The purchase order is an essential document of the purchasing process for any business.
However, purchase orders and their processing are often plagued by delays, errors and manual inefficiencies.
Perfecting the purchase order process is considered time-consuming and therefore often not prioritized by businesses. However, an efficient purchase order process goes a long way in maintaining AP efficiency.
In this article, we will cover
- what is the purchase order process.
- the various steps required to execute a buy order.
- how to optimize the purchase order process;
What is the purchase order process?
A purchase order is a document that officially confirms the purchase of goods and services between a buyer and a seller.
It is created by the buyer to authorize a transaction that may not have been previously confirmed in writing.
As it is an official document, it is legally binding on both parties.
Here’s what a typical purchase order looks like.
We know that creating a buy order means starting a market.
The purchase order process is the series of steps that businesses follow to purchase goods or services from suppliers. It is so named because the process can be thought of as a set of tasks aimed at creating, approving, implementing and finalizing a purchase order document from start to finish.
What should be included in the Purchase Order?
A purchase order should include all relevant information about the transaction, such as:
- Specifications and quantity of items required
- Contact info
- The price at which goods or services are to be purchased
- Date of order
- Delivery times and details
- Payment terms and conditions
- A purchase order number for tracking
Stages of the purchase order process
The purchase order process includes several critical steps to ensure compliance and efficient processing. Below are the basic stages. We will follow an example of a business that wants to buy office chairs.
- Create a Purchase Order: The business needs 50 new office chairs. The office manager creates a PO to order them.
- Request for discount (RFQ) : An RFQ is sent to several suppliers to obtain prices and lead times for the chairs.
- Supplier selection : After comparing the offers, a suitable supplier is selected to offer the best price and delivery terms.
- Contract negotiation: The company negotiates the terms with the supplier by agreeing on the delivery date.
- Proof of goods/services: Once the chairs are received, the business checks them against the PO to make sure the order is correct. The goods receipt is created if it is not already included with the order.
- 3-way matching: Match PO, supplier invoice and proof of delivery to confirm everything lines up.
- Invoice authorization and payment: Once confirmed, the business authorizes the payment and the accounts payable department processes the invoice.
- Record keeping: All purchase related documents are stored for future reference.
- Close purchase order: Once everything is done, the PO is marked as closed in the system, signaling the end of the process.
Challenges in the purchase order process
As we saw above, the purchase order process is arduous. Here are the problems businesses commonly face when implementing it –
- Manual tasks that are repetitive and inefficient.
- cause errors and delays.
- high costs associated with manual labor
- These problems increase enormously as the business scales
- it is difficult to implement effective approval procedures and exercise cost control.
- missing or outdated analytics
- leads to poor supplier performance management
- lack of expenditure visibility
Automation of the ordering process
Going through the above steps of the process, we can see that the tasks involved are manual, error-prone and slow.
A business can introduce a PO automation software to overcome these challenges.
See how an automated PO system like Nanonets automates the above workflow.
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.
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.
Approval notifications are sent and can be easily managed with popular communication tools like Slack and Microsoft Teams.
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).
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.
Automated triple matching ensures accuracy by automatically matching invoices, purchase orders and delivery notes before processing payments.
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.
8. Integration with ERP/Accounting Software:
Nanonets integrates with various ERP and accounting systems for a unified procurement and financial data management experience.
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.
Purchase Order Process for Small Businesses
Larger companies typically need an integrated purchase order (PO) system to manage their procurement process. When multiple purchasing transactions involve a large number of employees, it is important to have complete tracking and tracing of the entire process.
Now, let’s talk about small business. They often operate with limited resources and may wonder if implementing a PO system is necessary.
However, there are several compelling reasons why even small businesses can greatly benefit from having an automated PO system.
- Improved financial control: By documenting each purchase, businesses can easily track their expenses and identify any unnecessary expenses.
- Improved shopping process: It helps keep a clear record of what was ordered, when it was ordered and by whom. This reduces the risk of errors such as ordering the same thing twice or receiving the wrong quantities.
- Cost saving: While setting up a PO system may require an initial investment, the long-term savings can be significant. By avoiding costs incurred in manual tasks, preventing over-ordering, negotiating better terms with suppliers and reducing administrative costs, small businesses can achieve significant cost efficiencies.
- Scalability and Growth: As a small business grows, its purchasing needs become more complex. Fortunately, a PO system can scale with the business, providing the necessary infrastructure to manage increased order volumes and more complex supply chains.
In conclusion, although implementing a PO system may seem daunting at first for small businesses, the benefits it offers in terms of financial control, efficiency and scalability make it a worthwhile investment. By adopting a PO system, small businesses can streamline their operations, reduce costs and create a solid foundation for future growth.