How do you benchmark and compare your OTC cycle with industry standards?

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Order to cash (OTC) is the end-to-end process of receiving, fulfilling, and collecting payment for customer orders. It involves multiple steps, such as order management, invoicing, credit control, payment processing, and reconciliation. Optimizing your OTC cycle can improve your cash flow, customer satisfaction, and operational efficiency. But how do you know if your OTC cycle is performing well compared to your industry peers and best practices? In this article, we will show you how to benchmark and compare your OTC cycle with industry standards using four steps.

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Andriy Sichka, creditologist

founder and managing partner at Credit Engineering
Mohammed Yasir

Engagement Manager | Expertise-O2C, Order & Transition Management | Achieved ???? reduced UAC in 4 months | Delivered…
Mahammad Maner - Financial Operations Professional

Result Oriented Experienced Professional I MBA Finance I Financial Operations – OTC, AR, AP I Collection & Billing I…

1 Step 1: Define your OTC metrics

Defining key metrics to measure your OTC performance is the first step. These metrics can vary depending on the industry, business model, and customer segments, but some common ones include order to delivery (OTD) time, days sales outstanding (DSO), invoice accuracy, payment method mix, and dispute rate. OTD time is the average time between receiving an order and delivering it to the customer, while DSO is the average number of days it takes to collect payment from customers after invoicing. Invoice accuracy measures the percentage of invoices that are error-free and match the customer order and delivery. Payment method mix evaluates the distribution of payment methods used by customers, such as credit card, bank transfer, cash, etc. Lastly, dispute rate examines the percentage of invoices that are disputed by customers due to errors, discrepancies, or dissatisfaction.

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Andriy Sichka, creditologist

founder and managing partner at Credit Engineering
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'You only manage what you measure' is a kind of absolute truth. However, Credit/OTC function could not be simply copied from company and pasted to another. Actually the optimal trade credit function is always unique to a company. For example, two companies in the same market with similar products would require two extremely different OTC functions just because one of the is a market leader and another one is challenger. At the same time, the function should involve all recent developments in the trade credit, included but not limited to advanced credit structuring, proactive credit control and timely payment's assurance.

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Mahammad Maner - Financial Operations Professional

Result Oriented Experienced Professional I MBA Finance I Financial Operations – OTC, AR, AP I Collection & Billing I Reconciliation I Process Management & Stabilization I Transitions I MIS I PMO I
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*Describe the important metrics: Determine important KPIs first, such as the cash conversion cycle, collection efficiency ratio, and days sales outstanding (DSO). *Investigate Industry Standards: Learn what constitutes "good performance" in your industry by reading through industry publications, benchmarks, and peer comparisons. *Analyze the differences between your present performance and industry norms by doing a gap analysis. This step identifies areas in which there is room for improvement. *Ongoing Evaluation and Modification: OTC effectiveness is not a one-time solution. Keep an eye on your metrics, modify your plans in response to performance patterns.

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2 Step 2: Collect and analyze your OTC data

The next step is to collect and analyze your OTC data for a specific period, such as a month, a quarter, or a year. You can use various sources of data, such as your enterprise resource planning (ERP) system, your customer relationship management (CRM) system, your accounting software, or your OTC automation tools. You can also use surveys, interviews, or feedback forms to gather qualitative data from your customers and employees. The goal is to calculate your OTC metrics and identify the strengths and weaknesses of your OTC process.

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Andriy Sichka, creditologist

founder and managing partner at Credit Engineering
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Having necessary data in hand is extremely important. It would be great to have them for at least last 13 months and perform detailed internal portfolio analysis in a historical perspective and see existing trends together with potential areas for improvement.

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Mahammad Maner - Financial Operations Professional

Result Oriented Experienced Professional I MBA Finance I Financial Operations – OTC, AR, AP I Collection & Billing I Reconciliation I Process Management & Stabilization I Transitions I MIS I PMO I
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*Gather Your Data Squad! ?ERP, CRM, and accounting software—all your business systems can reveal valuable OTC insights. *Don't Forget the Human Touch! Surveys and feedback from customers and employees can highlight areas for improvement. *Time to Analyze! Crunch the numbers for a specific period (month, quarter, year) to calculate key OTC metrics. *Identify Your Superpowers & Kryptonite!♀? What parts of your OTC process excel? What areas need a boost? *Benchmark Away! Now you have the data to compare your OTC performance with industry standards and best practices.

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3 Step 3: Compare your OTC metrics with industry benchmarks

The third step is to compare your OTC metrics with industry benchmarks. Industry benchmarks are the average or best-in-class values of OTC metrics for similar businesses in your industry. You can find industry benchmarks from various sources, such as industry associations, research reports, consultants, or peer networks. Alternatively, you can use generic benchmarks, such as the cash conversion cycle (CCC), which measures the time between paying your suppliers and receiving payment from your customers. The lower the CCC, the better your OTC efficiency. You can compare your OTC metrics with industry benchmarks to see how you rank and where you can improve.

