Order-to-Cash in a service business: seven places where cash gets stuck
Service companies rarely lose money through theft. They lose it through work that is never billed, billed late or billed wrongly. Seven points in the Order-to-Cash cycle worth checking.
A service company has no stock to count, so its largest asset after people is usually what customers owe. Order-to-Cash (O2C) is the cycle that turns delivered work into money. In reviews, the same seven weak points come up again and again.
1. Work starts before the contract is complete
Teams begin on an email confirmation while the contract or purchase order is still "in process". When the invoice is raised, the customer's accounts team rejects it for want of a PO number. Check how many live engagements have no signed contract or valid PO, and how old they are.
2. Contract terms never reach billing
The sales team negotiates milestones, rate cards, caps and credit periods. The billing team works from a summary email. Differences between contract and invoice lead to disputes or, more quietly, to under-billing that nobody notices. One contract summary sheet, prepared at signing and held by finance, closes most of this gap.
3. Effort and deliverables are not captured on time
Time-and-material billing depends on timesheets. Milestone billing depends on sign-offs. If timesheets are filled at month end from memory, or completion certificates are requested weeks after delivery, revenue is lost or delayed. Measure the gap between the date of work and the date it is approved for billing.
4. Unbilled revenue keeps growing
Work done but not invoiced sits in the books as unbilled revenue. A balance that grows faster than sales, or items older than 60 to 90 days, usually means a billing dependency nobody is clearing. Each old item needs a named owner and a reason.
5. Invoices are raised correctly but late, or on time but wrong
Both delay cash. Common errors are a wrong GST registration or place of supply, a missing PO reference, a rate that differs from the contract, and missing supporting documents. Track the percentage of invoices returned by customers and the reasons. A short pre-dispatch checklist is cheap and effective.
6. Collection has no owner
Sales says collection is a finance job. Finance says the relationship belongs to sales. The receivable ages while both are right. Decide who makes the first follow-up, when the account manager steps in and when management is told. Review an ageing report every week, with the action taken against each large item.
7. Receipts are not matched
Customers pay several invoices in one transfer, deduct TDS, and adjust credit notes without saying so. If receipts are parked "on account", the ageing report becomes unreliable and follow-up calls are made for invoices already paid. TDS deducted should also be reconciled with the tax credit statement each quarter, or the credit may be lost.
What to measure
Three numbers give a fair picture of O2C health:
- Days sales outstanding (DSO), tracked monthly, with unbilled revenue shown separately
- Billing lag: average days from delivery or period end to invoice date
- Invoice rejection rate: invoices returned as a share of invoices raised
Where to start
Pick the ten largest overdue and unbilled items and trace each back to its cause. In most companies they fall under two or three of the points above. Fix those first, then write the corrected process down so it survives the next change of staff.
This article is general information as on the date of publication. Law and practice change, and the facts of each business differ, so please take professional advice before acting on it.