Every business purchases goods and services from other companies. It might be paper and other office supplies, or it might be items you’re manufacturing or selling. One thing is certain – the more items you purchase, the more difficult it is to keep track of everything. It makes sense to use purchase orders for the items you buy and employ a purchasing order approval process to keep track of all your purchases.
How Purchasing Changes as Your Business Grows
When your business was smaller, everything was easier. When you needed supplies, you just went to the store and bought them yourself. Yes, you kept track of all your receipts (most of the time, anyway), but that was the extent of your paperwork.
As your business grew, you discovered you couldn’t do everything yourself anymore. So when you needed supplies, you assigned someone else to go to the store and purchase what you needed. Maybe you gave this person cash, a check, or the company credit card – or maybe you had an open account at a particular store. In any case, it worked pretty well. You only had a few employees, after all, and you trusted everybody. If there was an issue about something you needed or purchased, it was easy to ask someone about it.
Now your business is even larger, and purchasing is threatening to get out of hand. You’re buying from several vendors, and they each have their own way of doing things. Sometimes you’re ordering over the phone, sometimes you’re ordering online, sometimes you’re sending someone out to pick up items you need today. It’s getting more and more difficult to keep track of the balance in your checking account, you’re getting invoices for things you didn’t even know you bought, and your stockroom or warehouse is piling up with all the wrong items – while you keep running out of the stuff you need every day.
It’s a simple fact that as your business scales up, the purchasing process changes. You place more orders from more places, the dollar value of your orders keeps increasing, and you know there needs to be more oversight of the entire process. You or somebody needs to start approving orders before they’re placed, but it’s more than that. You need a system for managing all your purchases that includes a clear record of who ordered what and who approved those orders.
In short, you need a professional purchase order approval process.
What a Purchase Order Approval Process Is and Why It Makes Sense
A purchase order approval process is a system for managing purchase orders and the entire purchasing process. The process requires any purchase your business makes to be preceded by a purchase order, which then needs to be approved by management before the purchase can be made.
A purchase order or PO is a paper or electronic document that a buyer (you) issues to a seller, committing to purchase and pay for specified products or services. Upon receipt of the purchase order, the seller delivers the goods or services and invoices the buyer for that delivery.
Every PO is assigned a unique number. This helps both you and the seller keep track of each order, its delivery, and payment. In a purchase order approval process, each PO needs to be approved before it is sent to the seller – or, ideally, each request for a purchase approved before the PO is generated.
A purchase order approval process sets up a system for requesting and issuing purchase orders and tracks each PO as it moves through the process. The process also specifies who can request purchases and who has to approve each request.
A purchase order approval process makes sense when the number of purchases your business makes exceeds your ability to keep track of them all in your head. It not only creates a record of each request and purchase order but also generates reports that help you get a handle on what you’re buying, which can help reduce unnecessary purchases and save you money.
In addition, an automated purchase order system can integrate into or be a part of your company’s inventory management system. The larger goal is to better manage your firm’s inventory, and purchase order management is a key component of that process.
How the Purchase Order Approval Process Works
An effective purchase order approval process requires you to assign employees to specific roles in the purchasing process. You need to identify who can request the purchase of specific items and who needs to approve those requests. These assignments might differ depending on the size of each request. For example, small purchase orders below a certain dollar amount might be able to be approved by department managers. Purchase orders above a certain dollar amount might require approval by higher-level management. It’s all a matter of designating approvers and setting approval limits.
Once you’ve set these request and approval levels, you can design your own specific purchase order approval process. A purchase order approval process can be manual – that is, you walk or email the POs around to get approvals – or automated via purchase order or inventory management software, such as inFlow. Naturally, the automated systems work a lot more efficiently and with fewer errors.
Whether you create a manual or automated process, it should work pretty much in the following fashion.
Step 1: Generate the Request
The purchase order process starts when an employee or department requires specific goods or services. This initiates the purchase requisition process, where the employee creates a purchase requisition that details what items are needed, the desired vendor, the cost of the items, when the items are needed, and where the items are to be delivered.
