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Purchase Order Best Practice

Purchase Order Best Practice

Purchase Order Best PracticeQuite often during the process of implementing AP automation, the subject of Purchase Orders and the policies surrounding their use in the business is raised. This document serves to guide our customers through the re-engineering process.

Why would you want to increase your PO:non-PO ratio?As many as 7.4% of all invoices in certain industries contain errors 1. Raising PO’s provides the business with a record of what was ordered and therefore a baseline for comparison.

So what is the target ratio of PO:non-PO? Well that depends in the industry and the purchasing behavior. It could be suggested that if you are reading this document you suspect that you are probably not raising enough PO’s, and you are probably right.

The business should evaluate its purchases and understand which purchases it would like to have centralised control over. The industry standard for raising of PO’s is 50% 2 and in some industries this may be the goal. At Redmap for example, most of our purchases are either fixed or contract based and therefore there is little value in having our staff request PO’s for regular purchases. A good rule of thumb is if it is an elective purchase, raise a PO.

CapabilityThe key to strong PO processes lies in the systematic capability to enforce the policy. Key to all of this should be the finance system. The challenge is that most often many of the people that need to raise PO’s may not have a license for the finance system. Often it is cost prohibitive and forces businesses to look for other solutions.

The first order of business is to determine how the business will request and track these PO’s. There are 2 options:

Utilise the PO functionality within the finance system; or

Invest in 3rd party PO requisition portals. There are many offerings in the market, many of which can offer direct integration into the finance systems.

Regardless of the decision it is imperative that the chosen system provides some critical functionality:

Ideally it would be web-based;

It should be able to maintain levels of authorisation. PO’s being requested by the resource that is within the resource’s approval limit should not unnecessarily be held up waiting for ‘approval’;

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1 IOFM AP Department benchmarks and analysis, 2011. 2 IOFM AP Department benchmarks and analysis, 2011.

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It should be able to replicate the tables from the finance system for item codes, GL’s, customer codes etc.;

It should be capable of electronically distributing the approved PO’s; and

It should integrate with the budgeting, reporting and alerting functionality of the finance system.

OperationsHow prepared are you to increase/implement the use of PO’s? It may sound simple, but the devil is in the detail.

Does your business run with detailed budgets? Are they realistic? It is our opinion that the establishment of budgets is the first and most critical step in the PO process. Now that you have the budgets established, how do you determine what needs a PO and what doesn’t?

AuthorityWho can and can’t approve a PO? The answer has more to do with the organisational chart then the financial perspective and this authority to raise PO should replicate it.

InclusionsSo now we know who can raise a PO, when do they need to raise it? Typically this is based on one of the below factors:

Value – PO’s are to be raised for all purchases of more than $X, simple enough;

Function – raw materials that form part of the manufacturing process need PO’s but those in the Admin or Ops department do not;

Location – typically is more focused on who can approve and raise PO’s rather than whether they need to be raised or not; or

GL code – not dissimilar to the function factor above, purchases for these GL’s must have a PO raised for them.

ConclusionRaising PO’s is a good idea. It provides control to the finance department/business over the spending of corporate money. Further from an AP automation stance it provides a record in the database that can be queried when the invoice is received. This will not only provide a baseline to identify errors, but also speed up the processing of the invoices.

Purchase Order Best Practice2