Order to Cash (OTC) is the revenue cycle of a business. It starts when a customer places an order and ends when you collect their payment and match it to the right invoice. When OTC runs well, cash comes in faster, DSO goes down and customers are happier. This lesson is a complete F&A process guide to OTC.
What you will learn
- The six stages of the OTC cycle
- How a sales order becomes an invoice, including e-invoicing in India
- How credit management protects you from bad debts
- How the dunning process collects overdue payments
- How cash application and AR reconciliation close the cycle
Note: Tax rules change often. Check the latest notification on incometaxindia.gov.in or gst.gov.in before you file.
Start: the OTC cycle at a glance
Think of OTC as six stages that follow one after another.
- Customer order received, then a credit check.
- Order confirmed, then goods or service delivered.
- Invoice raised, then sent to the customer.
- Payment due, then collections and follow up.
- Payment received, then cash application.
- AR reconciliation, then period close.
AR means accounts receivable, the money customers owe you.
Sales order to invoice
This is where the order turns into a bill. Each document has a job.
- Sales Order (SO): the customer’s confirmed purchase. It includes items, quantity, price, delivery date and payment terms.
- Delivery Note: an internal document that allows the goods to be sent out from the warehouse.
- Invoice: issued on delivery. It must include the GSTIN, HSN code, GST amount, PO reference and bank details.
- E-Invoice: mandatory in India for B2B supplies by businesses above ₹5 crore turnover. It is generated through the IRP portal and carries an IRN and a QR code.
- Revenue recognition: under Ind AS 115, recognise revenue only when the performance obligation is satisfied, not just when the invoice is raised. In simple words, you book the sale when you have actually delivered what you promised.
- In SAP: VA01 (Create SO), then VL01N (Delivery), then VF01 (Invoice).
Remember: Raising an invoice does not by itself mean you have earned the revenue. Under Ind AS 115, the performance obligation must be satisfied first.
Credit management and risk
Before you sell on credit, you need to know how much risk each customer carries. Credit management decides who can buy on credit, and how much.
- Credit limit: the maximum unpaid balance allowed for each customer. It is set based on their financial health, payment history and industry risk.
- Credit score: use CIBIL/CRIF data along with an internal scoring model (payment behaviour, order size, how long they have been a customer).
- Credit hold: automatically block new orders if a customer goes over their credit limit or has invoices more than 60 days overdue.
- Credit insurance: insure the money owed by large or risky customers. ECGC covers export receivables.
- Bad debt provision: Ind AS 109 requires Expected Credit Loss (ECL) provisioning, based on aging and the probability of default.
Collections and dunning process
Dunning means sending payment reminders that get firmer step by step as an invoice gets older. It is usually automated.
| Dunning level | When | What you do |
|---|---|---|
| Level 1 | Day 1 overdue | A friendly reminder email with a copy of the invoice |
| Level 2 | Day 15 | A firm reminder, asking when the payment will come |
| Level 3 | Day 30 | A phone call and a formal notice, escalated to senior management |
| Level 4 | Day 60+ | A legal notice, referred to a collections agency or legal proceedings started |
Collections dashboard: track how each collector is doing, such as calls made, promises to pay received and amounts collected.
Tip: Always attach a copy of the invoice to the first reminder. Many late payments happen simply because the customer cannot find the bill.
Cash application and receipts
When money arrives in the bank, you must decide which invoices it pays. This is called cash application.
- Cash application: matching incoming payments (bank receipts) to specific open invoices in the AR ledger.
- Remittance advice: a document the customer sends showing which invoices they are paying. Use it to allocate the payment.
- Unapplied cash: a payment received but not matched to any invoice. Investigate it within 5 business days.
- Deductions and short payments: the customer takes off discounts or penalties, or holds back money for a dispute. Each one must be approved or recovered.
- Automation: AI based cash application tools (HighRadius, YayPay) can auto match more than 90% of receipts.
Common mistake: Leaving unapplied cash sitting in the ledger. The customer still looks overdue and may get dunning reminders for money they have already paid.
End: AR reconciliation and aging
The last stage checks that everything in AR is correct before the period closes.
- AR aging report: lists all open invoices by age: 0 to 30, 31 to 60, 61 to 90, and 90+ days.
- Days Sales Outstanding (DSO):
DSO = (AR ÷ Revenue) × 365. The industry benchmark is 30 to 45 days. DSO tells you how many days, on average, customers take to pay. - Customer reconciliation: match your AR ledger to the customer’s AP ledger, and resolve disputes before month-end.
- Write-off policy: set the threshold and approval levels for writing off debts that cannot be recovered.
- GSTR-1 reconciliation: all B2B invoices in AR must match your GSTR-1 filings. This is critical for GST compliance.
For example, if your AR is ₹15 Cr and your yearly revenue is ₹100 Cr, DSO is (15 ÷ 100) × 365, which is about 55 days. That is above the 30 to 45 day benchmark.
Consultant’s tip
Every day you cut from DSO frees up a lot of working capital. If your revenue is ₹100 Cr and DSO drops from 60 to 45 days, you free up ₹4.1 Cr in cash. Focus on e-invoicing compliance, automate dunning, and set strict credit limits. OTC is where Finance meets Revenue, so own it.
Quick recap
- OTC runs from customer order to cash collected, in six stages.
- The sales order, delivery note and invoice move the sale forward, and e-invoicing is mandatory above ₹5 crore turnover.
- Credit limits, credit holds and ECL provisioning protect you from bad debts.
- Dunning sends firmer reminders at Day 1, 15, 30 and 60+.
- Cash application matches receipts to invoices, and AR reconciliation and DSO show how healthy your collections are.
Try it yourself
Your company has yearly revenue of ₹100 Cr and AR of ₹15 Cr.
- Work out your DSO with
DSO = (AR ÷ Revenue) × 365. - Is it inside the 30 to 45 day benchmark?
- A customer’s invoice is 30 days overdue. Using the dunning table, what should happen now?
- A payment of ₹2 lakh arrives with no remittance advice. What do you call it, and within how many business days should you investigate it?
- Write down the SAP transaction codes for creating a sales order, a delivery and an invoice.
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