The Invoice to Cash Process Flow

Want to know about the key financial business processes that make up Invoice to Cash? Lois Houston and Nikita Abraham, as well as Sr. Principal ERP Learning Strategist David Barnacle, are here to simplify this critical process flow for you.   In this episode, they go over the entire Invoice to Cash process flow, which includes everything from the moment the invoice is created to the moment when the customer's debt (payment) is settled and reconciled with the bank statement.   Oracle MyLearn: https://mylearn.oracle.com/ Oracle University Learning Community: https://education.oracle.com/ou-community LinkedIn: https://www.linkedin.com/showcase/oracle-university/ Twitter: https://twitter.com/Oracle_Edu   Special thanks to Arijit Ghosh, David Wright, Kris-Ann Nansen, Radhika Banka, Parvathy Narayan, and the OU Studio Team for helping us create this episode.   --------------------------------------------------------   Episode Transcript: 00:00 Welcome to the Oracle University Podcast, the first stop on your cloud journey. During this series of informative podcasts, we’ll bring you foundational training on the most popular Oracle technologies. Let’s get started. 00:26 Nikita: Hello and welcome to the Oracle University Podcast. I’m Nikita Abraham, Principal Technical Editor with Oracle University, and with me is Lois Houston, Director of Innovation Programs. Lois: Hello everyone! In our last episode, we spoke about Enterprise Resource Planning business processes, particularly those related to Oracle Fusion Cloud: Financials, with our Sr. Principal ERP Learning Strategist David “Barney” Barnacle. We discussed how there are five business processes within the Oracle Cloud Financials Business Process Model. Today, Barney joins us once again to take us through the first of those business processes, the Invoice to Cash process. Nikita: Welcome back, Barney! 1:08 Barney: Hi Niki. Hi Lois. Nikita: Barney, what does the Invoice to Cash business process cover? Barney: Invoice to Cash is a child process of a parent life cycle commonly known as Order to Cash. Order to Cash includes all the steps involved in fulfilling customer orders, from order entry to delivery to the final customer payment. 01:31 Barney: Order processing can take many forms depending on the industry, product, and customer. It can range from delivering standard items that are directly shipped from stock to complex items, configurations (or structures), which can be fulfilled from multiple sources i.e. make, buy, or transfer. It can include processes such as drop shipments and internal orders. Certain businesses may process orders based on subscriptions only, which may or may not include fulfilment of items. If you’re interested in learning more about these complex business subprocesses, I’d suggest visiting mylearn.oracle.com and looking for the business processes under Supply Chain Management (SCM), in particular Order Management Processing. 02:20 Barney: Here, in the business process for financials, we have simplified Order to Cash into two child subprocesses: Order to Shipment and Invoice to Cash. It is the second subprocess i.e. Invoice to Cash that uses financial products and covers customer billing (including the calculation of transaction tax), customer payments, also known as receipts, bank statements, reconciliation of receipts, and the ultimate creation of accounting entries for all transaction events in this billing process. 02:55 Lois: So, you’re saying Invoice to Cash is just one part of the Order to Cash process. Barney: That’s right, Lois. While the origin or source of a customer transaction can be multiple feeder systems (for example, Order Management, Projects, Subscription Management, and third-party or legacy billing systems), Invoice to Cash refers to an end-to-end process covering everything from the moment an invoice is created until the customer's debt is finally settled and reconciled with the bank statement. The real value for businesses lies in automating the process and getting insights and alerts from the Oracle Cloud applications to improve their overall profitability and cost savings. 03:38 Lois: Help me understand the flow of events, Barney. Because surely there are processes that occur before an invoice is raised, right? What are the processes covered in the larger Order to Cash cycle? Barney: You’re absolutely right, Lois. Let’s break it down further. Order to Cash is the parent business process. It starts in Order Management (with order capture and pricing) and ends in Cash Management (with the reconciliation of customer receipts). If we take a simple view of Order to Cash, we can use, as our example, ordering standard product items delivered directly to the customer from existing stock. We have two subprocesses here: Order to Shipment and Invoice to Cash. These processes use many different SaaS products. 04:25 Barney: The Order to Shipment subprocess starts with order capture by the order entry clerk, the salesperson, or directly input by the customer. The order captures essential attributes, such as items and quantities, required delivery dates, and financial contract terms, like payment terms, and so on. The pricing engine is called to create a sales price and then the global order promising check verifies supply of the items. Once the order is validated, submitted, and optionally approved, the order line passes on to order orchestration or fulfillment. 