by ProcureDeskLast Updated : Feb-18-2024
Are you a small or medium-sized business issuing more than 10-20 purchase orders in a month? If so, a purchase order system is exactly what you need.
Based on our experience, we have seen many of our clients follow this exact strategy to streamline their manual purchasing process. In this blog, we’re going to cover how to select a purchase order system for your business to help you achieve the following:
Let’s define what a purchase order is and the different components of the purchase order system.
If you are familiar with what is a purchase order, please feel free to skip this section.
The official Wikipedia definition of a purchase order is as follows
“A purchase order (PO) is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from external suppliers.”
Like any other legal contract, PO has an offer and acceptance cycle.
A buyer sending the purchase order is just an offer to purchase from the supplier. The PO becomes legally binding when the vendor accepts the offer by acknowledging the purchase order. The vendor can accept the order as-is or ask for a change order. Having a purchase order simplifies this back and forth between buyer and supplier.
A sample purchase order is below:
A purchase order has the following components:
A purchase order header consists of the following components:
b) Key Terms
This section lists key terms, including shipping method, trading terms, and agreed or standard payment terms for your suppliers or any additional terms.
Order Line item details: this section contains line items that you are purchasing from the vendor. The key fields are the description of the item purchases, quantity, unit of measurement, unit price, and total. You might have additional fields to track whether it is an inventory or noninventory item.
This section lists the taxes related to the purchase and other charges like Freight etc.
Whether you should use purchase orders or not can be assessed by the following two factors.
If you have a low purchase volume or most of the purchases are non-repeatable, you probably won’t get the most value out of a purchase order process.
For example, if you purchase supplies from Walmart and Sam’s, you don’t need a purchase order process because the vendors don’t accept a purchase order.
You can still think about setting up an approval flow to control your cost, but a purchase order process would not have much value.
If you have a simple purchase process – then you don’t need to use purchase orders.
For example: if you are a ten-person company, one person is responsible for ordering all products and services, and everything is paid by cards, you don’t need a purchase order process.
If you don’t have a need for inventory stock management, then you probably don’t need a purchase order system.
A purchase order system is software that helps you create, issue, and track purchase orders. A purchase order system is an effective Spend management tool.
If you are not familiar with purchase orders, see the definition below.
At a very high level, it is a purchase order process system that allows you to do the following:
When an employee needs to purchase a product or service, they need to issue a purchase order to the vendor. This is not true for small purchases, but a purchase order is typically required for all major purchases.
Before you send the PO to the supplier, it needs to be approved by the management or finance team. This is to ensure that the purchase is authorized and you have a budget set for this purchase.
The final step is to send the purchase order to the supplier. Companies spend a lot of time on this step because they don’t have an easy way to generate a purchase order.
These three steps could cost companies anywhere from $60 – $500/ purchase order. That is the cost of the purchase order.
This is a huge range, and we recommend that you calculate your purchase order cost to get an accurate estimate of the cost of the purchase order process.
One key step to looking for a purchase order system that fits your business is by knowing the important features you should keep an eye on.
For the purpose of this blog, we’re going to use our tool ProcureDesk as an example.
Let’s review the key features of a purchase order system and how it helps streamline your purchasing process.
A requisition process allows employees to create a purchase requisition to have the spend authorized before the purchase.
Employees can create a requisition from a catalog (Internal or external), or employees can enter the data into the system.
How it helps:
Here is an example of how a purchase requisition works in ProcureDesk:
The ability to route purchase approvals to different stakeholders so that the spending can be authorized.
With flexible workflows, you can easily route the request to department budget owners. That way, they have complete visibility into what is being purchased.
How it helps:
A flexible approvals process helps with the following:
Here is an example of how a flexible workflow might look like in ProcureDesk:
A Budget feature allows you to set up budgets for cost control. The finance team can set up the budgets at a department level, a project level, or any other structure.
With Budgets, you can not only control costs but provide budget visibility to the stakeholders.
How it helps:
Here is an example of how the Finance team can set up budgets for cost control:
Catalogs help with improving the purchasing experience of the employees.
Catalogs provide an online purchase experience for the employees.