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Andriy Sichka, creditologist

founder and managing partner at Credit Engineering
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As mentioned above, credit function and O2C metrics for each company are very individual, so other companies metrics, although from the same industry, should be taken very carefully, especially on the strategic, functional level. At the same time some tactical approaches and best practices should be well noted and implemented.

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Mahammad Maner - Financial Operations Professional

Result Oriented Experienced Professional I MBA Finance I Financial Operations – OTC, AR, AP I Collection & Billing I Reconciliation I Process Management & Stabilization I Transitions I MIS I PMO I
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-Industry Benchmarks are your Best Friends - Think of them as guideposts on your OTC journey. They show you how similar businesses are performing and where you might be lagging. Find your crew! Industry associations, reports, and even peer networks can be goldmines for benchmarks. -Generic Benchmarks Work The Cash Conversion Cycle (CCC) is a great example. It tells you how quickly you turn cash into... well, more cash! A lower CCC means a smoother OTC flow. Compare & conquer! Now that you have benchmarks, see how your OTC metrics stack up. This will highlight areas that could use some love. It's all about improvement! Use these insights to streamline your OTC process and become a cash flow ninja!

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4 Step 4: Implement OTC improvement actions

The final step is to implement OTC improvement actions based on your benchmarking results. You should prioritize the areas that have the most impact on cash flow, customer satisfaction, and operational efficiency. Examples of OTC improvement actions include streamlining order management to reduce errors and delays, automating invoicing and payment processing to increase accuracy and speed, improving credit control and collection policies to reduce DSO and bad debts, offering flexible payment options to customers to increase payment method mix, and enhancing customer service and communication to reduce disputes and increase loyalty. By benchmarking your OTC cycle with industry standards, you can gain valuable insights into your OTC performance, optimize your cycle, and achieve better business outcomes.

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Andriy Sichka, creditologist

founder and managing partner at Credit Engineering
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'Try everything, keep those working' Jim Collins. The company's function should use only those tools that give results in the four business expectations: - minimum overdue - minimum bad debts - minimum lost sales - reasonable comprehensive credit cost

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Mahammad Maner - Financial Operations Professional

Result Oriented Experienced Professional I MBA Finance I Financial Operations – OTC, AR, AP I Collection & Billing I Reconciliation I Process Management & Stabilization I Transitions I MIS I PMO I
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Remember, benchmarking is awesome, but it's all about taking action. Here's the top 5 to consider: Streamline & slay errors: Let's ditch order mistakes and delays. Smooth workflows are key to happy customers and a happy cash flow. Automation is your friend: Invoicing and payments on autopilot? Yes, please! Freeing your team for higher-level stuff while boosting accuracy and speed. Tighter credit control: Smart collection policies mean less bad debt and a healthier DSO (Days Sales Outstanding). Win-win! Flexible payment options: Make it easy for customers to pay! Offer a mix of methods to boost that payment method mix and keep the cash flowing. Customer service magic: Stellar communication and support reduce disputes and build loyalty.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Mohammed Yasir

Engagement Manager | Expertise-O2C, Order & Transition Management | Achieved ???? reduced UAC in 4 months | Delivered ????% efficiency boost & ????% accuracy with RPA | Led team size of 260| Market Served-NAM, EMEA, APJ
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Benchmarking and comparing the Order-to-Cash (OTC) cycle with industry standards involves evaluating key performance indicators (KPIs) to assess efficiency and effectiveness. Start by identifying relevant metrics such as Days Sales Outstanding (DSO), collection effectiveness index, and order fulfillment time. Compare these metrics against industry benchmarks to gauge performance. Conduct a comprehensive analysis of each OTC phase, including order processing, invoicing, payment collection, and reconciliation. Evaluate technology utilization, automation levels, and employee productivity. Continuous improvement can then be implemented to align the OTC cycle with or surpass industry standards, optimizing cash flow and customer satisfaction.

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Andriy Sichka, creditologist

founder and managing partner at Credit Engineering
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In a very general terms O2C/Credit function should possess four main qualities: #1 commercial focus #2 compatibility #3 integrity/wholeness #4 pro-activity

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How do you benchmark and compare your OTC cycle with industry standards?

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1 Step 1: Define your OTC metrics

2 Step 2: Collect and analyze your OTC data

3 Step 3: Compare your OTC metrics with industry benchmarks

4 Step 4: Implement OTC improvement actions

5 Here’s what else to consider

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