Understanding Order-to-Payment in Business Systems

This article focuses on the order-to-payment flow where customers pay after receiving an invoice, typically on credit terms, i.e., payment after invoice.

Disclaimer: I’m not a finance expert, accountant, or bookkeeper - I’m a techy. This is simply what I’ve learnt from spending the last 10–15 years around finance systems, in various companies, and trying to make sense of how they actually work. If a seasoned finance professional reads this and winces, please take it as proof that I’m still learning.

The model shown above is deliberately simple to illustrate the core concepts. In reality, most large organisations - that i've worked at - rely on multiple systems across the value chain, including ecommerce platforms, finance systems, payment gateways, and integration layers, to name a few. The real process can involve a myriad of process steps, lots of error scenarios, and controls than shown in this visual.

Before we dig into the flow, here is a quick jargon buster to cover any terms you may not be familiar with:

Jargon Buster

• Invoice: A document that tells a customer how much they owe for goods or services, and when they need to pay.
• General Ledger: The main financial record a business uses to track all money-related activity in one place. This is usually a capability within the finance system or an ERP.
• Debit (DR): An entry that usually increases assets like cash or money owed to the business, or decreases liabilities.
• Credit (CR): An entry that usually increases income or liabilities, or decreases assets like cash or money owed.
• Transaction: A recorded financial event that becomes part of the audit trail and is typically immutable, meaning it cannot be changed once posted and must be corrected with a separate entry if needed.
• Account Balance: The running total shown in the customer’s transaction history that reflects what the customer owes the business, or what the business owes the customer. It can be positive when the customer owes money, or negative when the business owes money back, such as in cases of credits or refunds.
• Remittance: Information sent by a customer, usually via email or post, to explain what their payment relates to, often listing the invoices paid.

Process Overview

New Order

01 - Customer requests a product or service, creating an order record. This establishes the commercial intent but does not create any financial balance.

Example: A customer places an order worth $10,000. At this point the order is recorded, but the customer does not owe anything and the account balance remains $0.

Fulfillment/Service Activation

02 - The product is delivered or the service is activated. The order is marked complete, confirming that the business has met the conditions to bill, but the customer account balance is still unchanged.

Example: The product is delivered or the service goes live. The order is fulfilled, but there is still no financial impact. The customer balance is still $0.

Invoice Generation & Issuance

03 - The system generates an invoice. This creates a financial transaction where accounts receivable is debited and revenue is credited, establishing the amount the customer now legally owes.

Example: An invoice is generated for $10,000. A $10,000 debit is recorded in 'accounts receivable' and 'revenue' is credited for $10,000. The customer now owes $10,000 and their account balance shows $10,000.
N.B: Accounts Receivable and Revenue are Nominal Accounts held within the General Ledger.

04 - The invoice is issued to the customer. The customer account reflects the outstanding balance, and the invoice is awaiting payment.

Example: The invoice for $10,000 is sent to the customer. It remains open and unpaid, and the outstanding balance stays at $10,000.

Payment Matching

05 - The customer sends payment to the bank, often with limited reference information. A remittance advice may be provided separately, usually by email or post, to explain which charges the payment relates to.

Example: The customer sends a $10,000 payment to the bank. The business has received the cash, but the system does not yet reduce the customer balance because it's not been matched to the invoice. The balance remains $10,000.

06 - The finance team performs payment matching by comparing the payment to open invoices. When matched, cash is debited and accounts receivable is credited, clearing the outstanding balance on the customer account.

Example: The payment is matched to the $10,000 invoice. Cash is debited and accounts receivable is credited by $10,000. The invoice is closed and the customer balance returns to $0.

Key Takeaway

The order debt is recorded when the invoice is issued and cleared once the payment is matched, typically with a remittance.

This has been a broad overview of how order-to-payment typically works when customers buy on credit terms.

In future articles I plan to dig into payment matching and what happens when money cannot be allocated. This will cover scenarios such as payments with no reference, bulk payments covering multiple invoices, part-payments, overpayments, and cases where the amount received does not match any open invoice. I’ll also touch on how unallocated cash is handled in practice and why it often ends up in a suspense balance.

I hope you found this useful. If you have suggestions on how I could improve the content, please feel free to message me. If you’re interested in custom visuals or system-focused content for your organisation, please get in touch.