Finance tools & tech 8 min read

Purchase order processes: common issues and best practices

Patrick Whatman

Purchase orders are one of many valuable tools in a company's accounts payable chest. They add a level of formality and order to what can otherwise be quite a messy system. 

But just like most classic spending processes, the idea is usually better than the execution.

Purchase orders should add clarity and visibility to business transactions. Instead, they tend to add admin, confusion, and long email trails. 

In this article, we'll quickly look at what's causing these issues. Then we'll show how automation and better technology removes them almost instantly. 

But let's start with the basics.

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What is a purchase order?

A purchase order (or “PO”) is a document created by a buyer showing what it hopes to acquire from a supplier. It’s essentially a list of goods or services a company wants to buy. The purchase order should include a clear description, quantity, price, payment terms, and necessary delivery details. 

In most cases, when the supplier accepts a purchase order it becomes legally binding. They’ve entered into an agreement, and are now bound to deliver the goods. 

For companies with a clear purchasing or spend management process, POs let employees make clear internal resourcing requests. They can set out new equipment, software, or agency services they require, find the perfect vendor, and their manager can review and approve the request with all the information they need. 

This leaves a record of the request for everyone who needs to see it, including executive leadership and the finance team.

 

Types of purchase order

There are four key types of purchase orders to keep in mind: 

  • Standard purchase orders. Most commonly used for one-off transactions, a standard purchase order contains all the information required, including payment and delivery details. Companies create these whenever they need to buy goods on a singular basis. These are the most precise.
  • Planned purchase orders. Planned purchase orders are similar to standard POs, but aren’t generally used for one-off orders. Instead, they set out the full scope of a transaction, with payment and delivery to take place in installments. You might order 100 new computers over the next six months, but will issue specific releases for 10 at a time as required.
  • Blanket purchase orders. These are less precise. Companies can request an unspecified amount of a particular good or service from a supplier, over an unknown amount of time. This is really an agreement to buy from the vendor, but with the specifics to be determined. 
  • Contract purchase orders. These are essentially just an agreement to create a commercial relationship between the two parties. They set out the vendor’s details and often payment or delivery requirements. The company will then raise a standard PO to make any real purchases. 

In this article, we’re dealing with standard POs.

Purchase orders vs invoices

Purchase orders and invoices are two different steps in the same process. The first is a request from the buyer which sets out clear expectations for the goods and services requested. The second is an account of the goods and services actually provided, issued by the seller so that it can be paid. 

  • Purchase order (buyer): Request sent to a supplier, detailing exactly what is expected to be delivered. 
  • Invoice (seller): List of goods or services delivered, with the sum due to be paid by the buyer. 

In a robust purchasing process, these two documents are closely connected. If unsure whether an invoice is justified and legitimate, the finance team (or purchasing manager) can refer to the original purchase order. They should be able to tell quickly whether the goods and services delivered match what was ordered. 

The value of purchase orders for business teams

The primary purpose of POs is to create an agreement between buyer and seller. But before they even reach the supplier, POs serve a valuable function within the buyer company.  

Consider how a typical company transaction takes place without one

  • A team needs to purchase something to work more effectively - a software subscription, for example. 
  • A team member requests this software, and their manager approves the purchase. 
  • The team member creates an account and begins using the software.
  • One month later, an invoice arrives. The team member can’t pay it themselves, so they send it to the finance department. This is the first the finance team has heard about this software. 
  • To get all the information the finance team needs, an email chain is created. This involves the team member, their manager (who vaguely remembers approving the purchase), and the finance team. 
  • What should be a relatively simple transaction now involves a good deal of back and forth and extra admin work for all parties. 

If this transaction had begun with a purchase order, the finance team would have a full record of who made the order, and why. They would simply need to check that the invoice matches the PO, and they can pay it without issue. 

The purchase order process

The standard purchase order process contains several steps that really can’t be skipped or eliminated

  1. A team member has a resourcing need and creates a purchase order
  2. They identify the ideal supplier. This can include a tendering process or requests for quotes
  3. A budget manager approves the purchase.
  4. The purchase order is sent to the supplier so that the order can be filled. 
  5. The company receives the goods or services requested. 
  6. The supplier sends an invoice. This is analyzed by the company to ensure it matches what was ordered.
  7. The invoice is approved, and the supplier gets paid.
  8. The invoice and purchase order are saved to company records, and the payment is booked by the company’s accountant.

All of these steps are important, but that doesn’t mean that every step needs to be done manually or even by a person. Let’s look now at the key steps in this process that can be sped up and automated.

Three-way matching

Companies need to verify that all invoices received are legitimate. This requires “three-way matching,” which looks for consistency between: 

  • The purchase order
  • The goods and services and delivered
  • The invoice

If all three match, the supplier can be paid with no issues. 

