For many organizations – especially younger, fast-growing ones – it’s just easier to use corporate credit cards instead of establishing a formal purchase order process.
The concept of designing and implementing a purchasing process can indeed be daunting. Who should be involved? How many steps are adequate? Are more resources (employees) needed? There are, to be sure, numerous facets that need to be considered.
But, an entrenched purchasing method, including the use of Purchase Orders (POs), is critical to the financial health of an organization. Credit card spending, although easy, is precisely the opposite.
You should simply be using POs instead of relying on credit card payments.
The purchasing process
So, what does a standard purchasing process look like? That’s a good question (glad I asked!).
Depending on who you ask, you may get slightly different answers. That’s because different industries have different intricacies, or specifics, that are required in purchasing. That said, I think business blog and go-to reference sites such as businessdictionary.com has compiled an excellent example of a typical purchasing process.
Step 1) Need Recognition – the organization knows it needs to order a good or service. That good / service may be new to the company, or it may be something that is being re-ordered.
Step 2) Specific Need – ordering the right product, of course, is paramount. Some industries have specific requirements or specs for their products, which requires research on the part of the purchasing unit. Once the product specs etc. have been outlined, that product can be reordered.
Step 3) Source Options – determining where to get the product. If a previous vendor doesn’t exist, those in charge of purchasing are tasked with finding the supplier that offers the best quality.
Step 4) Price and Terms – once a suitable vendor has been selected, the purchasing team will negotiate price and terms (delivery etc.).
Step 5) Purchase Order – at this point, a purchase order is issued for the good / service in question. The purchase order will outline all of the relevant information (price, terms etc.).
Step 6) Delivery – a simple step: delivery of the purchase order. In e-procurement systems, this is done via email.
Step 7) Expediting – this is another simple step: fulfilling the terms and conditions set out in the PO, namely, payment dates and delivery times.
Step 8) Receipt and Inspection – upon receipt of the good, an inspection must occur. If the good isn’t broken and all other terms are satisfied, then the company can proceed to payment. If something is wrong, the company can reject the good.
Step 9) Invoice Approval and Payment – a company must match the invoice, the receiving document and the original purchase order. Payment, typically, is made in cash, bank transfer, cheque or other electronic transfer.
Step 10) Record Maintenance – keeping all records on file, for audit purposes.
Trusting the process
As I mentioned earlier in the post, the purchasing process listed above is an example of a typical method. The process, of course, can be altered to suit the needs of an organization. For instance, some companies don’t need to source option or collect quotes. Other companies have no need for collecting and cataloguing specs for products (such companies may simply be purchasing desks and office supplies).
But the length and intricacies of the process isn’t what’s important – it’s that there is process in the first place. And that process includes issuing POs.
Typically, there is no formal structure when spending on corporate credit cards. There may, in some cases, be an approval process after the fact, but that isn’t the greatest deterrent to excessive spending. In fact, the spending has already happened. Of course, there are times when credit card spending is unavoidable: travel or one-off, quick purchases, for instance. But those are outliers.
Establishing and adhering to a purchasing process will help your company’s bottom line precisely because it ensures that spending is approved (and, by extension, understood) before it happens. By doing so, companies can better adhere to budgets and better forecast for future financial quarters.
How e-procurement can help
A well-designed e-procurement system can only enhance the effectiveness of a solid purchasing process.
For example, e-procurement systems ensure a PO is emailed to a vendor which, it is fair to say, is more effective than fax.
Furthermore, e-procurement systems offer real-time views of budgets. This is a critical feature because companies, at all times, can see what their spending is. That is not an option for those doing all of their spending on credit cards.
But, without a doubt, the single greatest advantage to using an e-procurement software solution to bolster your purchasing process is the approval function e-procurement technology offers. Good procurement software will have an approval function built into the workflow, which means every purchase will be approved before a PO is sent off to a vendor. Your purchasing process will only be strengthened as a result.
Of course, you need to have that purchasing process in place first. And that means you have to kick your corporate credit card habit.
Stop relying on corporate credit cards – start using POs now.