other inventory, you may also be able to enter into a consignment agreement so you retain ownership until the goods are actually sold by your customer.
Is the customer’s receivable balance substantially in excess of the credit limit? Or, are they significantly past due? If so, inform the customer that their order will be held until they make (or, if you trust them, promise to make) a payment that will bring them in line with your standards.
3. Send an Order Confirmation to the Customer:
Acknowledging receipt of the customer’s order and advising them of the probable ship/service fulfillment date is a very important step. Your order acknowledgement document should include a caveat stating that fulfillment is subject to change based on the customer’s credit status (which may change between the order approval and fulfillment date) and unforeseen events (acts of God, natural disasters, etc – an attorney can help with this wording).
However, do not expect your order confirmation to override your customer’s Purchase Order (PO). If there are elements of the customer’s PO to which you object, you must secure an amended PO.
Your Virtual Credit Manager offers expert advice regarding Order-to-Cash best practices and the selection of services and solutions for improving AR performance.
The Bottom Line
When you get the order right and then get the invoice right you will incur very few collection problems and thereby eliminate most of the costs associated with resolving disputes and discrepancies. Upwards or 80 to 90 percent of all discrepancies are self-inflicted. In other words, collection issues are usually caused by the supplier, not the buyer.
A little extra attention when processing orders goes a long way to controlling costs and promoting customer experience. When you make it easy for customers to do business with you by fulfilling their orders expeditiously and correctly, and then giving them a clean invoice, you will both improve cash flow and reduce the need for past due collection efforts. Make mistakes with the order and the credit approval, and you are also making extra work for yourself.