Purchasing chaos and budget overruns is a continuous process in an organisation, but creating a structured procurement process takes time. If your accounting team is always rushed and stakeholders have to chase after supply orders, it’s time to improve your procurement methods. To improve the procurement process you can start by strengthening the company’s purchase order processing procedures. Procurement can reap numerous advantages by implementing a purchase order (PO) process that is more organised and efficient. To enhance budgeting and purchasing standards, it enables the business to use procurement data, formalises spending guidelines, and aids in justification for purchases.
We cover all the information you require to maximise the efficiency of your purchase order processing techniques today:
- What is purchase order processing?
- Why is purchase order processing important?
- What are the 7 steps for purchase order processing?
- Best practices in purchase order processing
- Benefits of Automating Purchase Order Processing
What is purchase order processing?
Purchase order processing is the process of selecting, authorizing, ordering, fulfilling, and tracking supply or service orders from vendors. The team from the purchasing or accounting departments handles it. The process of order processing entails confirming that the goods or services availability, setting aside money for purchases of goods or services, informing vendors of the specifications, and making sure that the ordered items are delivered precisely.
If the company acquires goods in an organised and methodical manner, this PO process will function optimally. Stakeholders have the resources they need to order the correct items in accordance with purchasing policies when a process is well-structured. It offers the structure needed to approve purchases and finish the documentation required for fulfillment. All purchases are also recorded during the process. They are used for spending planning, analysis, and future record-keeping.
The Difference Between Purchase Requisition and Purchase Order
In the procurement process, both the purchase orders and purchase requisitions have different purposes, even though they are frequently used interchangeably.
- A purchase requisition, which is also referred to as an intake form, is an internal document used to request approval for purchasing products or services. Typically, it is signed by the division manager and then sent to the procurement team for review and processing.
- While, a purchase order is an external document. It functions as a binding legal agreement between a supplier and a buyer. It includes all of the order’s details. Some of the major details include the cost, the amount, the delivery date, and the terms of payment.
Both of them order streamline procurement processes within businesses. They facilates efficient ordering, fulfilment, and tracking of supplies.
The importance of purchase order processing
Purchasing is the major cost that centres on the organization. Over 20 to 30 percent of total revenue is spent on purchasing as an indirect cost. The procurement team handles hundreds or thousands of monthly purchases. An effective purchase order process is central to the success and cost-effectiveness of your business with so many moving parts needed to keep procurement flowing smoothly.
What are the 7 steps for purchase order processing?
1. Identifying the items needed
Wondering what’s the first thing to do for purchase order processing? The initial step includes figuring out what you need to buy. Stakeholders should look at different vendors to see who has the best supplies, check the similarities in the products, and compare the products’s prices. While making a list, do not forget to keep a record of the purchasing policies of your organization. Everyone benefits from knowing how to spend money on goods and services in accordance with policies both inside and outside the business.
2. Create a purchase requisition for the items.
After making a complete list of the required and needed items, it’s time to fill out the form called a purchase requisition. This form should have all the details about the vendors you’ve chosen and any papers that show why you need to buy those items.
If you want to make buying things go smoothly, you should have a clear process for approving purchase orders and specific people in each department who approve them. Things move more quickly when everyone is aware of their responsibilities regarding purchase approval. You can also seek the help of experts who are well-versed. This helps to reduce errors and ensure that decisions are well-considered.
3. Submit the purchase requisition for approval.
If you are done with the request form, it is time to send it to the first approval process. The documents are filled out by the manager or department head. This approver reviews the request to see if it matches the budget for the department or project and gives the initial approval to spend the money. After that, the request goes to other people, who also need to approve it. Depending on what is being purchased, teams from IT, legal, security, or finance may need to review it. Each company determines when additional checks are required for larger purchases. For example, the executive team may need to approve contracts that exceed a certain amount.
4. Create an approved purchase order.
The accounting or finance team will utilise the requisition form to generate a purchase order once the request has received all necessary approvals. A thorough purchase request ensures a complete purchase order.
- Purchase order number
- Date and time of the purchase order
- Requestor name and department information
- Vendor information, including name, address, and contact information
- Description of goods or services being purchased
- Quantity of goods or services being purchased
- Unit price per item
- Total price
- Taxes and fees
- Shipping and delivery information (including cost, if applicable)
- Billing instructions to the vendor
- Payment information and net terms
- Additional notes from stakeholders or the finance team
5. Approve and submit the purchase order.
Sometimes, accounting might review completed purchase orders again to make sure they’re right and complete. Once the purchase order gets approved, Finance sends it to the vendor.
Next, the supplier checks the order details. If any confusion arises, they will either contact the person who requested the items or the finance department. They contacted me back with information on the available items. If any of the items mentioned are not available in their inventory, the seller may suggest alternative options or give you an estimated time for the product’s arrival.
