Create the Accountable Spend Culture You've Been Dreaming Of
What's so great about a purchase order (PO)? A lot actually, and it's not simply the PO itself that's so valuable, but also the process structured around it. Purchase orders bring business purchase control; the PO process creates a transactional audit trail while supporting deeper vendor relationships.
Your purchase order system provides vendors with the clear guidelines and purchase instructions they need. Internally, it allows departments, such as your finance team, to follow pending purchases before additional money is committed and to intervene early if necessary should a purchase go against the agreement or budget.
So, whether you're in need of a complete spend or process overhaul, or just looking to tighten up some loose ends, read on to learn more about how an excellent purchase order process paves the way to an accountable spend culture.
Defining the Purchase Order
Let's begin with the basics. The PO is a request for order sent as a formal document from a buyer to a vendor or supplier. A transactional authorization, it details pertinent information around the purchase request including work/order description, execution timeline, delivery date, pricing and payment terms. It also assigns the purchase order number that identifies the purchase as it progresses through the procure-to-pay cycle.
For larger companies, the “buyer” may include the procurement department or operational managers who create, issue and/or approve purchase orders. Depending on the purchasing process, PO approval is usually structured around site location and department with budgeted amounts attached.
Why Optimize Your Purchase Order Process?
Two words: financial control.
The purchase order outlines your project-specific needs and sets clear expectations for a strong vendor relationship foundation. A clear PO process brings the following internal and external advantages:
- Systematizes purchase procedures.
- Tracks project, spend and budget progress.
- Supports the budget and more efficient cash flow.
- Protects both sides of the relationship with a legally binding agreement.
- Acts as a backup when transactions are audited.
The Perils of Purchasing without a Purchase Order
Lack of–or a lacking–purchase order process can be risky business for several reasons.
Lack of control = lack of visibility
Without a PO, it's tough to track spending, ensure purchases are authorized, keep spend within the budget and reconcile invoices.
Inconsistent procedure = poor processes
The PO brings consistency and systematization to purchases. Without it, confusion, delays and errors in purchases and payments all creep in.
Missing information = mistakes
The PO ensures all pertinent information about the vendor, goods or services, and terms of the transaction are clearly communicated. Not using it opens the door to invoicing or payment errors, inadequate execution and risk of disputes.
Lack of clarity = negatively impacted vendor relationships
The PO sets up vendor relationships to be successful with clear expectations outlined early. Without it, misunderstandings are more likely to occur around timeline, pricing and payment terms.
Lack of formal agreement = lost negotiation opportunities
Without clearly specifying the service, pricing and terms, there's no reference for procurement to use for better pricing or more favorable term negotiations.
While the PO adds more steps to the purchasing process, it saves time at the end of the day by smoothing transactions and reducing the risk of less-than-acceptable vendor performance quality.
If you're curious about the difference between a purchase order and an invoice, you're not alone. Each contains similar information. One key differentiator is the creator. For the PO, it's the buyer; for the invoice, it's the vendor. Additionally, the PO is issued prior to purchase and is more detailed; the invoice is sent after and includes cost breakdown, invoice and purchase order number for reference.
It's also common to ask whether the purchase order is a contract. Once the vendor accepts the PO, it is a legally binding contract. However, vendors may reject a purchase order by letting the buyer know they cannot complete the order.
How Does the Purchase Order Process Work?
Now that we've covered the basics of the “what” and “why” around the purchase order process, let's move into the “how.”
The PO process typically fits into the procurement process after the Request for quotation (RFQ), vendor evaluation and purchase requisition stages are complete. While the actual procedure may vary according to industry and company, the PO process generally follows these steps:
Step 1: Create the purchase order.
Based on the information in the purchase requisition, the PO outlines all details of the service request including pricing and payment terms with other relevant conditions.
Step 2: Review and approval.
Relevant stakeholders, including purchasing and finance managers and other department heads then review and approve the purchase order.
Step 3: Issue the purchase order.
The PO is then issued to the vendor, detailing the terms and conditions of the transaction. Once agreed upon, it is legally binding for both parties.
Step 4: Service review.
Once service has been delivered, it's important to check and ensure the quality of service meets the PO's requirements. Discrepancies should be addressed with the vendor.
Step 5: Invoice process and payment.
Once the vendor submits their invoice, it should be compared with the purchase order and any other applicable documents. If everything matches, payment is applied according to the terms agreed upon earlier.
While sharing all these advantages the purchase order offers, we must also address a common bottleneck in the PO process: three-way matching. This is the stage where the purchase order is compared with the invoice and all other relevant documents. It ensures service was delivered as originally agreed upon and that the invoiced cost meets the PO terms and conditions.
- Match the purchase order: Compare the details in the purchase order to the invoice to ensure that the service delivered matches what was ordered. Confirm the scope of work, timeline, and payment terms meet agreed-upon terms in the PO.
- Match supporting documentation: Depending on the nature of the service provided, there may be additional supporting documentation that needs to be matched with the invoice. For instance, equipment certifications may be required.
- Confirm service execution: Confirm the service has been delivered or completed according to the agreed-upon terms. This may involve reviewing reports, invoices from subcontractors or other relevant documentation.
If all three matches are met the invoice is approved for payment. If there are any discrepancies, they must be resolved or the anomaly explained prior to approval.
Performed manually, this stare and compare matching is time-consuming, repetitive and mentally exhausting. Industrial facilities are turning to digitized solutions that automate line item monitoring against vendor activity and automatically alert appropriate parties to anomalies flagged.
Purchase Order Best Practices
Perfecting your PO process transforms your vendor spend culture from a reactive position to a proactive powerhouse.
