The purchase order process should have steps that are followed each and every time. Purchase orders are designed to offer clarity and transparency between buyers and sellers, but they can be complex.
On the surface, the purchase order process may seem to consist of simply creating a document that tells the seller the items you wish to buy, their quantity, and the purchasing and delivery terms. But it also requires a variety of purchase order process steps such as considering supply and demand, budget, and more.
Businesses that can simplify their purchase order process will maximize their budget, improve compliance, minimize risk, and save time and money. But what steps will they need to take to make this happen? This article will answer the question, how does the purchase order process work, and provide tips on how to make your process as simple as possible.
What is a purchase order?
A purchase order is a legally binding agreement created by a buyer and presented to a seller. It states the items the buyer wants to purchase, the quantity of each, and the payment and delivery terms. It protects the buyer by giving them a legal record of what they ordered. It also guards the buyer against unexpected price increases.
How does the purchase order process work?
The purchase order process steps are as follows:
- Create requisition: This step involves creating the order for the product or service the company intends to purchase. It can be created manually or automatically.
- Budget approval: Next, the order is reviewed by upper management so the budget can be approved before it’s sent. If many executives are required to approve the budget, it can add time to the purchase order process.
- Issue the purchase order: This involves the purchase order being officially issued to the vendor. It differs from the requisition step as the requisition may have only determined the products needed. In this step, a vendor will be identified, and the order will be sent.
- Receive material: Next the material is received by the company. If the product is tangible, employees will check it to ensure the order was accurately fulfilled and no items were damaged. They will then inventory the items. If they got a receipt, it would need to be filed.
- Receive the invoice: Vendor invoices can be sent in one of two ways. The vendor may send the receipt as a paperless document that must then be manually entered into the buyer’s system. Or it may be sent straight through Electronic Data Interchange which fully integrates the invoice into the buyer’s backend system eliminating the need for data entry.
- Invoice reconciliation: The invoice is then reconciled against the PO (or in some cases both the PO and receipt). If no discrepancies are found, the buyer will pay the vendor based on the payment terms.
Advantages of optimizing your purchase order process
Optimizing your purchase order process can benefit you in the following ways, and beyond.
- Compliance: If you use the right procurement software you will be able to match orders, run audits on inventory and identify important documents easily. This will ensure you comply with the standards needed to keep your business running.
- Minimize risk: With suitable technology, you can automate systems to provide order details, costs, and payment and service terms. This will make it easy to correct orders that may be incorrect due to a vendor error and minimize the risk of disputes turning into legal battles.
- Improve budget management: When all your purchase orders and invoices are input into a central location (ideally in a computer software program) you will be able to see them at a glance. This will give you a quick picture of your budget so you can handle money matters more effectively.
- Better business relationships: A simplified purchase order process will conveniently provide you with the terms of each order. This means any miscommunications between the vendor and buyer can be easily resolved making for better business relationships overall.
- Save time and money: Simplifying the purchase process will add efficiency to the way your company does business. It will save you time and money so you can focus on other tasks and increase your bottom line. Most importantly though, it will improve the experience for clients.
How to simplify and improve your purchase order process
Whenever possible, processes should be simplified. This same rule of thumb goes for purchase orders too. Here are some ways that businesses can simplify and improve the purchase order process.
- Create a list of established preferred vendors: If buyers have a list of established preferred vendors, they won’t have to take time to find the best vendors when they want to order a product. Determine the vendors that offer the best prices and highest quality items you require and have their information on hand so you can contact them as needed. This can also protect the business to ensure employees are not choosing friends as vendors for a personal gain.
- Utilize technology: Technology can be used to automate systems and cut back on errors, so the purchase order process is more efficient.
- Inventory sourcing strategy: An inventory sourcing strategy consists of analyzing business needs and historical spending on a regular basis. This will make the decision-making process simpler when it comes to future purchases. It will also increase company earnings.
- Negotiate with your suppliers: It’s advisable to negotiate with suppliers for discount rates within reason. This will be especially effective if you are a regular customer and/or buying in bulk. Before asking for a discount, make sure you are asking for a reasonable discount as you want to keep the supplier encouraged to work with you so you can both maximize profits.
- Review your approval process: The approval process can be time consuming, especially if you’re bringing in various decision makers. Companies should review their approval process to make it as simple as possible.
- Improve information access: Your purchase order process should run smoothly if all information regarding purchases is stored in a central, easy to access location. There are several software programs that can serve this purpose. Do some research to find one that’s best suited to your needs.
- Assess existing processes: Assess existing processes to determine what may be getting in the way of your business functioning at optimal efficiency. Shadow the person handling purchase orders to see how certain tasks can be sped up. Do regular reviews to ensure your systems are always running as smoothly as possible.
- Automation: Businesses should take advantage of automation whenever possible as it can minimize error. Furthermore, automation helps keep processes consistent. Purchase order creation and processing can be automated to some extent.
How Kickfurther can help
Once you’ve mastered purchase order processing, you can accommodate more orders. Resources should be spent on fulfilling orders, providing customer support, marketing, and every effort that drives business. While this includes purchase orders too, this should really be one of the easier parts of the process. As your business achieves efficiency with purchase order steps, you can open the door for more orders. More orders means more inventory, and that’s where Kickfurther comes in.
Kickfurther is the world’s first online inventory funding platform that enables small businesses to access funds that they are unable to acquire through traditional sources. For companies that sell physical products or non-perishable consumables and have revenue between $150k to $15mm over the last 12 months, Kickfurther can help. We connect brands to a community of backers who help fund inventory on consignment and give brands flexibility to pay that back as they receive cash from sales.
Kickfurther can help startups and small businesses fund millions of dollars of inventory at costs up to 30% lower cost than the competition. With more than $100 million in inventory funded to date, Kickfurther can help you get funded within a day or even minutes to hours.
Closing thoughts
The purchase order process is something companies must continue working on to ensure optimal efficiency. With the right strategies, you will get your process down to boost compliance, minimize risk, optimize budget, and build better business relationships. You will be able to work out a system that helps your company grow.
Kickfurther can help you improve your purchase order process by helping businesses access funding they need to acquire inventory.
Interested in getting funded at Kickfurther? Here are 3 easy steps to get started:
#1. Create a free business account
#2. Complete the online application
#3. Review a potential deal with one of our account reps & get funded in minutes
