The Credit Lifecycle

The Order to Cash (O2C) cycle is the lifeblood of a business’s revenue stream. It encompasses the steps between when a customer places an order to when the payment is received. 

Effective credit management is the unsung hero of the O2C cycle, quietly influencing each stage to ensure risk mitigation and revenue-protecting decisions.. Let’s walk through the O2C cycle and take a closer look at how credit plays a critical role at every stage.
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Step 1: Order Management

A customer places an order for goods or services. The business captures and verifies order details, including product availability, pricing, delivery terms, and customer information. The order is then confirmed and forwarded to fulfillment.
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Step 2: Credit Assessment

If a customer requests a credit line, this is where the credit assessment comes into play. This step is essential for determining the customer's ability to meet payment obligations. Credit teams typically review financial data, payment history, and other risk indicators to make an informed decision.

If credit is not approved, alternative terms—such as cash on delivery or payment upfront—may be offered. Over time, as the customer builds a positive payment history, they may become eligible for a credit line.

If credit is approved, the credit team sets the appropriate credit limit and payment terms based on the customer’s risk profile.
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Step 3: Order Fulfillment

Once the order is confirmed, products are picked, packed, and shipped, or services are scheduled and delivered according to the agreed specifications. Logistics teams coordinate transportation, manage tracking, and ensure timely delivery. Shipping documents, such as packing slips and delivery confirmations, are created during this stage.
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Step 4: Invoicing

After the order is fulfilled, an invoice is issued to the customer. It includes itemized charges, applicable taxes, due dates, and payment instructions. The invoice serves as the formal request for payment and marks the beginning of the payment period.

Credit terms established earlier—such as Net 30 or Net 60—and clear invoicing helps ensure those terms are honored. Credit teams may review invoices to confirm alignment with approved terms and prevent delays in payment.
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Step 5: Accounts Receivable

The business monitors the status of outstanding invoices, tracks aging reports, and manages the collection of payments. Incoming payments are received, recorded, and applied to the appropriate customer accounts.

Credit teams play a key role in monitoring overdue accounts, communicating with customers, and determining whether to maintain or adjust terms based on payment behavior. Their decisions at this stage can influence future credit limits and collection strategies.

Step 6: Cash Application

Once a payment is received, it is applied to the corresponding invoice, and the accounting records are updated. This process ensures that outstanding balances are cleared and customer accounts remain accurate.

Credit teams help ensure payments are applied in line with agreed terms. When discrepancies occur—such as partial or incorrect payments—they may assist in resolving the issue and maintaining account accuracy.

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Step 7: Collections

When payments are past due, the collections process begins. This may include sending reminders, escalating communication, and negotiating payment arrangements to recover outstanding balances.

Credit teams are central to this step, evaluating the risk of non-payment, maintaining customer relationships, and deciding when to escalate or adjust credit terms based on ongoing behavior.
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Step 8: Dispute Resolution

When a customer disputes an invoice—whether due to pricing, product quality, or accuracy—the business reviews the claim, investigates the issue, and takes corrective action. This may involve issuing a credit note, updating documentation, or adjusting the invoice.

Disputes can significantly affect payment timelines. What may appear as late payment could be a result of an unresolved issue. Credit teams often rely on tools and industry relationships to identify disputed payments as they are making decisions on a new customer.

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Step 7: Cash Flow Management – Keeping the Money Flowing

In the final stage of the order-to-cash cycle, businesses analyze performance metrics to assess efficiency and identify areas for improvement. Common KPIs include Days Sales Outstanding (DSO), aging reports, dispute frequency, collection rates, and average payment timelines. These insights help refine processes, adjust policies, and inform strategic decisions across finance and operations.

Consistent analysis is critical to managing cash flow—a core objective of the entire O2C process. Credit decisions made throughout the cycle directly impact liquidity, helping businesses strike a balance between extending terms and ensuring timely payment.
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The Bottom Line

Strong credit management keeps the O2C cycle running smoothly. Informed credit decisions at each stage help prevent bad debt, protect cash flow, and build healthier customer relationships. Poor credit practices, on the other hand, can lead to overdue accounts, financial stress, and strained partnerships.

When embedded across the O2C process, smart credit practices drive sustainable growth, stability, and success. Every invoice, every order. It all works better when credit is working strategically behind the scenes.

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