PO System for Small Business

PO system for small business

Need a PO system for your small business?

Are you struggling with finding the best purchase order system for your company?

You are not alone; there are many PO systems there, so how do you select the best solution?

In this article, we walk you through key features that you need in the PO system. We will then talk about how they deliver value for your business.

Companies come to ProcureDesk when they are struggling with the following:

PO system for small business

AP(Accounts Payable) team unable to keep up with PO volume

You might have tried to use a manual process for purchase orders using purchase order forms or templates. Employees get their requests approved over email and send an email to the AP team.

The AP team then goes to your accounting system like QuickBooks, creates the purchase order, and sends the purchase order to the requester. The requester then sends the PO to the supplier.

This process works fine when you have ten purchase orders per month, but the AP team can’t keep up the volume when you have 100”s of POs every month.

Struggling with cash flow planning

You probably don’t have a PO process at all.

As a business owner, you might have high-limit credit cards. You might have individual cards for key individuals, and they make all the purchases on behalf of the company.

There is no visibility into spending and no way for you to plan for the working capital needs proactively.

Surprise invoices show up that must be paid ASAP, which causes cash flow problems.

Or you have to wait for employees to submit expense reports before you know the total spending.

If you are a fast-paced, growing company and have a high burn rate – not knowing cash flow needs in advance could lead to you running out of money.

You can proactively track all the purchases and plan your cash flow accordingly with a purchase order process.

 Growing and have no purchase order management process 

You might have had some success with purchase orders but don’t have a formal process for purchase orders.

Some employees create purchase orders, and some don’t.

The PO adoption is sporadic because employees find it difficult to create purchase orders.

There are no compliance controls, and you are probably paying invoices without proper approvals.

By implementing a purchase order system, you can increase productivity for the overall organization, increase compliance and get better at cash flow planning.

Want to know how? Then read on.

What is a PO (Purchase Order) System?

A purchase order system automates the manual purchasing process for a company. When companies implement purchase order management software, they eliminate the paperwork for purchasing a product or service.

A PO system automates the entire process from requisitions, approval, PO creation, and order tracking.

A purchase order software offers the following benefits for a small business:

  1. It provides a single place to track all purchase orders. You can track what is getting purchased, order history, and historical pricing for an item.
  2. It improves productivity by moving the organization from a manual to an online purchase order system.
  3. It helps the finance team with better cash flow planning because now you have digital purchase orders.

Must have features for a PO system

Now let’s look at key features that you need in a purchase order (PO) system. We have used ProcureDesk as an example, but these features should be available in most purchase order systems.

Purchase request automation

With purchase request automation, you eliminate a paper-based requisition process.

If your employees use a paper form to request a purchase, they will thank you for implementing a purchase requisition process.

Here is how the purchase request automation works:

The employee sees a single dashboard where they can track all their purchase requests.

You can check request status and track requests that are already approved and pending PO generation.

It helps track the key purchases and avoid any duplicate purchases.

Requisition Dashboard

You can see all the requisitions with different statuses in the example above. You don’t have to worry about looking up your emails to track requisition status.

Employees can easily request by creating a new purchase request.

The system remembers basic information like department and cost codes so that you don’t have to reenter the same information again.

Here is an example of how it works:

Purchase_request_header

You can then create a request from catalogs or just enter the description of what you want to purchase.

The system then checks for required approvals so that your employees don’t have to worry about figuring out the appropriate person for approvals.

All the employees have to do is submit the request, and the system does the rest.

Catalogs help speed up the purchase requisition process, and we will cover that in the next few sections.

Vendor catalogs 

Vendor os supplier catalogs make it easy for employees to create purchase requisitions.

With vendor catalogs, employees don’t have to spend time entering the purchasing details on the purchase order.

For example, if you purchase the same widget repeatedly, it makes sense to create a product catalog for such purchases.

Here is an example of a product catalog:

Supplier catalog

If an employee needs to purchase a widget, all they have to do is to add the product to their shopping cart.