Some companies may also require the employee to justify the purchase – that is, state how the items will be used. This request can be on paper or electronic form. (For certain items, you may also need to generate a request for quote, or RFQ, to determine the best vendor and the lowest price.)
Step 2: Approve the Request
The original employee now sends the purchase requisition to the person designated for PO approvals. It may be the employee’s manager or someone higher up in the chain. If the request is approved, you move onto the next step in the process.
Step 3: Issue the Purchase Order
An approved purchase requisition is now converted into an official purchase order, which has its own unique number for tracking purposes. The PO is then transmitted to the designated vendor.
Step 4: Record Vendor Response
When the vendor receives the purchase order, they typically notify you of its receipt and let you know when you should receive the goods. Note that when the vendor accepts your PO, that creates a legally binding contract for both parties.
Step 5: Receive the Goods
Time goes by and the shipment finally arrives. One of your employees checks the shipment against the packing slip and then acknowledges receipt. If something’s missing, damaged in shipment, or not as ordered, your employee can notify the vendor. Otherwise, the goods are sent to the employee or department that ordered them.
Step 6: Match and Process the Invoice
Receiving what you ordered isn’t the end of the process. The vendor now sends your company an invoice for that order, which is received by your purchasing or accounts payable (AP) department. Your staff now performs what is called three-way matching. According to Accounting Tools, three-way matching uses three documents: the original purchase order, the vendor’s invoice, and the packing slip or other receiving report – to ensure that the items received match the items ordered. If everything matches, the accounts payable department pays the vendor, per the agreed-upon terms. If something’s off, then further discussions with the vendor are in order.
How the Purchase Order Approval Process Changes Purchasing
There are several ways that a purchase order approval process changes the way your company purchases goods and services. Here are six of the most important ways.
Improves Order Accuracy
A purchase order approval process documents all the details of a purchase for all parties involved. Your purchasing department knows exactly what’s ordered, as does the vendor. Nothing is left to chance, and it’s all well-documented in case there are issues.
Helps Control Purchases
Without a purchase order approval process, you really have no idea what’s being purchased for your company. Individuals and departments can order things you don’t know about or want them to, which can result in your expenses and inventory spiraling out of control. When every purchase has to be approved, every purchase gets scrutinized. You’ll end up ordering fewer unnecessary items and keeping better track of those you do. You’ll also better track the items you receive and ensure you receive exactly what was ordered.
Provides Enhanced Security
An automated purchase order approval system offers strict control of who can order what within your company. Most systems provide digital access control where you set not just who has permission to approve purchases but also who can view or change data in the system. This functionality, which can be enhanced with two-factor authentication, helps to protect your valuable data and keep employees from making unauthorized purchases.
Saves Time and Money
Manually issuing, tracking, and checking purchase orders and invoices is an extremely time-consuming process. Purchase order system software can automate much of this formerly manual work. Purchase requisitions, POs, and invoices can be automatically populated with pre-existing vendor information, shipping details, and pricing. Three-way matching can be done automatically, no manual labor necessary. All of this saves you not just money, in terms of the labor involved, but also time, by speeding up all those processes.
Reduces Human Error
Automated purchase order approval reduces the chance of human error throughout the purchasing process. All those time-consuming manual processes can lead to all sorts of mistakes. Automating these processes ensures greater accuracy across the board. It’s a simple fact – automated systems make fewer mistakes than do overworked human beings.
Identifies Your Best Vendors
Do you know which suppliers you do the most business with? Which ones always deliver on time? Which screw up the most orders? Well, with a purchase order approval process, you will. One of the useful side benefits of a purchase order approval process is the reports it can generate. Use your purchase order system to determine which are your best vendors and send more business their way – and to shift business away from the vendors that consistently overcharge or disappoint.
Let inFlow Automate Your Purchase Order Approval Process
When you want to automate your purchase order approval process, turn to inFlow. inFlow is powerful cloud-based inventory software that can automate your entire purchase order and invoicing process and help you better manage your inventory.
inFlow lets you set approvers and approval limits, streamlines the purchase order workflow, tracks the process of all purchase orders, and makes receiving a breeze. You’ll know exactly what you have on hand and when you need to reorder, while reducing wasteful purchases.