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What Is SAP Order-to-Cash?
Order-to-Cash is an integration point between Finance (FI) and Sales (SD). It is also known as OTC or O2C in short form. It is a business process that involves sales orders from customers to delivery and invoice. It comprises SO, Delivery, Post Goods Issue (PGI), and billing to customers. OTC process is a very important process in Enterprise Resource Planning software(ERP Software). Both major ERP software SAP and Oracle include this process.
Its configuration touches both Finance and Sales & Distribution modules. This is an end-to-end process from customer Inquiry to goods delivery, billing, and payment of money. The process starts when a customer inquires about an inventory item (finished goods for a company). The customer gets a quote for the item and places an order for the quantity needed. A user from the company places the order and passes it for processing. Inventory gets picked up from the warehouse and shipped to the customer. The billing process also starts with delivery and it can be sent with the item or later. This is an overall OTC scenario in general.
This process gives integration between customer master records, sales organization, sales offices, distribution channels, divisions, and plants.
Here in this article, we are going to discuss the steps in detail.
SAP OTC Process Flow
SAP OTC is a process involving customer sales order creation and satisfying customer requirements via delivery.
Prerequisites are customer master record is set up, sales area (sales organization, divisions, and distribution channels) was set up already.
Generally, the steps are as follows:
- Customer Inquiry
- Quotation for customer inquiry
- Sales Order creation
- Post Goods issue (PGI)
- Billing (bill sent to customer)
- Receipt of money- Customer Payment
The First two steps that are inquiry and quotation may or may not happen. A new customer may inquire and ask for a quotation but an old customer may not inquire. Moreover, if you have a contracted agreement to sell products at a certain price then customers will directly order without quotation.
Now, let's see what is the impact on the accounting entries for this cycle steps. Each step has its own configuration used in business workflow. As I mentioned earlier, this process involves many different organizational levels. The most important organizational levels in this process are company code, sales organizations, distribution channels, divisions, and plants.
SAP OTC Sales & Distribution
|OTC Process Steps||Transaction Code||Accounting Entries|
Post Goods Issue (PGI)
Receipt of Money
This is an imported integration in the SAP landscape. Here are the configuration steps in detail. Its configuration happened in transaction code OBYC.
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- Inquiry: A customer inquires about the product price and service. This is a very starting point of the OTC process. This process does not have any effect on general ledger accounts and does not have any accounting entries. Once a customer creates an inquiry, an inquiry number is generated. Inquiry is created by transaction code VA11.
- Quotation: Quotation is a price quote given to the customer. A quotation follows inquiry steps. A quotation can be created via inquiry or without an inquiry reference number. A quotation is created by transaction code VA21.
- Sales: According to some SAP experts, sales order is the first step of the OTC process. After inquiry and quotation, once it's gets created. Sales order can be created with reference to quotation or without reference. It does not make any accounting book entry and it does not make any change in General Ledger accounts. It is just a commitment to deliver goods to the customer. SO can be created with transaction code VA01.
- Post Goods Issue: Post goods issue is the steps where goods are being picked by the warehouse, packed, and shipped to the customer's given shipping address as per the sales order. We have accounting entries as inventory is being credited against the cost of goods sales (COGS) debited. General ledger accounts associated with the cost of goods sales and inventory is affected respectively.
- Delivery: Delivery follows post goods issue (PGI). Delivery is the actual fulfillment of goods to the customer's shipping address. At the delivery stage, we have accounting entries in the books. At this stage, we debit the revenue account and credit the customer account. The transaction code for delivery is VL01n.
- Billing: At the billing stage, we send the bill to the customer for the goods delivered. We have accounting entries at this stage where we debit customers and credit cash accounts. The transaction code for billing in SAP is VF01.
More Reading About SAP
- What Is the SAP Software System?
Here is everything you need to know about SAP. You will get answers of what is SAP ? How SAP software works ? Why SAP is one of the top ERP system ? You also get to know about different SAP modules.