There is no need to search the web, find the website, and manually enter the product description and pricing in the purchase order solution.

Sometimes, it is easier to browse a vendor’s website instead of creating your catalog.

For example, if you purchase from Amazon, they have a broad selection of items, and the market pricing keeps on changing.

Instead of creating a product catalog, you can link your purchasing system to the vendor’s website.

Employees can choose what they need to purchase and then send the data back to the purchasing system for approval.

Here is an example of vendor catalogs(a.k.a punchouts):

Amazon punchout with procuredesk

In this example, the employee clicks on the approval button and then routes the request back to the purchasing system.

Here is how it looks in the purchase order system:

purchase_requisition_from_Amazon

 

Purchase Approvals

Purchase approvals are automated using a PO system. You should have a purchasing policy covering your procurement process and approval matrix.

You can completely automate the purchasing approvals so that your employees don’t have to remember who needs to approve a purchase order.

The first step is to set up purchase approval rules using a configurable workflow engine.

You can set up rules based on purchase amount, category, GL codes, departments, etc.

The following is an example of a purchase approval workflow:

Purchase_order_approval_workflow
Setting up an approval workflow in ProcureDesk

In this example, the reporting manager reviews and approve the purchase request.

Now, if the purchase amount is greater than $10,000, it is also sent to the CFO of the company.

The system gives you the flexibility to set up your workflow. However, the key to an effective approval workflow process is to ensure that the senior management doesn’t become a bottleneck for approvals.

If senior management approves all purchase requests, it slows downs the purchasing cycle and leads to delays.

Follow the 80-20% principle (Pareto Principle) to ensure that the appropriate management level approves the purchases.

20% of the transactions should be approved by senior management because that helps you control 80% of the Spend.

The rest, 80% of the transactions, should be routed to the department owners.

Purchase order generation

Once the purchase order is approved, The buyer must dispatch the PO to the vendor.

The system should be able to handle different types of purchase orders, i.e., standard and blanket purchase orders.

In most cases, a vendor would need to have a purchase order unless you are ordering directly on the vendor’s website.

The purchase order generation process eliminates the need to manually create the purchase order and dispatch it to the vendor.

You need to select the appropriate purchase order template, and then the system does the rest.

The purchase order can be sent by email or electronically using EDI(Electronic Data Interchange) standards. It depends upon vendor capabilities on whether they can receive an electronic purchase order.

Here is an example of a purchase order document:

purchase_order_template

 

As you can see above, the PO captures all the relevant information that the vendor needs to process your order.

For example, it covers the item description, quantity, unit price, payment terms, and other standard terms and conditions.

It also has the supplier contact details so that the system can automatically dispatch the order contact to the supplier.

Purchase order tracking

Once the vendor receives the purchase order, you should be able to track the PO in your purchasing software.

You need to track the purchase order acknowledgment status and when the vendor will ship it.

There are two main things you need to track for a purchase order.

Vendor acknowledgment:

Vendor acknowledgment is the process for the supplier to inform the buyer that they have received your order.

The vendor can either accept or reject the purchase order.

If anything wrong with the purchase order, this process enables the vendor to provide feedback.

For example, if the pricing has changed, the vendor can request a change before accepting the purchase order.

Here is an example of vendor acknowledgment:

order_acknowledgement

 

The vendor can also use this process to provide delivery estimates. For example – if the product is back-ordered, the supplier can provide an estimated ship date.

Order shipping details

Once the vendor ships the product, they can provide the tracking details.

Some vendors refer to it as Advance ship notice (ASN).

The supplier ASN contains delivery information. The information includes the carrier name, tracking number, quantity, and the item’s details of what was shipped.

You can then use that information to track the purchase orders through the shipment process effectively.

Some vendors email this information to the buyer, and some vendors can electronically send the shipping details to a purchasing system.

Here is how you can track shipping information in a purchasing system.

