Managing purchase orders effectively is a big deal. Smart procurement systems and processes can save you time and money, reduce effort and conflict, and keep the wheels turning regarding pre-approved business spend. The real beauty in these processes? Understanding 1) how to use them and 2) how to fit them into your company's overall financial and operational resilience.
A purchase order is effective any time you order something you intend to purchase. Take, for example, the last time you were at a restaurant. You likely chose a dish, the waiter wrote it down and then took it to the kitchen.
The above is a simple example of a purchase order in action. In business, a purchase order is a document from a buyer to a seller detailing the items or services they wish to purchase, their quantities, and agreed prices. It's very similar to your restaurant order, but of course, a bit more formal.
Why are purchase orders so important? The main reason is that they serve as a legal record of a transaction between a buyer and a seller, and so help to avoid any misunderstandings or mistakes. With the help of purchase orders (and wider purchase order systems), businesses can maintain clear communication, avoid errors, keep clear audit trails, and increase control and visibility over committed company spend. They can also offer protection to both parties in case of disputes.
What are the different steps in the purchase order process? The first step starts with the buyer. They identify a need for goods or services. They then create a purchase order with all the required details, including what they want to buy, how much they need, and the desired delivery date.
The buyer then sends the purchase order to the supplier, who reviews it and decides whether to accept it. Once the order is delivered, the buyer checks it against the purchase order to ensure everything is correct and that they have received the proper service with the right amount.
The process is like a relay race, where the baton is the purchase order, passed from buyer to seller and back again.
To be effective, purchase orders should be part of a more comprehensive purchase-to-pay process that supports robust approvals and payments. You can implement different strategies and tools to help this, but some are more in-depth than others regarding features like approval workflows, payment methods, automation, and more.
Purchase orders work best within purchasing processes that include the following:
The process ends with updating your company records and closure post-successful payment completion.
Not all purchase orders are the same. Based on the unique requirements of your business and the already existing agreements made with suppliers, there are several different types:
Understanding the different types of purchase orders can help businesses simplify their procurement process and reduce manual work. This is vital for ensuring they can focus on more strategic, value-adding initiatives instead.
One of the most critical aspects of purchase orders is that they are, in a nutshell, a contract and can have legal consequences. Once a seller accepts a purchase order becomes a legally binding agreement. It's like signing a contract to buy a car; you must pay once you've signed.
Businesses on the supplier side must ensure they can fulfill their obligations before accepting a purchase order.
Managing purchase orders is a bit of a tightrope walk. You've got to keep all the balls in the air — tracking orders, maintaining records, communicating with suppliers, and more. It's crucial to have a system in place to ensure everything runs smoothly. This might involve using spreadsheets, databases, or a dedicated procure-to-pay solution, which can even automate much of the work involved.
As mentioned, purchase orders are most effective when part of a broader, more in-depth purchasing or procure-to-pay process. Therefore, easily following up and monitoring purchase orders is crucial to a successful procurement process. Four effective tactics are as follows:
Remember that not every strategy or solution works for every company, so be sure to find one that works for you. Download and fill in our new guide and checklist ‘Perfecting procurement: How to streamline spend management from requisition to payment,’ to assess your current setup and see what you’re missing.
Keeping track of every transaction linked to your purchase orders might initially seem tough. But if you can stick to a few key tactics, it gets much more straightforward:
These tactics will reduce compliance risk, increase audit efficiency, and preserve accuracy.
Clear-cut communication greases the wheels of collaboration. And this is incredibly true for purchase orders.
No matter how you work with suppliers and what systems you use, the following two points are incredibly helpful in ensuring good relationships and positive outcomes.
Although the two suggestions above seem like a big commitment initially, developing effective cooperation will strengthen your company relations and save time, money, and stress.
Now that we're talking about software, let's explore purchase order systems. The purpose of these digital technologies is to make purchase order processes more efficient. These systems can track orders, automate activities, and link with other corporate systems like accounting or inventory management software.
Selecting the correct tool is similar to choosing the ideal car; you must consider your budget, the required features, and how well the tool will integrate with your current setup.
Choosing the right electronic solution for your business takes time and effort. Not only are you looking for efficient purchase order processes and automation, but you also want a system that fully connects with everything else you need. You don’t want to use multiple tools for corporate cards, expense management, and procure-to-pay, as you’ll have to look in different places to assess and control your spending, and it can quickly become inefficient and confusing.
Using a complete spend management solution is probably the best option, and some of the key features you must look for should include:
You’ve decided to implement a purchase order process. Here are a few tips to help you get the most out of it.
First, streamline your process to reduce errors and improve efficiency. This might involve using templates, automating tasks, training staff, or implementing procure-to-pay software with time-saving automation.
Second, negotiate favorable terms with your suppliers. This could mean securing discounts for bulk purchases or agreeing on good delivery times.
Finally, ensure you comply with all relevant regulations and industry standards. It's like driving — you need to follow the rules of the road to avoid fines and accidents.
Switching provider(s) can be daunting if you're in a big business. In contrast, if you're in a growing business, you might avoid implementing a purchase order process altogether. But would things look different if you knew you could automate your purchase order process so it would run smoothly with minimal intervention?
That's the promise of intelligent procure-to-pay with purchase order automation. It can support you to automatically create, approve, track, and match your purchase orders, freeing up time for you to focus on other tasks.
Automating purchase order processes obliterates manual work time, giving you more time to focus on high-value tasks. The time you normally spend on recording data can be spent on strategic activities instead.
Error reduction is a big win, too. Without human intervention, miscalculations or transposition mistakes are virtually eliminated. This leads to a higher accuracy rate, ensuring every 'order example' corresponds to its requisition correctly.
Another noteworthy benefit of some automated purchase order systems is the increased prominence of every "purchase order." Every transaction may be tracked in real-time, from beginning to end, using an automated system. This translates into improved decision-making due to readily available knowledge and faster reaction times when problems arise.
Even with the best systems in place, challenges can arise with purchase orders. You might receive an incorrect order, face delays, or encounter price disputes. The key is having strategies to resolve these issues quickly and effectively. This might involve regular supplier communication, thorough record-keeping, and a clear dispute-resolution process.
The most common issues and problems that can arise during the purchase order process are:
Smooth transactions seldom happen by chance but result from deliberate strategy and good practice.
While experience is valuable, these strategies can help tackle common challenges with purchase orders.
Clearly, purchase orders are a vital tool for businesses. They provide a clear record of transactions, help manage purchases, and offer legal protection.
By understanding the purchase order process, choosing the right tools, and following best practices, businesses can streamline operations, reduce errors, and build strong relationships with suppliers.
At Payhawk, our procure-to-pay automation is part of a complete spend management solution that helps customers save time, money, and avoid errors. Learn more about procure-to-pay automation here.
Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.