To put it to work, keep these tips in mind:
- Communicate your PO policy, procedure and approval methods to all departments, employees and vendors involved.
- Keep a roster of preferred vendors who provide quality service at a competitive rate and on time.
- Create Master Service Agreements for regular vendors that define pricing, terms and conditions to eliminate excess admin time and effort.
- Centralize vendor and purchasing information so it's accessible to all users who need access at any time.
- Use purchase requisitions as part of your purchase order process to systematize the procurement process and eliminate unnecessary spend while always keeping company spend visible and under control.
- Capitalize on quick pay discounts, which can add up to substantial savings fast.
While we tend to take a “glass half-full” perspective, we'd be remiss if we didn't warn you about a couple of common purchase order problems to watch out for:
The goal is to work with vendors who become partners in your success. So, vendors or suppliers who fail to see value adds beyond pay are not optimal. Terms and conditions should be negotiable to create win-win scenarios.
Purchase order errors
Should there be any errors in your PO–pricing, execution timeline or payment terms–the earlier they're adjusted and the PO amended prior to work activity, the better.
Skipping appropriate approval
Issuing a PO, verbally or in writing, without the proper financial authority approval can have negative consequences for the issuer and the budget.
How can you reap the benefits of a strong purchase order process and skip the headaches? Digitize and automate your system.
Different Types of Purchase Orders and Why You Might Need Them
Standard purchase orders (PO)
A standard purchase order is the type of purchase order most commonly used by businesses. Companies typically use standard POs for non-recurring orders. For example, a company would use a standard purchase order when buying office computers, since this is a one-time purchase.
Standard POs need more specific order details because they're used with vendors who aren't regular partners. A SPO typically contains these details:
- Terms and conditions of the order
- List of items to be purchased
- Quantity and price of each item
- Billing address and delivery date
Planned purchase orders (PPO)
A planned purchase order is basically an individual order that a business releases as needed. Typically, PPOs are used for purchasing goods needed to restock or replace items that the company uses on a regular basis, such as printer cartridges.
A planned purchase order is a lot like a standard PO but without a set location and expected delivery date. The buyer decides what items to buy, the quantity, and the price. Once all these details are set, a "release" against the planned purchase order is created, known as a “schedule release”. Sometimes, PPOs might have unconfirmed tentative schedules, but they need to be confirmed before the order is delivered.
Blanket purchase orders (BPO)
A blanket purchase order is a legally binding document between a company and a vendor for getting goods or services on a regular basis, at a fixed price, and for a specified period of time. Blanket purchase orders are a lot like planned purchase orders, but the exact quantity and delivery details aren't decided yet.
For example, you might use a blanket purchase order to buy printer paper. Unlike with printer cartridges, it's hard to know exactly when printer paper will run out and how much will be needed. So, a BPO with a specific vendor ensures you’ll have enough paper whenever you need it.
Contract purchase orders (CPO)
A contract purchase order is like a deal between a vendor and the buyer. It lays out the terms of the relationship, including the items to be purchased, delivery details, and payment. The buyer might refer to the CPO when making a standard purchase order. These legal documents typically last for a set time, usually one year.
Digital purchase orders are a new kind of purchase order, joining these four commonly used types. They are part of a move toward using technology to make buying easier and more accurate. Now, let's dive into how this digital revolution is changing things.
The Digital Purchase Order Revolution
Any downside to using a purchase order process tends to reside within human error. Using paper-based manual PO systems is more work than necessary and it opens up the margin for mistakes both the buyer and the vendor could make when making the purchase.
One way to avoid some of the potential for error is to use a purchase order template in Microsoft Excel or Google Forms. This can help speed up the work of your purchasing department, and make sure you input the needed purchase order details. However, an even better solution is to forgo the manual work and rely on a dedicated PO platform.
Automated solutions speed the process, improve communication and protect you from financial risk. Advanced technologies for electronic purchase orders refine your purchase order process so you:
- Avoid duplicate orders.
- Eliminate surprise invoices.
- Track all incoming orders.
- Are sheltered from unexpected cost increases.
- Achieve incurred-to-pay accuracy.
- Get 100% contract compliance.
- Stay on budget and forecast more effectively.
- Improve process timing and save HR hours.
- Communicate transparently with vendors.
- Safeguard your organization with a central repository of accurate information.
How does digitization achieve all this? Here are just five of many ways.
- Centralize POs. Cloud-based solutions gather all PO management into a central online platform. Now, cross-departmental visibility is achieved throughout the entire purchase cycle in an accessible and secure format.
- Faster approval process. With automated verification of all line items and submission alerts, bottlenecks are a thing of the past.
- Budget visibility. When all stakeholders have visibility into current spend and what spend is coming, it's easier to approve or intervene when needed.
- Eliminate unnecessary spend. Automated validation and anomaly detection at entry means your company will never pay for more than what's actually earned.
- Single source of truth. Digitized records provide teams central and transparent access to information, whenever they need it, all at their fingertips.
So, to recap, your PO process is your clear, transparent lens into what people are purchasing, who is purchasing, why they're purchasing and which vendor best delivers what you need in a dependable way. Perfecting your PO approval using a rule-based, customized solution pays back in massive ways across your organization.
Power Your Purchase Order Process with PayShepherd
PayShepherd was born out of a boots-on-the-ground understanding around the downfalls of manual vendor management monitoring methods, including PO validation and processing. We know how much time and money it wastes, and we're here to help people reimagine a better way forward.
We're already achieving this for large facilities across North America. How can we support your vendor management transformation and unlock huge cost savings without compromising relationships?
Find out today. Let's talk.