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Revenue Leakage: Understanding Control Gaps in the Order-to-Cash (O2C) Cycle

June 15, 2022


Understanding the control gaps in the O2C cycle

Revenue leakage affects your bottom line. We take a look at common control gaps in the merchant Order-to-Cash (O2C) cycle.

Businesses can lose up to 5% of annual revenue before tax due to revenue leakage, according to multiple sources. Revenue leakage is often caused by errors in repetitive tasks such as billing and admin, manual data entry, and outdated software. Outside of the O2C cycle, businesses may have to contend with penalties as a result of incomplete accounting and reconciliation records.

A business’s system for managing payments processing and accounting, or the Order-to-Cash (O2C) cycle, is the most likely victim of revenue leakage. When a component of a process or system is not operating or handling risk management effectively, or there is simply no regulated system in place—control gaps can occur.

The O2C cycle covers initial order to final documentation:

  1. Initiation: The customer places an order, which is verified by order management
  2. Fulfillment: The merchant business prepares the order for shipment.
  3. Shipment: The order is completed and delivered to the customer.
  4. Invoicing: The merchant business generates an order invoice for the customer.
  5. Payment: Customer instigates payments processing cycle where payment information is authorized and verified.
  6. Documentation. Completed payment is documented by accounts receivable.

Common control gaps in the O2C cycle

Within the steps listed above, there is plenty of room for error. Here are a few of the most common control gaps that occur within the O2C cycle and how they can contribute to revenue leakage.

Lack of order processing validation

Order management is a crucial part of the O2C cycle. Once the customer has instigated an order, that information would generally go to a management system that would verify and validate the information before moving on to fulfillment.

A control gap at this stage often results in incorrect order information being logged and the wrong orders being fulfilled, which can endanger customer relations. Revenue leakage may come from businesses’ need to offer discounts or take on the cost of returned orders. It could also occur if inventory information has not been properly logged or synced with order management, which will prevent businesses from fulfilling customer orders.

Unverified proof of delivery

Businesses selling goods can often lose sight of them during the delivery process without proper verification. Unverified proof of delivery can result in product loss and a higher number of refunds if the customer receives an order late, is not home to receive an order, or does not corroborate delivery.

For consumers that expect a streamlined fulfillment process, failing to ensure expedited shipping with activity tracking and notifications can also cause customer drop-offs. According to recent reports, 75% of customers would want free shipping and they tend to abandon the cart if the shipping cost is too high.

Incomplete invoicing and tracking

The backbone of any business, invoicing processing and tracking must be handled efficiently to avoid serious revenue loss. Without a defined invoicing and tracking system, businesses cannot function properly. Unsent, incomplete, or lost invoices can cause accounting and reconciliation errors.

Similar issues may also arise with sent invoices. The inability to adequately track late payments, or lack of a system that automatically tracks payments as well as due dates and sends timely reminders, triggers a cycle of loss difficult to break out of.

Manual dispute resolution

Dispute resolution, likely to happen in the last few stages of the O2C cycle, is another potential problem area. Even if the order has been successfully fulfilled, delivered, and invoiced, businesses can run into issues if the payment process hits a snag.

Common issues in dispute resolution, especially if the process is being handled manually by staff, include inaccurate payment information due to manual data entry errors, fraudulent payments, or chargebacks. Any one of these may force the merchant to open a case and negotiate with the payments processing platform or the issuing bank and lead to company revenue loss.

Manage control gaps to avoid revenue leakage

Revenue leakage can happen at virtually any stage of the O2C cycle, which makes it imperative for companies to identify and manage control gaps. Legacy systems and manual processes are the most common causes of control gaps, leading to unnecessary delays and creating more problems than they solve.

According to a report by AppDynamics, 66% of people surveyed said that the pandemic exposed a weakness in the current digital strategy bringing about an urgent need for modernization. Simply put, outdated processes present yet another control gap that can cause not just revenue leakage, but revenue hemorrhage.

By streamlining and automating order management through a defined system, businesses can plug control gaps and reduce revenue leakage, fraud, and human error.

Reach out to our team of experts to know how you can modernize your payment systems.

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