Purchase orders (POs) are legal documents drawn up to finalize contracts between a buyer and a supplier. Today, the purchase order has become an integral part of modern business.
It is involved whenever goods or services are procured and plays critical roles
- formalization of agreements
- order tracking
- cost control
- Dispute Resolution
However, manually managing these order documents is a big hassle.
- Manual purchase order processing can increase cycle times by up to 50%.
- the error rate in manual data entry can be as high as 30%, leading to costly rework and delays.
- Businesses that use manual processes spend almost twice as much money on procurement processes compared to those that have automated systems.
All this leads to the need for a digital system that can create, track and process purchase orders in a simplified manner. That’s what a PO system does.
What is the purchase order system?
The purchase order (PO) system is a digital platform designed to automate and streamline the purchasing process. It allows businesses to create, track and manage purchase orders online.
By integrating with other business systems, such as inventory and finance, a PO system ensures accuracy, reduces manual errors, and enhances efficiency.
Today, both small and large businesses are increasingly adopting automated PO systems. These PO systems are effective at
- shopping automation
- reducing errors
- cost control
- saving time
- improve expenditure planning/budgeting
- improving relationships with suppliers
- ensuring compliance with documentation for controls
How does a PO system work?
We now know that a PO system optimizes the purchase order workflow.
Let’s look at an example of a typical manual PO workflow, and then explore how introducing a PO system streamlines the workflow.
Manual purchase order workflow
1. Purchase request:
An employee at a small manufacturing company identifies a need for new raw materials. The clerk fills out a purchase requisition form and submits it to the purchasing department.
2. Create a Purchase Order:
The purchasing manager reviews the request and manually creates a purchase order (PO) in a spreadsheet or on paper, detailing the required items, quantities, and prices.
3. Purchase Order Approval:
The PO is sent to the finance department for approval. This may include printing the document and obtaining physical signatures.
4. Send purchase order:
Once approved, the PO is emailed or faxed to the supplier.
5. Delivery of goods or services:
The supplier processes the order and delivers the goods to the company’s receiving department.
6. Matching Invoices:
The supplier sends an invoice to the company. The accounts payable team matches the invoice with the PO and receipt report to ensure consistency.
7. Payment Processing:
After matching, the accounts payable team processes the payment according to the agreed terms.
Reading the workflow above, we can see that the tasks involved are manual, error-prone, and slow. The company can introduce a PO system to remove these challenges. See how an automated PO system like Nanonets handles the above workflow.
Purchase order workflow with PO system
1. Purchase request:
An employee uses the Nanonets portal to submit a purchase request online.
2. Create a Purchase Order:
Nanonets automatically creates a PO based on the request details.
![](https://nanonets.com/blog/content/images/2024/02/image-32.png)
3. Purchase Order Approval:
The PO is routed through an automated approval workflow within Nanonets.
You can define predefined rules and conditional checks to maintain consistency across procurement activities, minimizing errors and preventing unauthorized spending.
![](https://assets-global.website-files.com/602f5459a0b1d84458c84d64/653bb952a6c34d5e72aafea1_647f3fcb83e2061e4ea5b791_smart_financial_controls.png)
Approval notifications are sent and can be easily managed with popular communication tools like Slack and Microsoft Teams.
![](https://assets-global.website-files.com/602f5459a0b1d84458c84d64/6363953dffbd5364b29e08b0_Img1.png)
These approvals include direct Call To Action (CTA), which simplify the process and facilitate rapid decision making.
4. Send purchase order:
Once approved, the system automatically sends the PO to the supplier via built-in email or a supplier portal (eg SAP Ariba, Coupa).
![Supply Chain & Operations Automation with AI](https://assets-global.website-files.com/602f5459a0b1d84458c84d64/664648c60e437bfdecff7930_6644d497a8acf9b6a3551ce6_Frame%25201000001779%2520(16).png)
5. Delivery of goods or services:
The supplier processes the order and updates the delivery status to the supplier portal, which is synchronized with Nanonets.
