Purchase orders (POs) are a key component of any streamlined accounts payable (AP) department, but far too many AP departments today aren’t utilizing POs to their full potential and taking advantage of the benefits they can provide to the purchase to pay process. The fact is that POs, particularly for retail/distribution businesses, can significantly enhance the daily operations of an AP department. Every organization should strive to get to 100 percent PO utilization.
Why are POs so important, and what benefits can be derived from them?
PO utilization helps to:
- Control spending
- Manage inventory
- Strengthen vendor relationships
- Predict cash flow
- Empower more employees to spend smartly
A controller at a manufacturing organization found out that over 90 percent of his POs were recorded after the purchase was made and the goods were delivered. Besides the fact that this method does not provide any controls at all, it is extremely ill conceived. So you can imagine the controller’s surprise (and embarrassment) when he discovered that the controls he was hired to enforce were being worked around by his team! While this is not fraud, it fosters an environment for potential fraud. In fact, this situation could easily become serious enough to cost the controller, or even the CFO, his job.
Properly implemented POs provide a record for preventing fraud. It’s a best practice to issue the PO before the invoice so that when the invoice comes in, it can be paid to capture any discounts associated. Another benefit of PO utilization is it allows for faster payment because approvals are all done at the front end of the process before the purchase is agreed to. You might be surprised how many times PO’s get created after the fact.
POs also help to improve vendor relationships, inventory accuracy, and, maybe most valuably, allow the negotiation of discounts. In a competitive world, strong vendor relationships can make all the difference in your ability to get the latest products, buy enough quantity to fulfill demand, and/or wisely improve your profit margin.
Beyond the benefits for purchasing, AP processors can also benefit from PO utilization because they will get time savings in three-way matching and payment processing at the back end of the process.