We have written many articles on purchase orders, but one key term that causes confusion and mixup is purchase requisitions. This article will highlight the differences between purchase requisitions and purchase orders, and why purchase requisitions are imperative in your organization.
Purchase Requisition vs Purchase Order – What is the Difference?
Purchase requisitions are a document used when an employee needs to make a purchase or an order request on behalf of their company. It is a document that is used to inform department managers or the purchasing officer of the decision so that the purchasing department can start the purchasing process. The finance team will also use this document to coordinate reporting procedures with the accounting department as well.
Purchase orders are issued by the purchasing department after a purchase requisition has been made and passed the approval process. They are documents sent from a buyer to a supplier with a request for an order, and are a legally binding document.
The Importance of a Purchase Requisition in a Business Organization
In any business organization, there is always the need for supplies or materials and equipment, these may be office supplies, consumables, machines and other equipment.
What is likely to happen when a business organization allows departmental managers to place orders directly with the suppliers? The answer is that there is a likelihood of fraud. To prevent this, a procurement department is often created to place the orders with the vendors and to oversee purchase requisition workflow. Within this department, there is a purchase requisition process in place to be followed to ensure that fraud is prevented, and the business organization gets value for its money.
One of the internal documents that are used in the department for a requisition order is a purchase requisition form. Using this process, the procurement department does not order goods directly from the vendors, rather there has to be a formal purchase requisition form from a given department, in this case, one where a given supply will be used, and then an approval process is followed, giving the company internal control over the purchase requisition process.
For example, the finance department may be interested in buying new financial software to make their work easier and improve security. The head of the finance department or the person whose role is requisition will make a formal request for the software. He or she will not do this by word of mouth, there has to be some tangible documentation in the form of the purchase requisition. It is on the strength of this document that the purchasing department will initiate the procurement process until the finance department acquires the new system.
In this case, the purchase requisition is a formal document that is used by department managers to make a request for materials which are needed. Upon materials running low, the departmental manager fills out the requisition form, indicating the quantity required, as well as some details about the order as well as the vendor. When the purchasing department receives the requisition form, they are supposed to go through it and take action. The action can be approval, alteration or even denying the request, but in this case, they must give reasons as to why they have arrived at this decision. Approval of the requisition gives the department the authority to create a purchase order, which is basically an order, to be sent to the vendor notifying them of the intention to make a purchase.
So Why is the Purchase Requisition Important in the Procurement Process?
It Initiates the Purchasing Process
Departments in a business will, from time to time, need materials; the purchasing request will initiate the purchase process. The purchasing department will be acting on the strength of the document. If there are any issues, the document will serve as evidence that a given communication was made.
It is a Control Tool
Where there are no proper checks, a departmental manager or staff may engage in fraud, where they order materials for personal use. With a formal purchase request, there are measures in place to ensure that no fraud is practiced. The request must go through a number of hands to ensure its accuracy as well as need. The departmental manager will have a look at it before sending it to the purchasing department where it undergoes further scrutiny before a purchasing order is sent to the vendor. It is a formal way of issuing notice that a given material is required, with it there is evidence that a department requested the supplies. This is important for auditing purposes so that you will not have a situation where somebody at the purchasing department initiates a request pretentiously. The document can always be counterchecked to ascertain the facts.
Protecting the Business
With requisition orders in place, chances of fraud are prevented. There will likely not have a situation where staff or departmental managers connive with vendors to steal from the business. The company assets are also protected. A requisition order is proof that a certain asset was ordered, it can be followed up on, ascertaining whether a delivery was made. With this document, it becomes easy to trace assets in case there are any issues regarding company assets.
Centralization of the Procurement Process
When a business organization requires that all requisitions be made centrally through the purchasing department, it becomes easy to manage the whole process. Likewise, the buyers benefit, as now they can bundle purchases and leverage the business organization’s buying power to negotiate better or more favorable terms. A centralized purchasing system also hastens the procurement process, this means that there are minimal departmental delays, something that greatly affects a business organization’s efficiency levels.
A purchase requisition may be seen as a mere document but it plays an important role in the procurement process of a business organization. It is a control tool, and a fraud control document as well as a vital component in authorizing purchases in a business.