Instead of remembering what information to type, they can simply browse or search the catalogs and find the right product or service.
How it helps:
Here is how a catalog can simplify purchasing for you using ProcureDesk:
The purchase order functionality allows you to create purchase orders and send the purchase orders to different vendors.
A purchase order is a legal document that is an offer from the buyer to the supplier. Once the supplier acknowledges the order, the purchase order becomes legally binding.
How it helps:
Here is an example of a system-generated purchase order in ProcureDesk:
Purchase order tracking functionality allows you to track the status of the purchase order through its life cycle.
A purchase order tracking functionality allows you to answer the following questions:
How it helps:
Here is an example of a central purchase order tracker in ProcureDesk:
Though it is not a feature, a user-friendly purchase order system would help drive adoption and increase purchasing compliance.
So along with other features, you should also evaluate the ease of use. This can be done through a quick demo or a quick trial.
An integrated system allows you to automatically sync the purchase order and invoice date with your accounting system.
Let’s say you use QuickBooks Online or Enterprise as your accounting system.
After creating purchase orders and Invoices in your cloud-based system, you need to sync that data with the accounting system to book the cost to the correct chart of accounts.
Without an integration interface with the accounting system, you have to enter the data in your accounting system manually.
How it helps:
As your company grows, you need better access controls. This allows you to control individual users or user group access.
For example, You only want certain users to see all purchase orders in the company.
Or do you only want certain users to change the purchase order after an order is created?
How it helps:
Here is an example of what the granular access control looks like in ProcureDesk:
Here are the top benefits of a cloud-based purchase order system:
When it comes to the cost of processing a purchase order, there is no simple answer.
For example, the manufacturing industry has an average cost of $59, and the petroleum industry has an average cost of $741 (As per CAPS(Center for Advanced Procurement Strategy) research).
Such a broad range is due to the process complexity and the number of people involved in reviewing the purchase order before it is sent to the supplier.
The cost to process a PO = Total yearly cost/number of purchase orders issued.
So even if you have a single employee with an average annual loaded cost of $75,000 and the total PO processed is 60 a month or 720 a year. Then the average cost per PO is $104.
By implementing an automated purchase order system, you can eliminate the cost of processing the PO by 40-50%.
A side benefit of automating the purchasing process is an improved relationship with suppliers. Automated purchasing process leads to
If you have a manual purchase order process, chances are you have limited visibility into company Spending.
Most of the companies rely on reports like Spend by the Supplier or spend by GL accounts. Beyond that, you must dig up the PO documents to find additional information.
With an automated purchase order system, you can get granular visibility at the line item level, which helps you better plan your budgets, and understand cost trends. The granular visibility provides better spend data which you can use for negotiations with your suppliers. It is not uncommon for companies to find out that they pay different rates for the same product across different departments.
You can ensure that the orders are authorized as per your purchasing policy by implementing automated approval workflows.
Most purchase order systems maintain an audit trail, and you can review the purchase approval history at any time.
With automation, you can build approval workflows so that employees don’t need to evaluate who should be approving the purchase. The purchase system automatically does that for you and helps in preventing procurement fraud.
Though it is ideal to have negotiated contracts for all the purchases, that is not always the case. In those cases, purchase order terms are a good substitute.
Every purchase order should list the standard buyer terms for the purchase, and that provides the general agreement on how both parties will conduct business.
Purchase orders include commercial terms like payment terms, product warranties, etc. It also includes legal terms like the limitation of liability, indemnification, etc.
If there is a dispute, these terms can help resolve it rather than leaving it open-ended.
If a case ever goes to a court of law, the standard terms can provide the general agreement framework rather than standard commercial terms.
With the purchase order system, you can gain efficiencies in purchase approvals and productivity improvements and ultimately reduce the time spent processing purchase orders.
However, that is just one side of the equation.
Once the vendor delivers the order, the vendor sends an invoice for the products they have provided or the services rendered.
If you stop with a purchase order process, you leave a lot of efficiencies on the table.
Customers who have implemented an AP automation solution along with a purchase order system see the following benefits.
Once you have the purchase order number, you can automatically match the supplier invoice with the purchase order.