05:04 Barney: The order orchestration process drives scheduling and reservations. Then, within warehouses, the items are picked, packed, and shipped to the customer. Once the shipment is confirmed, the customer is invoiced based on contractual terms. Here, the second subprocess of Invoice to Cash takes over. The order orchestration process pushes the order attributes into the auto invoice interface tables. From there, the Billing Manager runs auto invoice to import customer invoices. This, in practice, will often be automated. The transactions will include the correct taxes as well as default accounts, and revenue will be recognized based on defined revenue recognition rules or events. 05:52 Nikita: Can I just interrupt, Barney? What do you mean by revenue recognition rules? Barney: Revenue recognition is an accounting principle that asserts that revenue must be recognized as it is earned. Let’s look at this simply. The revenue recognition principle is a key component of an accrual-basis accounting. This accounting method recognizes revenue once it is considered earned, unlike the alternative cash-basis accounting, which recognizes revenue at the time cash is received or anytime cash changes hands. In the case of cash-based accounting, the revenue recognition principle is not applicable. 06:34 Barney: Revenue is generally recognized after a critical event occurs, like the product being delivered to the customer. Revenue recognition standards can vary based on a company’s accounting method, geographical location, whether they are a public or private entity, and other factors. In essence, revenue recognition looks to answer when a business has earned its money. Typically, revenue is recognized after the performance obligations are considered fulfilled, and the currency amount is easily measurable to the company. A performance obligation is the promise to provide a distinct good or service to a customer. On the surface, it may seem simple, but a performance obligation being considered fulfilled can vary based on several factors. 07:19 Barney: Essentially, the revenue recognition principle means that companies’ revenues are recognized when the service or product is considered delivered to the customer — not when the cash is received. Determining what constitutes a transaction can require more time and analysis than one might expect. To accurately recognize revenue, companies must pay attention to the five steps outlined in the various accounting standards and ensure they are interpreting them correctly. 07:47 Barney: For revenue recognition within our simple process flow, we could use an account receivables invoice and accounting rule to defer revenue, or we could pass the information over to the Revenue Management product to follow the steps of the relevant accounting standards and only recognize earned revenue when a performance obligation has been satisfied. Nikita: OK, I get it now. Thanks for that, Barney. 08:10 Barney: Great. So, getting back to our financial process, the invoice or invoices are either printed or electronically sent to the customer. The payment terms attached to each transaction will determine when full payment is due and may include early settlement discounts. Monthly statements sent to the customers will highlight account balances and any late or overdue transactions. Customers will send their payments, manually or electronically, and the company may also create automatic receipts (commonly known as direct debits) to transfer funds from customer bank accounts to the company’s bank account on a regular monthly basis. 08:52 Barney: The receipt received will be applied to the open transactions (debit items such as invoices) and either clear or reduce the customer’s account balances. The cashier will then ensure these receipts have all been correctly accounted in the company’s bank account – a step called bank account reconciliation. The subledger accounting rules engine will ensure that at each transaction event (e.g., create invoices, adjust invoices, create receipts), the correct accounting is created and ultimately transferred to the general ledger as receivables journals. That means a full account record is created for each order line processed within the Order to Cash flow. 09:37 Barney: Finally, the Collections team monitors customer account balances on a regular basis and with various collection strategies and actions (such as sending dunning letters) aims to reduce Days Sales Outstanding and improve the company’s cash inflow. 09:53 Lois: Let me make sure I get this. We have the larger life cycle, the Order to Cash process, which connects the various pillars of Enterprise Resource Planning, or ERP, like Financials and Procurement. And within them, there are modules like Order Management, Receivables, Collections, Cash Management, and General Ledger. Barney: Exactly, Lois. Nikita: So, since the focus of this series is on Oracle Financials, we’d like to learn more about the processes under it. 10:19 Barney: OK, Niki. Oracle Cloud provides capabilities to streamline the Invoice to Cash business process, and Oracle Receivables Cloud is the cornerstone of the Invoice to Cash solution. This application helps you improve cash flow, increase efficiencies, and optimize customer relationships. It has user-friendly interfaces that you can leverage to efficiently manage the process. And you can proactively manage the entire customer billing cycle and process customer receipts. 10:51 Nikita: From what I understand, the Accounts Receivable Specialist seems to be an important role in the Order to Cash process. So, how does the Oracle application help Receivables Specialists work more efficiently? 