Upgrade: Purchase order automation

purchase-order-automation

As with most company processes, purchase orders are a great tool as long as they work efficiently. But when they become an administrative burden on busy team members, they become counterproductive. 

Purchase order automation lets you remove most of this administrative hassle from the process. And it’s really as simply as finding the right tools. 

How purchase order automation works

Purchase order automation is designed with the idea that some things are just done better by machines (or software). Instead of manually filling out paper purchase reports, scanning them or entering the data by hand, and then emailing them to those responsible around the company, you can digitize and centralize POs from the start:

  • Digitized: Employees file purchase orders directly within the software platform. All the information required - vendor, price, time, reason for spending - is digital by default. So there’s no data entry and very little room for error. 
  • Centralized: All POs live in the same platform. Finance teams can access them whenever they need. 

There are countless benefits to handling purchase orders this way - a few of which we’ll get to shortly. But first, here’s how that standard process described above looks now

  1. A team member has a resourcing need and creates a digital purchase order. 
  2. They identify the ideal supplier, and enter the supplier’s details in the system. If it’s a repeat supplier, all the information is already there!
  3. A budget manager is notified automatically, and can approve the purchase from anywhere. They can even approve from the mobile app.
  4. The purchase order is sent to the supplier so that the order can be filled. 
  5. The company receives the goods or services requested. 
  6. The company receives an invoice. The software matches this with the corresponding PO, and ensures all the key details are the same. 
  7. The finance team takes a quick glance, sees there’s a match, and approves the invoice.
  8. Payment is scheduled automatically, the invoice and purchase order are saved digitally, and all data is passed directly to the company’s accounting tools.

You still have all the same important touch points and safety checks. But these no longer have to be done by hand. 

And the biggest difference: no more lengthy email chains. The process is smooth, asynchronous, and suits everyone involved.

Benefits of PO automation tools

What key results can you expect from switching from paper-based purchase orders, to a digitized, automated process?

A real-time view of committed spend

One issue with the standard purchase order process is that finance teams often don’t get involved until the end - the three-way matching stage. Until the invoice is received, they likely have no idea that the company has committed to spending a certain amount with this supplier. 

Digital purchase orders change this. Finance teams can see all POs as soon as they’re created. What’s more, they can see these commitments alongside other actual spend and future spend (subscription payments, for example). As a result, they can manage team budgets in real time and make sure that cash flow isn’t an issue.

A clearer process for employees

Most employees don’t understand the PO process. It’s just not a core part of their role. So to create one successfully, they need training and guidance. And if left to do this on paper, there’s lots of room for error. 

PO software walks employees through the process, so they can’t really make mistakes. They just follow the steps, and it’s impossible to submit an incomplete or fundamentally flawed purchase order. 

More visibility for finance teams

As mentioned above, purchase orders create a great order history for the company. Finance teams can see exactly what was ordered and why it’s necessary. But this still relies on purchase orders being submitted on time, and easy to find. 

If the PO is centralized in a platform, this is much simpler. Every purchase order lives in one place, easy for managers and finance teams to find. The PO is accessible from the moment it’s created, and from anywhere. This is incredibly valuable, especially with so many remote teams.

One source of truth

The other benefit of having all purchase orders in one place is that this platform becomes the clear authority on company spending. And when that platform is also connected to company cards and expense claims - an all-in-one spend management system - finance teams always have all the data they need.

More time saved, and fewer errors

As with all automated processes, the most obvious benefit is time saved. Your software handles most of the “processing” work for you, so you can worry about other things. 

And automation also reduces mistakes from human error, which is usually the main cause of mistakes in the first place. 

With all these clear benefits in mind, which purchase order automation tool should you use? 

Spendesk Invoices - full AP automation (with built-in purchase orders)

Naturally, we suggest you look into Spendesk to handle accounts payable alongside all your other company spending.

Spendesk Invoices includes purchase orders to help employees make clearer requests, and to let finance teams do three-way matching before approving payment: 

Part of a centralized spend management system

 

 

One fact that’s often overlooked is that invoices are just another payment method, fundamentally the same as credit cards and employee expense claims. All of these exist because a team member needs to spend company money to do their best work. The only difference is how they’re given access to that money.

So why not manage them in the same process, with the same platform? Spendesk lets you track card payments, employee expenses, and invoices together. You always know exactly how much company money is committed and spent, and finance teams have that single source of truth they desperately need. 

And vitally, other teams only need to remember one tool, one login, one system. Which makes managing company spend easy - the way it should be.

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Patrick Whatman

Patrick Whatman is a content marketer and writer. He lives in Paris, loves music, and writes his own brand of cultural criticism for fun. Tweet him @mrwhatman where he mainly talks digital marketing, American sports and New Zealand trivia.