With an integrated purchasing and invoicing system, the Accounting team doesn’t have to spend time matching the purchase orders with the invoices.
The system can automatically match the purchase order and invoices, mark the invoices for payment, or route the invoice for exception approval.
Approval workflow / Exception routing engine
The automated matching process might result in one of the two scenarios:
A perfect match is when the invoice document matches the quantity and price on the invoice, and there is a receipt for that order.
That is an exception scenario when an invoice doesn’t match the purchase order or the receipt.
For example, the unit price on the order is $10, and the vendor invoiced you for $13 per unit.
An integrated purchasing and invoicing system can automatically route the document for approval to the concerned parties if there is an issue.
That saves a lot of time because AP is now not investing endless hours chasing down stakeholders.
Creating a purchase order (PO) system for your business can streamline the procurement process and ensure efficient management of purchases. Here are seven steps to help you establish a purchase order system:
By following these steps, you can establish a robust purchase order system that improves efficiency, accuracy, and control over the procurement process, ultimately contributing to the overall success of your business.
Why do you need a purchase order system, or what is the purpose of the purchase order system?
If you are asking yourself this question, here are a couple of points to consider:
The apparent purpose of a purchase order system is to systemize your purchasing process.
But every automation project is also an opportunity to improve the process and make it more straightforward.
When you are looking at automating a purchasing process, see how you can improve upon the process and make it better.
Here are some things that you can improve upon:
A single place to track all purchase orders
With a purchase order system, you get a central place to track all purchase orders.
If you have been using spreadsheets for order tracking, then you know how painful that process could be.
It is hard to keep Spreadsheets updated because the information keeps on changing. For example, change orders and change in delivery dates, etc.
And if you have multiple people approving the purchase orders, that could be a nightmare to ensure that the changes are not getting updated.
Here a central dashboard looks like in a purchase order system:
With a purchase order system, you get better cost control.
With a purchase authorization process, the individual team or manager can control spending by evaluating the purchase request.
You can use this process for cost avoidance( not purchasing at all) or deferring the cost to better meet your cash flow goals.
Here is how simple it becomes to control cost with a PO approval:
The main purpose of a purchase order (PO) is to formalize and document the intent to purchase goods or services from a supplier.
It serves as a legally binding contract between the buyer and the supplier, outlining the specific details of the transaction, including item descriptions, quantities, prices, delivery dates, terms, and conditions.
While both purchase orders and invoices are essential documents in the procurement process, they serve different purposes and stages of the transaction:
A supplier uses a purchase order (PO) as a formal request from a buyer to supply goods or services.
Upon receiving a purchase order, the supplier verifies the details, including item descriptions, quantities, prices, delivery dates, and any special instructions.
The supplier then acknowledges the PO, indicating acceptance of the terms and conditions outlined.
Once the goods or services are delivered, the supplier generates an invoice based on the information provided in the purchase order, which serves as a request for payment from the buyer.
There are several types of PO’s commonly used in business transactions:
Manual processes increase the risk of data entry mistakes, discrepancies, and delays in order processing.
Additionally, manual PO creation lacks centralized tracking and visibility, making it challenging to monitor orders, manage approvals, and track spending effectively.
Yes, online stores can benefit from implementing purchase order (PO) systems, especially as they grow and scale their operations.
While online retail transactions often involve immediate payment at the point of purchase, businesses still need to manage procurement activities for sourcing inventory, supplies, or services.
A purchase order system enables online stores to streamline the purchasing process, track orders from suppliers, manage inventory levels and maintain accurate financial records.
Considering that you have evaluated your situation and decided that a purchase order process makes sense. The obvious question is, who should create purchase orders?
There are two options:
Implementing a purchase order system in your business can lead to significant time savings and efficiency gains.
By streamlining the procurement process, automating approval workflows, and integrating with accounting systems, you can reduce the time spent on purchase orders by at least 30%.
This not only frees up valuable resources but also enhances accuracy, transparency, and control over purchasing activities.
Investing in a purchase order system is a strategic decision that can yield tangible benefits, driving productivity and contributing to the overall success of your business in the long run.
What you should do now
Whenever you’re ready… here are 4 ways we can help you scale your purchasing and Accounts payable process.