11:02 Barney: Oracle Receivables has embedded business intelligence that offers summarized dashboards within the work areas, giving you or giving the receivables specialist an intuitive, simple, and modern user experience. Infolets highlight, in real-time, issues with the key processing steps, such as auto invoicing, receipt processing, etc., allowing receivables specialists to take effective action. Some of these errors can also be downloaded into a spreadsheet for efficient bulk correction of data. 11:40 Barney: Another interesting feature is social enterprise network, which can highlight issues within the receivables and collections team, leading to quicker adjustments or corrections of the customer account balances or transactions. There’s also Oracle Bill Management, which provides a self-service approach to reduce customer inquiries. You can set up Bill Management to enable the customer to directly complete various receivables processes for themselves, such as reviewing outstanding transactions and credit memos, monitoring disputes, and more importantly, making online payments. 12:22 The Oracle University Learning Community is a great place for you to collaborate and learn with experts, peers, and practitioners. Grow your skills, inspire innovation, and celebrate your successes. The more you participate, the more recognition you can earn. All of your activities, from liking a post to answering questions and sharing with others, will help you earn badges and ranks, and be recognized within the community. If you’re already an Oracle MyLearn user, go to MyLearn to join the community. You’ll need to log in first. If you’ve not yet accessed Oracle MyLearn, visit mylearn.oracle.com and create an account to get started. 13:01 Nikita: Welcome back. So Barney, you spoke about how Invoice to Cash has several tasks within it, like invoicing customers, collecting payments, and so on. How does all of this come together in terms of the Oracle Cloud Financials Business Model? Barney: Invoice to Cash is an integral financial process within organizations and is broadly divided in our model into four subprocesses: Customer Invoice to Receipt, Capture Transactions, Customer Statement to Collection, and Bank Transaction to Position. Let’s have a look at each of these in turn. 13:36 Barney: The Customer Invoice to Receipt subprocess includes several tasks. Everything from recording the invoice to be sent to customers for goods sold or services provided and addressing billing-related issues, if there are any, to recording customer receipts, making adjustments to outstanding amounts, posting receivables activities so that the Receivables subledger can be seamlessly closed, and finally using analysis and reporting tools to get deeper insights and drive better decision-making. 14:04 Lois: That’s a lot of details that are being captured. Barney: Yes, Lois. Every minute detail that affects the financial status of an organization can be captured, like the Capture Taxes subprocess. This is the process of applying required taxes based on legislative requirements. It’s based on the information entered within the invoice and invoice line level. This could be regarding customer ship to, bill to, product and tax classification codes, and so on. The system automatically applies the attributes and calculates the correct taxes at the invoice line level and then calculates the total taxes applicable to the whole invoice. 14:43 Barney: Then we have the Customer Statement to Collections subprocess, which includes sending statements to customers at periodic intervals, flagging delinquents, creating and assigning collection-related tasks to collection agents, recording and resolving disputes raised by customers, recording payments, and tracking and measuring KPIs to review the collection team’s performance. And finally, the Bank Transaction to Cash Position subprocess deals with matching bank statement lines to payments received from customers. Accountants working in the Treasury Department can prepare the expected cash positions, based on the expected receipts and payments to be made within the specific time period. 15:26 Lois: OK, so we’ve established that the application captures a lot of details. But we also need to be able to extract this data to assess the financial health of the organization, right? So, when it comes to receivables activities, what are the key performance indicators for an organization? Barney: Yes, you’re right there, Lois. KPIs are required to closely monitor and measure the performance of an organization. And to really optimize the Invoice to Cash process, the Receivables department in any organization will have certain KPIs they need to track. 16:01 Barney: Some critical ones we’ve already mentioned are Days Sales Outstanding or DSO, which measures the average number of days that a company takes to collect revenue after a sale has been made, Time to Settle, Percentage of Current Receivables, Average Invoice Age, % Disputed Invoices, Operational Cost Per Collection, Number of Delinquent Accounts, and Time to Reconcile. These are all important KPIs. All these KPIs are easily available in the Oracle application in a visual representation, like a graph or percentage, and can be viewed by management simply in a single dashboard. They can also be displayed in a user-designed format for greater efficiency. 16:49 Nikita: Thank you so much, Barney, for coming back to talk to us about the Invoice to Cash business process. Barney: No worries. Happy to be here. 16:56 Lois: We’re really looking forward to having you back next week to tell us about the next two business processes, Procure to Pay and Asset Acquisition to Retirement. And if you want to learn more about these ERP business processes and get certified, visit mylearn.oracle.com. Until next time, this is Lois Houston… Nikita: And Nikita Abraham, signing off! 17:18 That’s all for this episode of the Oracle University Podcast. If you enjoyed listening, please click Subscribe to get all the latest episodes. 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