One of the most important parts of the procurement process is getting paid—which is why getting your purchase order system is vital. When acquiring products and services, transactions need to run smoothly and be compliant with company policies. A good purchase order process keeps things moving along and your supply chain in good stead.
In this guide, we break down the purchase order process into easy steps to follow, and give you some best practices and tips to optimize this important procurement function.
A purchase order is a document that a buyer gives a supplier to request an item for purchase. The purchase order is a commitment to a sale. Once accepted by a vendor, these vital documents are legally binding, giving both buyer and seller the confidence to manage their businesses effectively.
POs are used to help companies manage their budgets—counting all the POs gives the finance department a sense of the company’s financial commitments. They help the compliance department ensure what they’re purchasing is compliant with the company’s policies. And they help the procurement department manage orders.
But a purchase order is not an invoice. While a purchase order is the request for an item or service, an invoice is a request for payment for delivery of an item or service. Essentially, the buyer sends a purchase order to the supplier, the supplier sends the item, and then the supplier follows it up with an invoice. Here’s one version of the process in more detail:
Once the company has decided on the purchase of a good or service, it raises a purchase order, detailing the terms of the intended transaction—including price and payment terms.
After the purchase order is created, it must be reviewed for accuracy and to ensure it is fit for purpose. Questions to ask at this point are: is the order for the correct items? Does it have the correct and budgeted-for price? Once the PO has been reviewed it must be officially approved so that it can be recorded and sent out to the supplier.
In the old days a PO would be sent to the vendor via mail or courier. Of course, these days the sending of a PO is usually electronic. However, it is still an important step in the process, because by sending out the PO you are registering your intent to purchase the item, along with the proposed terms. At this point the procurement and financial teams also need to file a record of the purchase order, so that when an invoice comes in after the transaction, the PO and the invoice can be reconciled.
When a supplier receives your PO, they send you the goods or deliver the required service. Unless you are also using a request for proposal (RFP) process, the terms within the PO can be used as a document to monitor whether the vendor is living up to the terms of the agreement.
The supplier sends the buyer an invoice, which contains the PO number and terms.
In a process called three-way matching, the buyer makes sure what they’ve been invoiced for matches what they received—and that it all matches the original purchase order.
Assuming everything matches, the company approves payment of the invoice and completes the financial transaction.
When everything is completed to the buyer’s satisfaction, the PO can be closed out and filed.
As you can imagine, there is an incredible opportunity for automation at many stages of the process. In fact, with the right procurement platform, the entire process can be automated and streamlined to provide cost savings, efficiencies and to keep PO records handy in a digital format for review and analysis.
Purchase orders need to be uniform across the entire company so that they’re easy to use, compliant with the organization’s policies, and capturing the same key information with every transaction. Here’s what your purchase orders need to contain:
Procurement platforms like Fairmarkit not only make the purchase order creation process simpler by providing PO templates, but they also act as a repository for POs and provide analysis tools that help you pull keep information out of your POs—how much have you orders and from whom, across all POs? What are the common terms of orders across the entire company? How often do suppliers deliver according to the terms of the POs? Creating a purchase order in a platform like Fairmarkit not only speeds up the process dramatically, it also helps procurement teams add value to their organization by gleaning insights and finding efficiencies in the entire PO process.
Many organizations want to reduce the time it takes to complete a purchase order cycle. The good news is that by following these simple best practices, you can not only reduce your PO cycle time, but you can also improve your organization’s overall bottom line:
For more advice on purchase order processes, check out Fairmarkit’s blog, The Source.