ASN_tracking

Purchase order receipts

With purchase order receipts, employees can confirm what was received and whether the product was of acceptable quality.

You can use purchase order receipts for material purchases.

Companies use AP automation software for service purchases to route invoices for approval.

The invoice approval is in place of a purchase order receipt.

The warehouse team can create the receipt if you have a central warehouse.

If you don’t have a central warehouse, the person who ordered the product can create the receipt.

When a buyer creates the purchase order receipt, the AP team knows that the product has been received and can approve the invoice for payment.

Here is an example of a purchase order receipt:

Create Receipt

While creating a receipt, the buyer can confirm which line items were received and how much was received.

In the case of a partial receipt, a buyer can create a partial receipt. You can have one or more receipts per purchase order or purchase order line.

You should also set up automated reminders for the employees to create a purchase order receipt.

If you use AP automation with a purchase order system, the system will also send reminders when the AP team uploads the invoice to the AP system.

Access control

Access control helps you define what each user can do in the system.

For example, only certain people can approve or issue a new purchase order to a vendor.

You might also want to limit who can see what purchase order is in the system or only for a certain department.

An access control mechanism allows you to set up these controls in the PO system.

Here is an example of how an admin can do this in ProcureDesk.

You can create different roles in the system and then assign those roles to different users.

For example, here is an example of a Requester role.requester-role

A requester can not only create a purchase order request but also approve the purchases.

If you want to limit the user to only certain activities, just select the appropriate access level and assign the role to the user.

Integration with Accounting software

After creating a purchase order, you need to create the same purchase order in your accounting system.

You need that for record-keeping purposes, but you also need a purchase order to create an invoice in the accounting system.

That is why your PO system must integrate with your accounting software.

Most small businesses use accounting packages like QuickBooks or Xero, and your PO system should support integration with these systems.

You also need to consider whether the integration is real-time or do you need to sync the purchase order data with the accounting package manually.

For example, ProcureDesk integrates with QuickBooks and Xero, and the integration is real-time.

You don’t have to press a button to sync the data with the accounting system. As soon as the PO is approved, ProcureDesk calls the accounting system and creates the purchase order automatically.

Optional features for the Purchase order system

The above section talked about must-have features for a purchase order management system. This section will talk about the two common add-on features available for most purchase order systems.

Inventory management

With inventory management, you can keep track of the on-hand quantity of the stocked items.

It gives you instant visibility into what inventory is available at any time and what is the total value of the inventory.

Inventory management has become critical given the current supply chain challenges.

Many companies who were just working on a just-in-time model are not moving to an inventory model where they are stocking the necessary items to run the business.

It is important to avoid disruption to your supply chain and ensure that you continue to serve your customers.

Here are the critical features of an inventory management system:

Track on-hand inventory

With inventory tracking, you can easily set up the items for which you want to track inventory.

Once you set up the inventory catalog, it is easy to track the movement of the inventory.

The system automatically updates the on-order quantity when you order an item.

Here is an example of the on hand order summary:

on_order_inventory

When the buyer receives an inventory item, the system automatically updates the on-hand quantity.

This way, you don’t have to manually track what is on order and what is on hand.

If you have different inventory locations, you can easily set up different warehouse locations and track the inventory at each location.

Inventory adjustments

Once you have the inventory in one system, you need a way to release or use the inventory. This activity is called inventory adjustment.

There are multiple ways to create inventory adjustments.

You can simply create a release to adjust the inventory. The release process allows you to capture what is released, to whom, and for what purpose.

Here is an example of an inventory release.

Inventory_release

 

You can also set up a request process to allow your employees to request inventory items through a purchase request process.

A purchase request process allows employees to create one request for inventory and non-inventory process, making it easier.

Inventory valuation

The inventory valuation report gives you a summary of how much inventory you are carrying at any time.

The inventory valuation report calculates the inventory value based on the inventory valuation method you have selected for your company.

For example, you can use LIFO (Last In First Out), FIFO (First In First Out), or an average value to calculate the inventory value.

