A Quick Guide to Purchase to Pay
Purchase to pay, procure to pay, source to pay: these terms can get confusing, quickly. Different organizations and products use these phrases to mean different things.
Differentiating between these terms can help you find the right technology to bring efficiency and productivity to your procurement process. In this guide, we’ll establish some standard definitions for purchase to pay, procure to pay, and source to pay, as well as break down the steps in the purchase to pay process to help your team find solutions for improving the overall procurement function.
What is purchase to pay?
Purchase to pay is defined as an integrated system that fully automates the process of purchasing goods and services for a company. Often abbreviated as P2P, purchase-to-pay systems handle everything from the purchase of goods to the payment of the vendor.
In comparison, source to pay (S2P) is considered the process of sourcing raw materials or components necessary to manufacture a product or provide a service. These digital solutions cover activities that also fall under P2P, plus the sourcing of products and services. Source to pay encourages more efficient processes and a higher quality of overall spend management.
And, finally, procure to pay systems integrate accounts payable with purchasing. Many procurement software vendors differentiate procure-to-pay by linking procurement with the financial department.
Procure-to-pay and purchase-to-pay are two terms that are most often used interchangeably; ultimately, these systems aim to provide full insight into both cash-flow and financial responsibilities. A majority of the organizations using these systems opt to centralize their procurement departments or to establish a shared services organization with a similar goal in mind.
Whichever term you use, what’s most important is that there’s an established, standardized process for sourcing, procuring, and purchasing the materials, goods and services needed for the business to run smoothly.
Elements of the purchase to pay process
The purchase to pay process starts with requisitioning, proceeds to procurement, and ends with final payment. Each of these elements is guided by technology that automates the process. Here’s an example of how purchase to pay could look at your organization.
The system begins with requisitioning, or the formal request for a product or service by a department within the organization. Once the procurement team receives a request, they will use an e-procurement system or spot buy catalog to begin finding preferred suppliers. If this is an entirely new need, the procurement team might begin an RFX process to find a vendor who can supply the goods and services.
Once the product has been selected, the buyer will send a purchase requisition to the manager who initiated the request.
- Raise a purchase order
A purchase order is issued once the requisition is approved by the internal manager. A purchase order is a document that a buyer gives a supplier to request an item for purchase. Once accepted by a vendor, these vital documents are legally binding, giving both buyer and seller the confidence to manage their businesses effectively.
The purchase order finalizes the contract negotiation and includes the total costs, description of the goods or services, quantities ordered, and the approval workflow. Usually, the purchasing company creates a purchase order to be circulated internally, approved by the senior leaders, and sent to the finance team.
Upon approval of the purchase order, the company’s finance team will send the details to the supplier with additional information:
- The reference number
- Payment terms
- Information regarding delivery and other details
The receipt of the purchase order triggers the supplier to prepare and send the goods and services per the agreement.
- Receive the goods and services
The supplier prepares and sends the product or service to the company. Upon receipt of the order, the company should document that the order arrived as well as double-check that the order was fulfilled accurately. Create a record of the order and contact the supplier promptly if anything is missing or damaged.
- Process + pay the invoice
Some suppliers require payment before releasing the goods: they will send an invoice upon receipt of the purchase order with a specific payment due date. Others will invoice on a regular schedule (quarterly, for instance).
When an invoice arrives, the company must reconcile the paperwork and complete the transaction. This involves checking the purchase order, the invoice, and any receipts to verify that records are accurate and compliant. Assuming everything matches, the company approves payment of the invoice and completes the financial transaction.
Clearly, the P2P process involves routing approvals, reconciling paperwork, and keeping clear records. This process can be labor-intensive and time-consuming — but also repetitive, which is why it can be automated relatively easily.
Tools like Fairmarkit can automate virtually every step of the purchase to pay procedure. Sourcing events, which generally don’t fall under P2P, can be automated from supplier identification, bid invitations, and response scoring. Fairmarkit’s platform can award an RFx event, notify suppliers automatically, and trigger Purchase Order processing in your ERP. When a P2P process is automated, it’s not only faster, but the data collected from each PO can be stored digitally to review later and improve the process or flag problems in the system.
Purchase order automation allows companies to better manage their supply chain. With automated P2P, suppliers are alerted to their bid results in a timely manner. Communication is streamlined through one centralized platform, adding transparency to the supplier/buyer relationship. Ultimately, this helps build better procurement-supply-chain partnerships and strengthen the backbone of your supply chain.
P2P systems are vital to budget management, not only for procurement, but across the entire organization. To learn more about procurement budget management, check out our blog, The Source.