Step-By-Step Guide to Purchase Order Process in 2024

An efficient and well-managed purchase order process is crucial for maintaining financial control, ensuring compliance, and encouraging strong vendor relationships. However, many organizations still rely on manual, paper-based processes that can lead to errors, delays, and increased costs. 

This comprehensive guide will explore the importance of the purchase order process, outline the key steps involved, highlight best practices, and discuss the benefits of automation.

What is the purchase order process?

The purchase order process is a very important step in procuring goods and services, which involves creating, approving, and sending an official document called a purchase order (PO) to a supplier. This document outlines the details of the purchase, serving as a legally binding contract between the buyer and the seller.

Impact of not having a proper purchase order process in place:

• Financial losses due to unauthorized or unnecessary purchases
• Delays in receiving critical goods or services, hampering operations
• Difficulty in tracking and managing procurement expenses

Related Reading: Purchase Order Vs Purchase Requisition

Importance of Purchase Order Process

The purchase order process is essential for maintaining control over procurement activities and ensuring the smooth functioning of an organization.

Here’s why you need a purchase order process:

Strategic Sourcing: 

A well-managed purchase order process allows you to consolidate your procurement needs and leverage your procurement power. When you have a bird’s eye view on the past purchase orders and frequently procured items, you can negotiate better terms, discounts, and contracts with suppliers, leading to significant cost savings over time.

Avoid Risks and ensure compliance: 

A well-structured purchase order helps mitigate various risks associated with the procurement process. By carefully selecting and vetting suppliers, you can minimize the risk of supply chain disruptions and ensure the quality of goods and services received.

Improved Cash Flow Management: 

An efficient purchase order process allows you to better manage your cash flow. If you can track purchase orders and their expected implementation dates, you can plan your payments accordingly, avoiding cash flow shortages or excessive deployment costs. Moreover, by negotiating favorable payment terms with suppliers, you can optimize your working capital and improve your overall financial health.

‍

Related Reading: A comprehensive guide on procure to pay

Steps in the Purchase Order Process

The purchase order process typically involves several key steps: identifying the need for a particular service or solution, creating a requisition, obtaining approvals, generating a purchase order, sending the PO to the supplier, receiving and inspecting the ordered items, and processing payment. 

A well-structured purchase order process ensures that all purchases are properly authorized, documented, and tracked, minimizing the risk of errors, fraud, or delays.

1. Purchase Requisition:

The purchase order process begins with a purchase requisition, which is an internal document that outlines the need for a specific product or service. An employee or department initiates this request, providing details such as the item description, quantity, estimated cost, and required delivery date. The requisition serves as the foundation for the entire PO process, ensuring that all necessary information is captured from the start.

2. Requisition Approval:

Once the purchase requisition is submitted, it goes through an approval process. The requisition is reviewed by the appropriate manager or budget holder, who assesses the necessity, verifies the budget availability, and ensures alignment with organizational goals. 

This step is crucial for maintaining financial control and preventing unauthorized or unnecessary purchases. Approvals can be routed based on predefined hierarchies, thresholds, or departmental requirements.

3. Vendor Selection:

After the requisition is approved, the next step is to identify potential suppliers who can fulfill the requested goods or services. This process may involve sending out requests for quotations (RFQs) to multiple vendors, evaluating their responses based on factors such as price, quality, delivery time, and reputation. The goal is to select the most suitable vendor that offers the best value for the organization.

4. Purchase Order Creation:

With the vendor selected, a formal purchase order is created. The PO is a legal document that outlines the specific details of the purchase, including the item descriptions, quantities, agreed prices, delivery dates, and any special terms and conditions. The PO serves as a contract between the buyer and the seller, clearly defining the expectations and obligations of both parties.

5. Purchase Order Approval:

Before the PO is sent to the vendor, it undergoes a final approval process. The PO is reviewed by the appropriate authority, such as the purchasing manager or finance department, to ensure accuracy, compliance with policies, and alignment with the approved requisition. This step acts as a final checkpoint to prevent errors or discrepancies and maintain the integrity of the purchasing process.

6. Order Placement:

Once the PO is approved, it is sent to the vendor, officially placing the order. The PO can be transmitted electronically or through traditional means, depending on the vendor's preferences and the organization's systems. The vendor acknowledges receipt of the PO and begins processing the order according to the specified requirements.

8. Invoice Processing:

Upon fulfilling the order, the vendor sends an invoice to the buying organization. The invoice is a request for payment and includes details such as the PO number, item descriptions, quantities, prices, and payment terms. The invoice is then matched against the corresponding PO and goods receipt, a process known as 3-way matching, to verify accuracy and prevent discrepancies. Any deviations are investigated and resolved before payment is authorized.

9. Payment:

After the invoice is approved and matched, payment is processed according to the agreed terms. This may involve issuing a check, initiating a bank transfer, or utilizing other payment methods as specified in the PO or contract. Timely and accurate payment is essential for maintaining good vendor relationships and ensuring a smooth flow of goods and services.