6. Record and match invoice data:
Nanonets extracts data from invoices, purchase orders and delivery notes automatically, minimizing manual entry and errors.
![](https://nanonets.com/blog/content/images/2023/03/image-45.png)
Automated triple matching ensures accuracy by automatically matching invoices, purchase orders and delivery notes before processing payments.
![](https://nanonets.com/blog/content/images/2024/01/image-42.png)
7. Payment Processing:
Nanonets facilitate seamless payment processes, ensuring that all transactions are completed efficiently and in a timely manner. This helps maintain good relationships with suppliers and avoid late payment penalties.
![](https://nanonets.com/blog/content/images/2024/01/image-44.png)
8. Integration with ERP/Accounting Software:
Nanonets integrates with various ERP and accounting systems for a unified procurement and financial data management experience.
![](https://assets-global.website-files.com/602f5459a0b1d84458c84d64/653bb82a88756f8574541d8e_647f3f255b177315d915566d_connect_accounting_software.webp)
By automating the purchase order workflow with a PO system like Nanonets, businesses can ensure seamless data flow across applications, reduce manual errors, and improve overall efficiency.
Are PO systems necessary for small businesses?
Larger companies absolutely need a complete PO system built to manage the procurement process. Multiple purchase transactions involving a large number of employees require full monitoring and tracking of the entire process.
Small businesses often operate with limited resources and may question the necessity of implementing a Purchase Order (PO) system. However, there are several compelling reasons why even small businesses can benefit greatly from a PO system:
- Improved financial control: A PO system helps small businesses track their expenses, ensuring they stay within budget. By documenting every purchase, businesses can easily track expenses and identify any unnecessary expenses.
- Improved shopping process: With a PO system in place, the purchasing process becomes more structured and efficient. It helps keep a clear record of what was ordered, when and by whom. This reduces the risk of errors such as duplicate orders or incorrect quantities.
- Improved supplier relationships: Using a PO system can improve relationships with suppliers by providing clear, formal documentation of orders. This ensures that both parties have a mutual understanding of the agreed terms and quantities, reducing the chances of disputes.
- Better inventory management: A PO system helps track incoming inventory, ensuring inventory levels are adequately maintained. This prevents overstocking or overstocking, which can be especially detrimental to small businesses with limited cash flow.
- Compliance and audit trail: Small businesses are often subject to audits and regulatory requirements. A PO system provides a detailed documentation trail, making it easier to comply with legal and financial regulations. This transparency can be vital during audits, providing clear evidence of financial transactions.
- Cost saving: While there is an initial investment to set up a PO system, the long-term savings can be significant. By avoiding over-ordering, negotiating better terms with suppliers and reducing administrative costs, small businesses can achieve significant cost efficiencies.
- Scalability and Development: As a small business grows, its purchasing needs become more complex. A PO system can scale with the business, providing the necessary infrastructure to manage increased order volumes and more complex supply chains.
Many PO systems such as Nanonets are now offered as Software as a Service (SaaS) with subscription pricing. This means that small businesses can access sophisticated software without requiring a large initial investment. Flexible pricing plans allow businesses to pay only for the features they need.
In conclusion, while the initial effort of implementing a PO system may seem daunting to small businesses, the benefits it provides in terms of financial control, efficiency and scalability make it a worthwhile investment.
Adopting a PO system can help small businesses streamline their operations, reduce costs, and create a solid foundation for future growth.
conclusion
The Purchase Order (PO) system has become essential for modern businesses, addressing the inefficiencies and errors of manual PO processing. Digital PO systems simplify procurement, ensuring accuracy, reducing cycle times and reducing costs.
A PO system like Nanonets automates workflows from purchase requisitions to payments, integrates with other business systems, and strengthens supplier relationships. It provides better financial control, compliance and scalability essential for business growth.
For small businesses, PO systems offer significant benefits such as cost savings, improved efficiency and streamlined processes. With flexible, cost-effective pricing models, modern PO systems are accessible and make sense for businesses of all sizes.