6. The vendor approves and fulfils the purchase order.
The next step involves the response of the vendor. After checking all the items and resources, the vendor finally confirms the order. He provides you with an estimated delivery date and a shipment tracking number. Then, the order is packed and finally sent to the shipping company. After the products finally get shipped, you can receive them. For more details regarding the goods, you can check their status using the shipment tracking number.
7. Receive and reconcile goods
The final step of the purchasing process is receiving the goods. The buyer will get in touch with you until and unless you confirm the products are in good condition. If there are any missing or damaged items, you will receive a replacement or a refund.
After confirmation of goods received, the account team now comes into play. They will keep a record of the delivery. They then compare the goods with the original purchase list, along with other documents like the bill of lading. This matching process ensures everything matches up correctly and is accurate.
Best practices in PO processing
Applying best practices can improve the PO system of every company no matter its size and stage. By following the below-mentioned steps, companies can benefit a lot, making the entire process smoother and stronger. Additionally, this process can also lead to better cost savings.
Build a documented procurement process
As a company starts documenting their purchasing policies, it will be further capable of controlling their budgets. This documentation process further allows the companies to establish and communicate clear guidelines for better purchasing habits. They also help the company in choosing the most suitable vendors among those who meet the considerable requirements while allowing them a great observation in their spending threshold. Meanwhile, this documentation process also helps the procurement teams deal better with the work pressure.
Moreover, the process of documented procurement enables more effective budgeting, with a clear picture on the company’s supply spending over time.
It also protects the company from unwanted fraud while staying away from low-quality vendors. All these policies along with a visible spending spree eventually help the company maintain a good reputation in the market.
Create a departmental approval roster
A strong roaster approved by the departmental purchase plays an important role in healthy procurement. All these members from the approved roaster set up a chain of command in each department. They make sure that the purchases match the company’s strategy and purchasing budget. This further helps in minimising unwanted expenses as they maintain accountability for every purchase made. While offering cost-effective solutions, this process further helps the company in purchasing vital goods and services.
Establish a preferred vendor network
A preferred vendor network consists of a select group of trusted vendors that an organisation has pre-approved for procurement. If you partner with these vendors, it streamlines operations and minimises risks associated with third parties. Moreover, businesses benefit from enhanced bargaining power to negotiate better prices, volume discounts, and favorable purchase terms.
Use strategic sourcing wherever possible
Strategic sourcing means carefully planning how to buy things. This practice involves studying the market trends and comparing suppliers to get the best deals. This process not only helps to save money but also helps in building strong relationships with suppliers. This ensures better quality goods and continuous help in supply chain problems. Strategic sourcing enables organizations to enhance their procurement procedures and forge enduring partnerships with dependable suppliers.
Use procurement software to automate
The use of automated purchase order processing makes buying easier and more accurate. Using this software you can save time and lower your mistake as it stops people from typing in order details and using spreadsheets to track orders.
Automation also shows orders and spending clearly. The used software allows workflows to do the most repetitive tasks, including approval, submission, three-way matching, reconciliation, and reporting. Using a central system helps companies grow their buying process smoothly.
Benefits of automating the purchasing process
There are several benefits of using the automated purchasing order process. The major benefits can be exercised by the finance teams.
Better Cost Saving: The use of automating the purchasing process helps find ways to save money and prevents cash flow problems. It stops mistakes like paying too much or getting poor-quality supplies. Finance teams can track every dollar spent with automation.
Higher Accuracy: Automating purchase orders makes sure data is accurate every time. This helps finance teams see purchases clearly and trust their financial information more.
Increased Efficiency: Automation also makes things faster. As the record are all automated, it helps in saving time for data entry, tracking orders, checking invoices, and paying bills. Thus, it lets team members focus on more important jobs.
Reduced manual entry: It can also help in reducing errors and saving time, by removing the manual steps in a process. The errors generated through manual entry can cause issues during payment and can also require extra research to fix.
Enhanced reporting: The use of an automated purchase order system helps to simplify the report creation on order and spending habits. It helps in understanding the purchasing pattern and how suppliers perform. It helps in understanding the purchasing pattern and the performance of suppliers. Thus, these insights helps you make decisions on future spending, pricing comparisons, and planning budgets, while building better relationships with suppliers.
Reduced risk: It lowers the risk of fraud by using secure platforms and tracking features. It monitors activities, detects risks, and limits user access to ensure a safe environment. This prevents unauthorized payments and orders by requiring approvals for changes.
Stronger negotiation: The automated system gives buyers with complete guide on process and cost. Thus, this gives you a chance for better negotiations and also helps in building strong relationships with the suppliers. It further helps evaluate supplier performance and supports making informed decisions when signing contracts.
