If your organization doesn’t already use purchase orders, you may be be hesitant to introduce them since they can technically be considered another step in the ordering process. You are, after all, trying to streamline procurement and accounts payable. Nevertheless, purchase orders allow for better financial controls and can provide a much needed documentation trail should any problems arise with your order. There are a host of other reasons that should further compel you to not pass on the PO.
Defining what a purchase order is may be the first step in their broader acceptance. A PO is a document that is sent from a buyer to a supplier indicating what items they wish to purchase. It includes type, quantity, agreed upon price, and payment terms. In an automated environment, you can implement a seamless PO workflow so that they’re subject to internal approvals, allowing for control before an order is placed. In other words, you can confirm that funds are available first and then update your budget prior to an invoice hitting your general ledger. Here’s why leading organizations have implemented this tool:
- Better budgeting, forecasting, and planning – Purchase orders will provide an overview of monthly spend, employee purchasing habits, and vendor behavior. Supervisors can identify trends and potential savings or negotiation opportunities with the data accumulated. And since POs occur before a purchase is made, managers and approvers can forego signing off on them if they’ll put you over budget. Organizations that rely upon POs have improved visibility over spend and are able to manage cash flow better.
- Duplicate order avoidance – Having systematic tracking and visibility of all the orders being made by your organization, including dates and quantities, will decrease the likelihood of an employee placing the same order and, thus, carrying excess inventory.
- Audit assistance – Some audits require a paper trail demonstrating that a manager approved a purchase and POs will provide just this information. You won’t have to comb through old vendor emails to find the information auditors need.
- Internal fiscal control – POs allow you to narrow down the number of employees who are authorized to make purchases. They can also enable you to cut down on maverick spend by limiting which items are allowed to be purchased from which vendor. Purchase orders are one piece of the vital 3-way match, where you compare the PO, invoice, and receiving report to ensure quantities, items, and prices match and that the payment being requested is valid.
- Fraud fighter – The paper trail provided by POs can help you identify internal fraud. You’ll be able to catch if an employee is requesting more money than needed for an order (so they may pocket the difference) and/or determine if they’re ordering items for personal use.
- Error Eliminator– Purchase orders spell out all the details of what you’re procuring, which can help prevent your suppliers from misinterpreting orders.
- Vendor Convenience – POs make life easier for your vendors as they clearly communicate what you need without them needing to ask clarifying questions. This can help speed up the entire purchasing cycle.
- Order tracker – With POs, you’ll have written record of what has been ordered, when it’s arriving, how you’re agreeing to pay for it, etc. for better order tracking and management.
Ardent Partners reported in 2017 that best in class organizations have 71% of their invoices linked to POs, with best in class being defined as those businesses having the lowest average invoice processing cost and shortest average invoice cycle time. Surely, purchase orders have been embraced by high performing teams. Taking on any change can seem like an uphill struggle but POs can actually save you time in the long run, especially if you automate them along with all your other processes.
Read our White Paper, To PO or Not to PO?, to learn more about how instrumental POs can be in tracking expenditures, improving communication, and reducing approval time.