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The Importance of Purchase Orders and the Impact of Automated Software

Validation that Automated PO-Based Invoicing Further Reduces Costs and Improves Control

March 4, 2016

10 min read

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In many ways, accounts payable (AP) automation is about control. AP automation controls costs, controls invoice approval and exceptions workflows, controls tracking and reporting, and controls opportunities to capture early-payment discounts. Often, lost within the discussion about AP automation is the greater control provided by migrating to purchase order (PO)-based invoicing.

For PO-based invoicing, approval to purchase goods occurs before a PO is issued to a supplier. This approach delivers significant operational and reporting benefits to payers, as well as potentially faster payments for suppliers. As a result, PO-based invoicing have gained acceptance. Advanced AP automation solutions make it easier than ever for companies to apply PO-based invoicing.

Adoption of PO-Based Invoicing – Don’t fall behind the curve

In an era of attention to the bottom line, it is no surprise that PO-based invoicing has great appeal.

PO-based invoicing empowers companies to have better control over spending and ensure that purchases are made with preferred suppliers. POs enable staff to see where they stand against their budget before a purchase is made and to better forecast cash flow through real-time reporting.

PO-based invoicing also helps eliminate mismatches and exceptions that lead to blocked invoices. Also, POs help make supplier invoice submission processes easier and as a result enhance supplier relationships. Other drivers of PO-based invoicing include improved operational efficiency, accelerated payment turnaround, fewer manual processes and streamlined approval workflows.

For all these reasons, PO-based invoicing has either already been adopted or a top AP initiative for many innovative organizations.

The Statistics

PO-based invoices now represent 52.8 percent of invoices handled by companies that responded to the 2013 AP Automation Study published by the Institute of Financial Operations (IFO).

The IFO study also reported PO-based vendor invoices represent 58.9 percent of the invoices handled by companies with more than $5 billion in annual revenue. Among companies with less than $250 million in annual revenue, PO-based vendor invoices represent 43.4 percent of their invoices.

Furthermore, 72.6 percent of respondents said that PO automation is an important component of an AP automation initiative. A whopping 87.5 percent of respondents from companies with more than $5 billion in annual revenue said PO automation is an important component of an AP automation initiative. Seventy percent of survey respondents from companies with less than $250 million in annual revenues said PO automation is an important component of an AP automation initiative. The majority of respondents to IFO’s survey from companies with morethan $5 billion in annual revenues said eliminating mismatches and exceptions was the biggest driver of PO-based invoicing.

PO-Based Invoicing Is Proven as the Fiscally Better Model for Invoice Processing

PO-based invoicing has a significant cost savings impact on an organization’s productivity. On average, an AP staff member processes less than one-third as many non-PO-based invoices as PO-based ones, according to The Institute of Finance & Management’s (IOFM) 2013 AP Benchmarking Study. In 2013 IOFM research found the average number of non-PO-based invoices processed per month by a full-time AP staff member is 903. This number is much lower when compared to the average of 2,728 PO-based invoices processed per month by an AP staff member. This should come as no surprise since processing non-PO-based invoices is typically more complex, thus more time-consuming than processing PO-based invoices.

AP departments can achieve even greater savings by combining PO-based invoicing with automation. The IOFM 2013 AP Benchmarking Study also revealed, on average, AP staff members working with a high level of automation can process more than four times as many PO-based invoices per month as those AP staff members that work with a low level of automation.

Legacy Partners

Legacy Partners is one company that benefits from PO-based invoicing.

Legacy Partners acquires, develops and manages residential communities. Since 1968, the company has acquired and developed more than 68,000 apartment homes and currently manages more than 14,000 units for investors and third-party clients.

Operations Director for Legacy Partners, Lisa Dixon, noted the company continues to grow, largely with conventional multi-family properties. The company, based in Foster City, CA, recently expanded into Baltimore, Chicago and Minneapolis, as well as North Carolina, South Carolina and Texas, expanding on its large footprint of communities in the western U.S.

“Looking for a way to better manage AP for its properties and administrative offices, Legacy Partners deployed NexusPayables in 2011,” said Lisa Dixon.

NexusPayables is a web-based software that automates the traditionally paper intensive AP process. The software digitally manages each aspect of the AP process, including on-site purchasing, POs, approval and exceptions workflows, invoice data capture, budgets and actuals, vendor compliance, and reporting. The software seamlessly integrates with any existing general ledger accounting system.

The Power of Nexus PO-Based Invoicing In Use

As part of its Nexus implementation, Legacy Partners began requiring POs for all invoices. “There was a lot of resistance because people view purchase orders as extra work,” Dixon recalled. “In some systems, POs are extra work. But in the Nexus system they are not. The system shifts when the work is done: coding and approval are done at the time of purchase.”

According to Dixon, one advantage of PO-based invoicing to Legacy Partners users is they always know “what they are buying, how much it costs, and whether they are going over budget”. Dixon further explains that with POs the company knows “well in advance, and with forethought” whether they will be over budget, therefore allowing property supervisors to decide whether something can be purchased or not.

Also, invoices do not always make it clear what was purchased, however, with PO-based invoicing this is no longer an issue “Some invoices use a code to describe an item. If you can’t tell what was purchased, you have to get a service tech on the radio to help figure it out, Dixon says. “In a PO-based invoicing environment, you always know what you purchased.”

