The efficient management of procurement is essential for any business, regardless of size or industry. Today, as organisations juggle numerous vendors and suppliers, implementing a robust purchase order (PO) system can be a game-changer. 

This article explores the reasons to use a PO system and delves into the intricacies of the PO process. We’ll also provide insights on setting up an effective PO system. 

Before we dive into the reasons to use a PO system, it’s important to establish a clear understanding of purchase orders and purchase order systems.

A purchase order is a document that a buyer issues to a seller. POs detail the products and/or services that the buyer wants to purchase from the seller. POs typically include a unique purchase order number, details of the products/services, the unit cost and total amount due, and other information relevant to the purchase. Once both the buyer and the seller sign a PO, it is considered a legally binding document.

A purchase order system is a tool used by businesses to streamline and manage their procurement processes. A PO system enables you to record and control who is authorised to make purchases within the organisation. It offers real-time insight into forthcoming payments, allowing you to monitor and understand your cash flow. With a well-documented process, the purchasing cycle becomes more transparent.

Here are some of the reasons organisations choose to use a PO system:

• Control and compliance: A PO system establishes control over the purchasing process and ensures compliance with internal policies and external regulations. By requiring a PO for all procurement activities, organisations can enforce standard purchasing procedures, maintain proper authorisation levels, and mitigate the risk of unauthorised purchases.
• Accuracy and accountability: A PO system provides a structured framework for documenting order details. It creates a clear record of each transaction, which improves accountability and aids in resolving any discrepancies or disputes that arise.
• Budgetary control: Businesses can maintain better control over their budgets with a PO system in place. POs provide a mechanism to track expenses and commitments, enabling organisations to effectively monitor and manage their spending. They help prevent overspending, enable better budget forecasting, and support financial planning and analysis.
• Vendor management: A PO system facilitates effective vendor management. By centralising purchasing activities, finance teams can establish preferred vendor lists, negotiate better terms and conditions, and maintain a consistent purchasing history. This enables businesses to build stronger relationships with their suppliers, optimise procurement costs, and improve overall vendor performance.
• Streamlined workflow: Implementing a PO system streamlines the entire procurement workflow. It simplifies the purchasing process by standardising and automating repetitive tasks, such as generating POs, sending them to vendors, and tracking order status. This increases operational efficiency, reduces human error, and saves time for the procurement team and other stakeholders.
• Inventory management: PO systems integrate with inventory management systems to ensure accurate inventory levels. By creating POs for items that need to be replenished, organisations can effectively manage their stock levels and avoid stockouts or a surplus of inventory.
• Audit and reporting: A PO system provides a robust audit trail and reporting capabilities. It enables businesses to generate reports on POs, vendor performance, spending patterns, and other key metrics. This information is valuable for internal audits, compliance reviews, and financial reporting. It aids businesses in making data-driven decisions to optimise procurement processes.

A PO system is a critical tool for businesses of all sizes to enhance their purchasing processes and achieve cost savings.

The PO process in accounts payable (AP) involves several steps to ensure the accurate recording and payment of expenses related to purchases made by a company. 

Here’s a general outline of the PO process:

1. Purchase requisition: The process usually starts with a purchase requisition initiated by the department or individual in need of a particular product or service. The requisition provides details such as the item description, quantity, estimated cost, and any other relevant information.
2. PO creation: Upon approval of the purchase requisition, a PO is created. The PO is a formal document issued by the buyer to the vendor/supplier, containing detailed information about the purchase, including item descriptions, quantities, agreed prices, delivery dates, terms, and conditions.
3. Order verification: The PO is reviewed and verified to ensure accuracy and to ensure that it’s compliant with the company's policies. This step may involve checking the budget availability, supplier selection, and obtaining any necessary approvals.
4. Order placement: The approved PO is sent to the vendor/supplier. It serves as an official request to deliver the specified goods or services.
5. Goods receipt: When the vendor delivers the goods, the receiving department inspects and verifies them against the details mentioned in the PO. Any discrepancies, damages, or quality issues are noted.
6. Invoice verification: Upon receiving the invoice, the AP department ensures it’s legitimate, accurate, and not a duplicate.
7. Invoice approval: Once the invoice is verified, it goes through an approval process, which may involve matching it with the PO and goods receipt in the company's financial system and having authorised individuals review and approve the invoice for payment.
8. Payment processing: After the invoice is approved, the AP department initiates the payment process. This may involve generating payment instructions, issuing cheques, initiating electronic funds transfers (EFTs), or processing other payment methods according to the company's established procedures.
9. Vendor payment: The approved payment is sent to the vendor/supplier within the agreed-upon payment terms.
10. Recordkeeping: All relevant documents, including the PO, goods receipt, invoice, and payment details, are recorded and maintained for future reference, auditing, and financial reporting purposes.

It's important to note that the specific steps and processes can vary between organisations, depending on their internal procedures, systems, and controls.

Identifying the need for a PO system

The first step in setting up a PO system is identifying the need for one. 

To do this, we suggest that you assess your current procurement process looking for pain points such as manual data entry errors, lack of visibility into purchases, or difficulty in tracking spending. Make sure to consider the volume of POs your business generates, the complexity of your supply chain, and the number of employees involved in the procurement process. Implementing a PO system is likely to be beneficial if you find that your business is experiencing inefficiencies or needs more control over purchasing activities.

Choosing the right software 

Once you've identified the need for a PO system, the next step is choosing the right software solution. 

Look for software that meets the unique needs of your business. Consider factors such as scalability, ease of use, integration capabilities, and customisation options. Evaluate different software vendors, read reviews, and compare features to find a solution that aligns with your budget and requirements. Look for features such as automated PO generation, real-time tracking, supplier management, and integration with accounting systems. Choosing software that offers strong data security measures to protect your sensitive purchasing information is also essential.

Training employees to use the software

After selecting the appropriate software, the final step is training employees in the use of the software. 

Offer comprehensive training sessions to all relevant staff members, including those involved in purchasing, finance, and inventory management. Conduct hands-on workshops, provide user manuals, and offer ongoing support to ensure a smooth transition to the new system. Encourage employees to ask questions, share their concerns, and provide continuous feedback to improve the user experience. Consider appointing a system administrator or power user who can provide assistance and serve as a point of contact for troubleshooting.

From reducing errors and ensuring transparency to optimising inventory and facilitating financial control, embracing a well-designed PO system can revolutionise your procurement operations. With PO software, like Quadient AP by Beanworks, you can enhance your ability to manage and understand your budgeted expenses while streamlining your purchase order workflow. A well-designed PO system can lead to significant improvements in procurement efficiency and cost savings.