- ASAP Methodology—SAP Implementation Phases
ASAP Methodology is an SAP Implementation Methodology which includes 6 phases. ASAP Methodology is an Software Development Lifestyle (SDLC).
Management and OTC Process
Order management is an important part of SAP Finance and Sales integration. This process is also known as SAP OM in short. It is an administrative process. It automates order processing and seamless integration of data among different modules. OM includes the customer master database, customer returns and refunds, billing information, shipping information, payment terms, payment conditions, and other information related to the OTC process.
OM along with the OTC process provides an improved sales cycle and easy handling of goods and efficient order processing. It is an important process in retail, health care, telecommunications, and customer-oriented industries.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Navnit Hatwar on September 07, 2020:
Thank you....Here I learned whole O2C process
HaraldAlten on January 05, 2020:
Usually, I do not comment but in your case I do: I have never seen a clearer and better description in over 25 ys practice. Also, the accounting entries are correct which is not always guaranteed in the web. I will recommend you - congrats,
Prahanth B from INDIA Andhrapradesh..... on December 29, 2019:
The Given information about OTC is marvelous.......based on the study i can say that Accounting Entries are seems to be wrong and according to my knowledge
Accounting entries starts from PGI (Post Good issue) that is when Goods are shipped out of Inventory.
That is the first step of accounting entry:
Dr. Cost of Goods Sold A/c
Cr. Inventory A/c
When Delivery Happened the entry is like
Dr. Revenue A/c
Cr. Customer A/c
Once Delivered the product we are sending the invoice along with Delivery or may be later also we can send the invoice to the costumer in this case the entry is like
Dr. Customer A/c (Accounts Receivable)
Cr. Sales A/c
Because customer is receiving the bill right..
Than last but not least in the OTC Process ends with the Payment so the entry will be generated like
Dr. Bank Account A/c
Cr. Customer A/c (Accounts Receivable)
because customer is sending money to business
hope this will be correct and if any wrong entries in this let me know
thaa on October 19, 2019:
thank you so much for uploading this videos. we expect this kind of infor -mation from you.
Ravi Chandra on August 06, 2019:
Thank you for posting such a productive information
lu on June 18, 2019:
Very good. I shared with my colleagues at Academy. Tks! :-D
Baden on January 13, 2019:
Please do you train
Hadiqa Sanober on April 24, 2018:
It's really nice article but accounting entries seems wrong please rectify
Pawel on February 14, 2018:
Very good article. Only one thing that should be precised. PGI is goods movement confirmation as shown on pictures and can be done only after delivery is processed.
Hari on February 10, 2018:
Very good information. Great effort. Very useful
firstname.lastname@example.org on February 08, 2018:
This is most comprehensive business flowchart associated with OTC I have come across since it shows all the processes involved as per Chart of Accounts.
I commend you for all your efforts.
Shraddha Shukla on January 04, 2018:
Thanks for the information.
Rohit Kulkarni on December 22, 2017:
Very Nice Information , As per my Knowledge PGI Accounting is
COGS A/c Dr
Sales or Revenue A/c CR
Sandy on November 13, 2017:
Very informative blog.
kamlesh on October 12, 2017:
Very good effort to present OTC process.
Keep it up.
Bhuwan Singh on July 01, 2017:
Really helps a lot. Thank you so much!! :-)
Shehnaz Ahamed on May 02, 2017:
Need more information about Accounts payable and Receivable.
mastan on April 28, 2017:
it's very useful to sap people
Ranjan Kumar on January 06, 2017:
O2C is a voice process?
kranthikumar on November 13, 2016:
very usefull to every one..nice....thanks
Mugdha on August 27, 2015:
In a Nut shell good overview of SAP OTC Cycle.
Josewilliam on February 10, 2015:
Great sap article!
Sharifah on January 19, 2015:
Unibeelvable how well-written and informative this was.