Here is an example of an inventory valuation report:

inventory_valuation_report

 

Invoice matching

auto-coding-of-supplier-invoices

Invoice matching functionality allows the AP team to match the supplier invoices with the purchase orders and reduce the time spent on processing invoices 

This set of features is called AP automation capabilities. We have covered these topics in detail, and you can check them here:

Best AP automation software for small business 

AP automation software for QuickBooks.

Here is a quick summary of how Invoice matching software can help you streamline the AP approval process.

Automatically create invoices

You can automate creating an invoice by connecting the invoice matching software to your AP email so that the system automatically creates the invoice.

The AP team doesn’t need to spend time downloading emails from the AP inbox and uploading them to the invoicing system.

Extract data from invoices and match to purchase order

Once you have the invoice, the system then extracts the data from the invoice so that the system can match it with an existing purchase order.

The system extracts invoice #, invoice date, amount, and line item details.

Perform a 3-way or 2-way match process

Once you have the invoice data, it is easy to match the invoice with the purchase order.

The system can then perform a 3-way match for material items or a 2-way match process for service items.

For material items, the system checks for missing receipts, and if a receipt is missing, the system automatically sends a request to create a receipt.

You can have the order contact create the receipt, or a warehouse clerk can create the receipt.

The system sends the service invoice to the appropriate order contact for review.

Invoice approval

If the invoice doesn’t match the purchase order or receipt, you must send it for review and approval.

If the invoice amount is more than the purchase order amount, you want someone to investigate the price increase and agree or work with the vendor to resolve the issue.

The workflow engine automatically routes invoices to different stakeholders based on the predefined conditions.

For example – route the invoice to purchasing to resolve pricing exceptions with the vendor.

Integration with your accounting system

After an invoice is marked ready for payment, the AP needs to create the invoice in the accounting system for payment.

With integration, the invoices are directly sent to the accounting system so that you don’t have to create the same invoice in two different places.

It saves time and avoids manual data entry errors in the accounting system.

 

FAQ’s – PO system for small business

This section aims to cover some common questions that most small businesses ponder.

Are purchase orders necessary for small businesses?

You don’t need to have a purchase order in the beginning. You can always use a credit card for all purchases and place the order directly on a vendor’s website.

And enjoy the 1.5% cashback!

But as the business scales, you need to provide the credit cards to employees or place the orders yourself.

It is not the best way to scale the business.

Also, as you start opening a line of credit with vendors, almost all vendors will request a purchase order.

You can manage without a PO system using a manual purchase order process. But as you scale the business to $2M+ in revenue, you will need a purchasing system.

Why do we need a PO system?

A PO system allows you to control spending and plan the cash flow to run the business.

Let’s double click on that.

If you don’t have a PO system, employees purchase using credit cards or just call the vendor. The vendor delivers the product or service and sends the invoice, which is due that week. Sounds familiar!

No one knows who spent the money and why.

If you have a PO system, you can request everyone to create a purchase request so that the Finance team can review and approve the purchase.

When the invoice shows up, you already know the related purchase order.

Since you have all the purchases in one place, you don’t need to worry about surprise invoices.

You can plan your cash flow based on the supplier payment terms and the projected delivery dates.

How do you create a purchase order number system?

Creating a purchase order number system is simple. You need to set up the sequence in your purchase order system, and the system generates that for you. For example, all purchase orders should start from 1000 and so on.

Now your turn!

With a PO system, our clients see the following key benefits in under 30 days of implementation:

  1. Average reduction of 50%  in PO cycle time.: That is,  the purchase orders are issued 50% faster.
  2. Better cash flow planning: The finance team has better cash flow visibility because the purchase orders are in one system.
  3. No surprise invoices: Since the buyers create the purchase orders before the invoices, there are no surprise invoices.

You can try to patch together a purchasing system or just sign up for ProcureDesk and see how easy it is to implement a PO system for a small business. Click the button below to schedule a demo.

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