Purchase order policy for nonprofit

Purchase_order_policy_template_non_profit

Bonus:Purchase order policy template

If you are a Finance Director for a non-profit and looking to set up a  purchase order policy, this is the strategy for you.

This article will cover the key elements you need in a purchasing policy. But before we get started, click on the link below to download the purchase order policy.

Download the purchase order policy template

 

Non-profit organizations that don’t have written procurement policies struggle with the following:

Unable to meet compliance requirements

There are strict compliance requirements if you have any state or federal funding.

It would help if you had controls to ensure that the spending is pre-authorized and by the appropriate people in your organization.

If there is no purchasing policy,  employees don’t know who should be authorizing the purchase. Or even if they know, they probably don’t follow the process all the time.

Having a written policy provides guidelines to the employees on how to purchase so that you stay compliant with the control requirements set up by the state of any other grant.

Surprise invoices

If you don’t have a  purchase order policy, there is no way to track what invoices are due unless the invoice shows up.

Surprise invoices cause issues with the cash flow because you have not accrued for those expenses.

A purchase order process enables you to accrue the expenses and have better cash flow planning.

Delay in a grant or federal funds

If you have to submit claims for reimbursement to the state of any other agency, then you need to have a single place to track all your purchases. Most state agencies have strict nonprofit control requirements.

When you don’t have a purchase process, you don’t know what to submit for reimbursement until all expenses are entered into the accounting system.

That means you have to wait for expense reports to be submitted and approved and all the vendor invoices queued for payment in the accounting system.

A lack of purchasing process often causes delays in getting reimbursed for expenses and could cause issues with cash flow.

We will cover the key sections you need in a purchase order policy in the sections below.

If you haven’t done this already, click the button below, download the purchasing policy template, and follow along.

Purchase order policy for nonprofit

We have intentionally kept the policy simple so that you can focus on the basic controls that you need.

Once these controls are implemented and adopted, you can add more sections.

The objective of Purchasing policy

This section describes the purpose of the purchasing policy.

This section sets the tone of why you have a purchasing policy, what you are trying to achieve with the purchasing policy, and what the employees are supposed to do. It also provides a procurement process for your employees.

Here is a sample text that you can use to define purchasing policy objective:

“The role of the purchasing policy is to define standard methods and procedures for the Company to purchase products and services from different vendors.

This policy covers all expenses for the company, including items like taxes, payroll payments, etc.

Compliance with this policy is mandatory for all employees. Noncompliance with this policy could lead to action, including termination of employment. The purchasing department is responsible for maintaining and implementing the processes defined in this policy. For any suggestions and feedback, please reach out to policyowner@yourcompany.com”

Vendor setup and onboarding process

You would need a vendor setup and onboarding process so that employees know whom to reach out to for setting up a new vendor.

The process establishes the key requirements for setting up a new vendor.

A nonprofit organization sometimes deals with PII (Personable Identifiable Information). You need a process to vet if the vendor needs to meet  HIPAA compliance requirements or needs to meet any other requirements.

A vendor onboarding process ensures that the vendor is vetted before you start doing business with the vendor. It also ensures that you are tracking all the required documents for procurement records.

Here is a sample process that you can implement to onboard new vendors:

 

vendor_policy
Download the purchase order policy template

Contract signing Authority

Not all purchases need a new contract with a vendor. But if you need to sign up a contract with a new vendor, then employees need a process for who can review and sign a contract.

This section aims to establish who can sign a contract in your organization and what the review process for a new contract is.

If you don’t have a purchasing department, your legal team should review the contracts.

If you don’t have an in-house legal team, you need to set up standard templates that your employees can use for any new contract.

And you need to train your employees on how to read and review a contract before signing.

Here is an example of a contract signing authority matrix:

Contract_signatory_authority
Download the purchase order policy template

 

You can change this to suit your organization’s needs, but we want to highlight that you need different signing authority levels.

If you only have one person signing all contracts, that person becomes the bottleneck. Imagine if only the CEO could sign a new contract, then how cumbersome it would be to get a new contract signed.

Purchasing authority levels

A purchase authority level defines who can approve a purchase order request in your organization.

Not all purchases would have contracts, but management must approve all purchases to meet your control and compliance needs.

By defining purchasing approval limits, you define who can approve a purchase in the organization.

It is ideal If you can automate this purchase approval process through purchase requisition software. If you have automation, employees don’t have to remember who needs to approve a purchase requisition.

Here is an example of a purchase approval matrix:

purchasing_authority_levels
Download the purchase order policy template

 

You can adjust the limits on the comfort level in the organization.

We recommend reviewing your existing purchases to figure out the right approval limit. Set up approval limits so that only 20% of the purchase requests go to senior management for approval. That 20% generally contributes to 80% of the Spend.

The department and budget owners can approve the rest.

For example, if your average purchase amount is $500, it doesn’t serve any purpose if a manager’s approval limit is $300 because they will never get any approval requests.

Delegation of authority

A delegation of authority allows a manager to delegate the approval authority to a team member.

There is permanent delegation, and then there is temporary delegation.

An example of permanent delegation is a CEO delegating approvals to her executive admin.

A temporary delegation could be an employee going on vacation for a week and delegating approval to someone in her team.

You could have someone fill up a delegation form, or if you have a purchasing system, you can delegate the approvals in that.

Purchasing process

This is the most important section of the purchasing policy. In this section, you define the process for purchasing.

The idea is to present clear guidelines to employees on how to purchase a product or service.

Here is an example of the purchasing process:

There are three main components of the purchasing process:

Requisition process:

A requisition process provides clear guidelines on how to submit a purchase requisition.

If you are using a manual process, it makes sense to create a template so that employees know what to fill in.

If you are using a purchasing system, this process should be straightforward. You can define rules in the system so that employees can create a purchase requisition.

Specific information to include in a purchase requisition is as follows:

  1. What the employee is purchasing.
  2. Who is purchasing and their cost center information?
  3. How do they get the pricing information? Attach any supporting documents.

Approval process:

An approval process provides the guidelines on how managers should approve the purchase request.

For example, the manager must print the form and sign the purchase request.

Or an email approval is ok without the need to sign the form.

If you are using a purchasing system, the system maintains the complete audit trail of approvals, so there is no need for physical signatures.

Purchase order creation:

Not all purchase requests need to be converted into a purchase order, but if a vendor requires a purchase order, you need to define the process.

Do you want employees to create their purchase orders? Or do you have a buyer who will convert approved purchases into a purchase order?

In this section, you should answer the following questions:

  1. When you need a purchase order.
  2. Who is going to generate the purchase order?
  3. Who is responsible for sending the purchase order to the vendor.

Now your turn!

If you haven’t downloaded the template, download the purchasing policy template for non-profits and follow the steps below:

  1. Customize the template to meet your specific purchasing and compliance needs.
  2. Create a cheat sheet for employees. Create a one-page summary for all employees.
  3. Roll out the policy with a pilot group and seek feedback. Adjust the policy based on the feedback.
  4. Roll out the policy to the whole organization.
  5. Automate the purchasing policy using a purchasing system and increase purchasing transparency.

If you want to automate the purchasing policy, click on the button to schedule a time with one of our product specialists.

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