Before automation, businesses struggled with slow order fulfillment, backlogged invoices, and missed or inaccurate payments. These inefficiencies caused major cash flow delays for businesses and left customers frustrated — a lose-lose situation all around.
Now, with the help of Electronic Data Interchange (EDI), businesses can automate the entire order-to-cash (O2C) process. EDI makes transactions faster, more accurate, and smoother for customers by streamlining data exchanges, minimizing errors, and processing orders in real time — ensuring everything flows seamlessly from start to finish.
In this guide, we’ll explain what O2C is, its key stages, and how companies use EDI to improve how they receive payments.
Understanding O2C: What Is Order-to-Cash?
In short, the O2C process is how businesses turn customer orders into revenue — from when a customer places an order to when the business receives payment, completing the transaction. When executed effectively, O2C boosts cash flow, accelerates order fulfillment, and enhances customer experience.
8 Stages of the O2C Cycle
Here’s a closer look at how the O2C cycle works step by step:
Order Entry
The process begins when a company receives an order, whether via its website, email, or a sales rep. The system captures the order details, verifies them for accuracy, and enters them into the O2C workflow to initiate fulfillment.
Credit Management
Before processing an order, the company reviews the customer’s credit history, payment patterns, and financial stability. This helps mitigate risk by confirming the customer can meet payment terms and allows the company to set credit limits or take additional approval steps, such as requiring a cosigner or a deposit, if necessary.
Order Fulfillment
Once the customer’s credit is approved, the order moves into fulfillment. For physical products, inventory management is key to timely processing. If items are out of stock, the company generates a backorder and notifies the customer.
Order Shipping
After fulfillment, the company packs the order and ships it to the customer's designated delivery point. This involves generating shipping labels, coordinating with freight providers, and providing tracking updates to the customer.
Invoicing and Payment Processing
Here, the company captures transaction details such as product price, taxes, and payment terms. To make the process more convenient for customers and secure timely payments, companies often offer multiple payment options, such as credit cards, bank transfers, or digital wallets.
Cash Application and Reconciliation
Once payment is received, it’s applied to the outstanding invoice. The accounting team reconciles all payments with accounts receivable, taking care to document all transactions accurately.
Payment Collection
If a payment is overdue, the company reaches out to the customer with reminders, notifications, or offers to resolve the issue. If needed, a collections agency may assist the company in securing payment.
Reporting and Analysis
The O2C cycle concludes with a detailed analysis report. Using EDI software, the company evaluates the order-to-cash flow, identifies bottlenecks, and refines strategies to improve ROI and customer satisfaction in future transactions.
How EDI Fits Into the Order-to-Cash Process
In the O2C process, EDI automates transactions, orders, and payments, reducing manual work and improving accuracy. Without EDI, businesses would rely on manual data entry, slowing down transactions, increasing errors, and making workflows less efficient.
Here’s a closer look at how EDI benefits the O2C process:
Enhanced Efficiency and Faster Decision-Making
EDI provides real-time updates on transactions, inventory, and product movement, streamlining order processing, document exchanges, and deliveries. This enables businesses to act quickly and make decisions without delay. When a product goes out of stock, EDI helps businesses automatically update inventory systems and place new orders, preventing stockouts and ensuring smooth operations.
Increased Accuracy
By automating data exchange and adhering to industry standards, EDI minimizes the chance of human error, improving consistency across systems and partners. It automatically transfers invoice details with precision, reducing billing mistakes and improving the accuracy of financial records.
Improved Customer Satisfaction
EDI speeds up order processing and data exchange, allowing businesses to meet customer needs swiftly and accurately. Real-time updates help build customer trust. When customers can track their orders in real time, they experience a more predictable and positive delivery process, which strengthens the business relationship.
Greater Transaction Transparency
Unlike paper-based invoices, EDI invoices allow for real-time visibility into transactions, enabling businesses to make quicker decisions and address issues before they cause disruptions. When discrepancies are identified in an EDI invoice, they can be resolved immediately, preventing delays in payment or shipment and ensuring smooth business operations.
5 Common EDI Codes for O2C
In the O2C process, specific EDI transaction codes streamline the flow of information between buyers and suppliers. Here are five of the most common:
EDI 840 (Request for Quotation)
Buyers use this document to request product or service details from suppliers. It includes information on pricing, delivery terms, and product specifications, helping buyers make informed decisions before placing an order.
EDI 850 (Purchase Order)
The first step in placing an order, the EDI 850 contains essential order details such as product type, quantity, delivery date, and shipment method. It applies to both single and recurring orders, setting the foundation for the transaction between buyer and supplier.
EDI 856 (Advance Shipping Notice)
Suppliers send the EDI 856 to notify buyers about shipped orders. It includes shipment tracking details, such as expected delivery dates and cargo descriptions, helping retailers prepare for the arrival of goods and giving both parties visibility into the shipment status and product details.
EDI 810 (Invoice)
TheEDI 810 is an invoice the supplier sends in response to the purchase order. It contains details on the goods delivered, taxes, item descriptions, payment terms, and more. Its standardized format allows it to seamlessly integrate with most enterprise resource planning (ERP) systems, speeding up the payment process.
EDI 820 (Payment Order/Remittance Advice)
This document notifies the seller that payment has been made for goods delivered. It includes payment details such as the amount, transaction date, account number, and reference numbers, allowing suppliers to reconcile payments with outstanding invoices.
Transform Your O2C Process With EDI
Ready to level up your order-to-cash process? Discover how EDI speeds up transactions, reduces errors, and enhances customer satisfaction, making your operations smoother and more efficient.
Contact an EDI expert today to learn more about EDI-based O2C solutions.