How & When to Use Purchase Orders Correctly

Many companies struggle with how to use purchase orders (POs). It costs money to create a PO, which adds up over time, so it’s important to know exactly how and when to use one.

Most PO processes are cumbersome. POs are unnecessarily used for most purchases, are often created after the fact to support invoice matching, and can require an onerous approval process. In this type of environment, employees will do everything they can to avoid using purchaser orders altogether. Companies lose visibility into upcoming AP invoices, directly affecting the accuracy of cash flow statements.

POs are a powerful tool when used properly. They can help organizations obtain the right items at the right time, track expenses, manage spending, avoid price gouging, and support a variety of planning activities. Understanding when and, more importantly, when not to use a PO is critical to ensure maximum benefit to companies.

When to Use a PO

Based on benchmarks from a variety of sources, a PO costs more than $100 to create, approve, maintain, and close. By default, this means it’s best to use POs for larger purchases (major assets), purchases above certain accounting thresholds, and for other significant acquisitions. When done properly within a well-structured strategic sourcing environment, POs can help companies:

• Prevent duplicate orders
• Ensure vendors comply with purchasing agreements
• Avoid unexpected invoices or price gouging
• Consolidate purchases to maximize discounts
• Get the right discounts
• Provide key information to track job profitability
• Avoid unanticipated price increases
• Track warranties by providing a purchase record
• Track expenses
• Manage spending
• Perform accurate budgeting and planning activities

When Not to Use a PO

POs are frequently used for the wrong types of purchases. They should not be used for smaller or frequently purchased items. If a PO costs more than $100 to create, obtaining one for a purchase that costs less than that isn’t worth it.

Contrary to popular opinion, POs are not needed for every item for the sake of controls. There are other ways to track expenses. Companies should consider issuing Procurement Cards (P-Cards) for smaller and emergency purchases. With P-Cards, expenses are tracked, and random audits can be performed at any time. Any fraudulent activity is easily recognizable.

How to Make It Easy to Use a PO

If a tool is difficult to use, it probably won’t be used correctly for long. Here’s how to make it easier for everyone:

• Streamline the PO process by eliminating requisitions if they aren’t needed. It just adds another step in the process that isn’t necessary.
• Purchasing cards can help with spending and reduce the need for POs on pre-approved items.
• Train the procurement team correctly.
• Automate workflows and give the procurement team an easily accessible way to approve POs.

Trenegy helps companies establish fit-for-purpose strategic sourcing programs which ensure the right items are purchased and delivered at the right time through the proper balance between POs and P-Cards. For more information, reach out to us at info@trenegy.com.