10. Record Keeping:

Throughout the purchase order process, all relevant documents, including requisitions, POs, invoices, and receipts, are stored and maintained for record-keeping purposes. These documents serve as an audit trail, allowing for easy tracking, reporting, and compliance with internal policies and external regulations. Proper record-keeping is crucial for financial transparency, dispute resolution, and future reference.

Best Practices for the Purchase Order Process

Implementing best practices in your purchase order process is crucial to avoid the costly consequences of an inefficient or poorly managed system. Here’s how you can stop playing catch-up with manual spreadsheets and finally take control over your purchase order process:

1. Standardize PO Templates:

Implementing standardized PO templates ensures consistency and completeness of information across all purchases. Pre-defined templates should include all necessary fields, such as item descriptions, quantities, prices, delivery dates, and terms and conditions, to provide a clear and comprehensive overview of the purchase.

2. Set Clear Approval Workflows:

Organizations should set clear approval hierarchies and thresholds based on factors such as purchase value, department, or risk level. Automated approval workflows can improve the process, route POs to the appropriate approvers based on predefined rules, and provide better visibility into the status of each PO. Clear approval workflows help prevent bottlenecks, ensure timely processing, and maintain compliance with organizational policies.

3. Enforce Contract Compliance:

Contract compliance helps prevent maverick spending, ensures consistent pricing, and maximizes the value derived from negotiated agreements. It’s better to establish mechanisms to track and enforce contract compliance, such as integrating contract information into the PO process, setting up alerts for contract expirations or renewals, and regularly auditing purchases against contracted terms. 

4. Conduct Regular Audits:

Regular audits  can uncover process weaknesses, procurement compliance issues, and areas where automation or process redesign can yield better business outcomes.

Reasons for Automating the Purchase Order Process

Now that you know how to manage your purchase order process effectively, it's time to consider taking it to the next level by automating the entire workflow. 

‍

Here’s why:

1. Saving Time with Automated Purchase Orders

Manual PO processes often involve time-consuming tasks such as data entry, paper-based approvals, and back-and-forth communication. Automation eliminates these manual efforts by digitizing the process, enabling electronic data capture, and automating workflows. This results in faster PO processing times, reduced cycle times, and improved overall efficiency. 

2. Real-time visibility into each Purchase order

With an automated system, organizations can easily track the progress of POs, monitor approval stages, and identify any bottlenecks or delays. This enhanced visibility enables better decision-making, as managers can access up-to-date information on procurement activities, budget utilization, and vendor performance.

3. Ensuring Compliance and Reducing Risk

Automating the purchase order process strengthens financial control and ensures compliance with internal policies and external regulations. It can enforce predefined approval hierarchies, route POs based on configurable rules, and maintain a complete audit trail of all procurement activities. This helps prevent unauthorized or fraudulent purchases, ensures adherence to budget limits, and facilitates compliance with legal and regulatory requirements. It can also flag any deviations or discrepancies, enabling proactive risk management and reducing the likelihood of financial leakage.

How Spendflo can help you automate your purchase order process

Spendflo makes it easy to automate and streamline your PO process. When you digitize PO creation, approvals and system integration, you'll save time and reduce errors compared to handling things manually.

‍

• Use Spendflo's PO creation tool which lets you input all the key details like item descriptions, quantities and prices. This helps ensure POs are accurate and complete.
• Set up approval workflows in Spendflo based on your company's approval policies. The system will automatically route POs to the right approvers and send notifications, taking care of follow-ups for you.
• Integrate Spendflo with your existing ERP and accounting software. This syncs data in real-time, cuts down on manual data entry work, and gives you a full picture of your purchasing activities in one place.

‍

Book A Demo with Spendflo Now!

Frequently Asked Questions on Purchase Order Process

‍

1. What are the 4 types of purchase order?

The four main types of purchase orders you'll typically encounter are standard PO, planned PO, blanket PO, and contract PO. A standard PO is used for routine purchases with agreed-upon terms, while a planned PO is for recurring needs over a period of time. A blanket PO is similar to a planned PO but without a definite delivery schedule, and a contract PO is used when you have a formal contract with a supplier.

2. What is the process flow of PR to PO?

The process flow from purchase requisition (PR) to purchase order (PO) starts with the requesting department identifying a need and creating a PR with necessary details. The PR then goes through an approval process based on your company's policies. Once approved, the purchasing department converts the PR into a PO, adding supplier information and pricing details. Finally, the PO is sent to the supplier to place the order.

3. What is workflow in purchase order?

In the context of purchase orders, workflow refers to the series of steps and approvals that a PO goes through from creation to completion. This workflow typically includes PO creation by the purchasing department, approval of the PO based on predefined rules and hierarchies, sending the approved PO to the supplier, receiving services from the supplier, and finally, invoicing and payment processing. A well-defined workflow ensures efficiency, accountability, and compliance in the purchasing process.

4. What is the P2P cycle?

The procure-to-pay (P2P) cycle encompasses the end-to-end process of purchasing goods or services, from identifying a need to making the final payment. The key stages in the P2P cycle include need identification and requisitioning, purchase order creation and approval, order placement with the supplier, receiving and inspecting goods or services, invoice verification and reconciliation, and payment processing. An efficient P2P cycle helps streamline procurement, reduce costs, and build strong supplier relationships.

‍