Book-to-bill is a calculation that helps to identify the current relationship between orders that have been placed by customers and processed all the way through to sending invoices for those orders. Usually defined as a ratio, book-to-bill can help a company assess the efficiency of its order fulfillment process, as well as help gauge the demand for its products. A healthy ratio indicates that the supply is sufficient to meet the demand, that orders are being processed in a timely manner, and that products are shipped and invoices forwarded in a manner that consistently keeps up with the order placement activity of customers.
There are several benefits that result from accurately assessing the current book-to-bill ratio. One has to do with monitoring the demand trend for each good or service provided by the business. Since the ratio involves comparing the number of orders placed with the orders that have been filled and invoiced during a specific billing period, it is relatively easy to compare the results of several periods and determine if that demand is remaining consistent, increasing significantly, or is declining. This makes it possible to adjust production accordingly and prevent either an unusually high inventory of finished goods or run the risk of exhausting that inventory and being unable to fill customer orders.
Making use of the book-to-bill approach also aids in projecting revenue for upcoming periods. This is often necessary as part of the planning for successfully remaining with the budget for the current fiscal year as well as preparing to draft a budget for the upcoming year. Based on the trends with supply and demand revealed by the book-to-bill calculation, companies can make budget cuts in remaining periods of the year to accommodate a decrease in orders or adjust some line items to allow for increased production to keep up with the projected demand.
Use of a book-to-bill evaluation can also help to enhance the procedures used in the order fulfillment process. If there appears to be an unusual amount of lag time between the receipt of a customer order and its fulfillment, this will often show up in the assessment for the billing period. This provides managers the opportunity to identify points in the process that could be restructured and expedite the shipment and invoicing components, a move that will often improve the aging of those outstanding invoices and allow the company to receive payments sooner rather than later.