PO-based invoicing with the Nexus solution also streamlines reporting. Dixons says, “Nexus also automatically generates a month-end budget variance report, eliminating a considerable amount of work for property managers,” The system captures budget overage notes at the time a PO is created. Property managers no longer have to “go through 30 days of activity in their minds to determine why they made a particular decision” because the note is already there.

Efficient and Significantly Faster

Dixon said that PO-based invoicing eventually won over her company’s staff and its vendors. “We’ve had great adoption from even our most staunch anti-PO employees,” Dixon said. “They now realize that POs make the overall process more efficient and significantly faster”. In instances where a “mom and pop” supplier does not have the ability electronically receive POs, the company calls the supplier and provides them with a PO number to include on their invoices, Dixon explained.

Not only has Legacy Partners seen adoption for its own employees, but the PO-based invoicing has impacted their vendors. The vendors the company uses has shown excitement and happiness over the switch to using POs. “Vendors recognize that they are going to get paid by us a lot faster by using POs,” Dixon says. “When the invoice comes in, all of the necessary approvals have been completed, and the site simply has to match the invoice with the PO, and we can turn a check very quickly,” In a non-PO environment, an invoice might have to be routed to “18 different hands” for approval for payment. 

Paperless PO to Invoice Workflow

Legacy Partners is not the only company to benefit from PO-based invoicing.

PO-based invoicing is a major reason SoCal Consulting recommended its client, RA Snyder Properties, a full-service property management company with over 30 years of experience, automate invoice processing in February 2011. The company manages residential rental property and commercial income producing rental properties. SoCal Consulting is a third-party business management company that helps companies increase operational efficiency and effectiveness.

Before automating its invoice processing, RA Snyder Properties tracked purchases using spreadsheets shared via e-mail between its corporate offices and properties. “It was extremely difficult for staff to determine whether they were using the latest version of the spreadsheet,” recalled RA Snyder Properties’ Richard Bonney. “We knew that deploying an automated solution for PO-based invoicing would make it easier for staff to track purchase orders and the related spending.”

PO-based invoicing has saved staff at RA Snyder Properties a lot of time and frustration. It also helps the company better control spending. Management at RA Snyder Properties was surprised to discover staff would order goods and then create a PO log after the fact before the company implemented a workflow that required POs to be created in advance for all purchases.

Linking POs with invoices also has significantly reduced the amount of data entry required to process and approve invoices. This new workflow not only saves staff time and frustration, but it adds an element of control.

Maintaining Budgets with PO-Based Invoicing

Steiner + Associates moved to PO-based invoicing a few years ago to streamline the business processes in its accounting department. The mixed-use developer was surprised when PO- based invoicing immensely helped its operations team with budgeting.

Previously in a non PO-based environment, the company’s property management team did not know where they stood with their multi-million dollar budgets until reports were published at the end of each month. After implementing Nexus in November 2007, PO-based invoicing and reporting has allowed the staff of Steiner + Associates to view actual invoice amounts, as well as any POs in the system and any invoices being routed for approval.

Vice President of Systems Operation for Steiner + Associates, Karen Blake, explains, “Our property management staff knows exactly how much they have committed against the budget, at any time.”

The combination of PO-based invoicing and the budget forecasting report helps staff know exactly where they are, in real time. Steiner + Associates have been extremely pleased with the efficiency and effectiveness of PO-based invoicing.

The Bottom Line

PO-based invoicing will continue to grow and become an AP standard. The process to request approval prior to purchases holds value in many aspects.

The PO-based invoicing approach is proven to help companies achieve better control over spend, ensure purchases are with preferred suppliers, eliminate mismatches and exceptions that lead to blocked invoices, improve forecasting, and streamline the invoice capture process from suppliers through electronic PO to invoice flip.

Best of all, AP automation solutions such as NexusPayables make it easier than ever for organizations to implement PO-based invoicing, and manage and track their PO processes.

About Nexus Systems

Nexus Systems is the leading provider of web-based applications that drive business process efficiencies and business process accountability, focusing on Accounts Payable. From its inception in 1999, the team at Nexus Systems has worked diligently to maintain its reputation as a highly responsive, innovative, and dynamic software company. Nexus Systems is a privately held company headquartered in the Washington, DC, Metropolitan Area, in Falls Church, Virginia. Its staff is comprised of technically savvy, hand-picked professionals with a dedication to satisfying each customer. Its flagship product, NexusPayables, automates the traditionally paper intensive accounts payable procure-to-pay process and is recognized as the best-in-class paperless solution. The NexusPayables application enjoys continued success as a result of its mature and robust functionality, intuitive interface, flexibility, compatibility with other systems, and overall ease of use.

About the Author

Mark Brousseau is a noted analyst, speaker and writer, with more than 21 years of experience advising leading providers of payments and document automation solutions. He is chair of The Institute of Finance & Management’s (IOFM) payments practice and leads AP, AR and payments research and educational projects for both IOFM and the Institute of Financial Operations (IFO). Brousseau began his career in financial services as senior editor of Item Processing Report, where he won many editorial awards. Additionally, he has written a popular guide to writing RFPs, and has authored many articles. Brousseau resides in York County, Pennsylvania with his wife and three sons.