How to setup a purchase order process

How to easily setup a Purchase Order Process

• Why use Purchase Orders
• Key outcomes
• Approval Workflows
• PO template design
• Receiving Invoices

Why Use Purchase Orders?

If you are looking to start using purchase orders, this article will look at what they are, how to set them up and what benefits you should achieve.

First off let’s just confirm what a purchase order is. It’s actually a formal intent to purchase that specifies what you want to purchase and at what price you expect to pay. As a document, a purchase order is something descriptive that will be sent to a supplier. From this document the supplier should be able to raise a sales order and dispatch goods or services to you, ultimately sending you a bill or an invoice. We will look at what to include on the order later, but first off, you now know what a purchase order is.

The next thing to really question is do you need them? How do you currently order your goods and services from your suppliers? If your key suppliers require online ordering – say Amazon, a purchase order is of no interest to them at all. They will expect you to do the hard work of choosing the goods, placing the order and potentially even paying, all up front.

Certain suppliers though want to receive a purchase order and won’t supply you unless they have your formal order.

What some people confuse is the purchase requisition with the order. What a lot of businesses want is a more formal process around who can place orders in the organisation, potentially exposing the organisation to financial commitments that haven’t been authorised. This is an approval process around the request. Once approved the request could be converted into the placing of the order with the supplier or simply better communication to confirm that something can be ordered.

As businesses grow, the need to control costs increases. Whereas the founders used to be present in the office, and staff could shout out “Ok if I buy those widgets from Mighty Supplier?”, perhaps the business has now grown with hundreds more staff and more layers of management. Who decides? This is the question you should ask when looking to introduce “purchase orders”. What are we looking to achieve here and how do we want to control the buying process?

Key Outcomes

Once you have decided if Purchase Orders are right for you, you can plan the outcomes, and these may well be:

1. How much can an employee spend without consulting a manager?
2. What are the approval steps and conditions we need for approvals?
3. How much can a manager spend without consulting a director?
4. How much can one single director spend without consulting the board?
5. Which suppliers want a formal Purchase Order?
6. What format do our key suppliers want for their purchase orders? (ie PDF / XML / CSV?)

The key outcome from this up-front investigatory work should be an approval matrix. Once you have this you can move onto the mechanics of the approval process and what software or system you will use.

The other consideration or outcome here is a reject process. Although we think positively about spend requests being approved and orders being placed, what do you want to happen if an approver rejects something? Who will you notify and what will happen to this request?

Although you can put a tracker together with a spreadsheet and use emails for approvals, it should be ruled out as being cumbersome and clunky.  If you are raising more than 10 orders a month, you will need a sequential number to identify them and you should use a software tool to manage the process. The visual from a dedicated software tool will be invaluable.

Approval Workflows

Now you have your approval matrix, this can be translated into approval workflows. You will need to decide whether you need one workflow for the entire business or one for each department. As an example, if you are an events company, your marketing teams spend on say a video or pay per click advertising will have very little similarity with your production team looking to buy cost of sale materials. Different people will be involved in the sign off and different budgets could be at play. Therefore it’s quite common to require multiple approval workflows per department or team that use different approvers under different conditions with different outcomes based on the supplier and whether a budget is in use and needs to be updated with any committed spend. A good workflow tool will have multiple conditions that you can use and have multiple steps. This all results in getting the right spend request placed in front of the right person or people in a timely manner.

A typical approval workflow might look like this:

Marketing Team approval workflow

Step	Condition	Action
1	<100	No approval required
2	>101 <= 5000	Marketing Manager Approval
3	>5001 <= 10000	General Manager Approval
4	>10001 <= 25000	Finance Director Approval
5	>2500	CEO Approval
6	None	Send email to Buyer
7	<> ”Online”	Send PO to supplier

Here we have a mix of approvals and actions. This approval could take 4 people to approve a £30,000 request. That would be an “inclusive” approach where everyone is consulted. Alternatively you could decide that the FD & then CEO are the only ones who need to approve, skipping steps 3 & 4.

Approval Information

Your approval matrix is ready and you are keen to get your process setup. What information does the approver need to see though to make a decision? Obviously they need to know what supplier is chosen and what goods or services are required. Do they need a justification? Do they want to see how the budget for this department will be affected by this purchase? Do they want to see what account / GL codes the line items are assigned to or what project this belongs to? The approver needs as much information as possible to make a decision quickly.

All of this needs to be customisable to suit your requirements. You need to also handle delegation in the event of absence or illness. And finally, make it easy for the approver. Some might want an instant notification by email and need the urgency to take action without delay – perhaps a vibration on their Apple watch. Others might want to check in daily and approve. Your system of choice should be flexible enough to handle all staff requirements so that everyone is on-board and supportive of this change that you are looking to make as you continue to grow.

Purchase Order Template Design

Now you have your workflows all designed out and have considered the approvers and what they need, you are now ready to design the purchase order template that creates the PO’s that your supplier’s receive. The key information you need on this PO template are:

• Supplier
• Buyer (ie your legal entity)
• Order Date
• Required By Date
• Buying terms – ie when you expect to pay
• Reference – a unique order number with a possible prefix
• Delivery address
• Contact Name
• Contact Phone / email
• Invoice address – usually an email

Then your line items need to be detailed enough to let them fulfil the order correctly. Wherever possible use a part code or article number. This hep the supplier accurately match your order with their stock. Here are the key fields to include on your lines:

Item Number – sequential number

• Part code
• Quantity
• Pack Type – box of 12 / each etc
• Description
• Price
• Discount Percentage
• Total Price
• Tax Rate
• Tax Amount
• Total Including Tax

The at the bottom you should specify the total net, total tax and total including tax. You should also reference your own terms and conditions on your website and perhaps specify that the order is made in accordance with your standard terms. It’s quite a lot of information to submit hence why po software applications like our own Zahara make it easy to raise orders and send them off.

Purchase Order Format and EDI

Wherever possible you should make it easy for your supplier to consume your order. The standard format for any document has to be PDF. Everyone can open a PDF and they are universal across all platforms.

You should enquire of your supplier whether they could consume the order from you in a format like CSV or JSON. These are “informal” EDI formats that can easily be absorbed using scripts. The benefit to you is that your order could be processed faster than someone else’s as it won’t require human keying in or validation if they are using a reading or OCR tool.

It may be too complicated to convert your order to something like a JSON file but certainly a spreadsheet or CSV or even just the lines in a CSV may be helpful.

Receiving Invoices

Once the order is fulfilled, an invoice will be dispatched to you and you will obviously process this for payment. A benefit of a front-end loaded process as we have described here is that the invoice can be a binary match of true / false with the order. In reality there may be delivery issues or stock issues and you may get partial invoices. What’s important is that you are receiving the invoices in the most efficient format – usually PDF and by email.

Part of the purchase order template is to specify how you want to be invoiced so make sure your email address is clearly stated.

There are many tools available to consume invoices and match them with orders. Our own solution, Zahara, allows this process to be expedited quickly with either automated reading and routing to your finance system or the requirement to send the invoice for approval with details of the order so that empowered people in the chain can make a decision on whether it can be paid now or needs to be disputed.

I hope this article is helpful and that you get to control your buying process now as your business expands.

about the Author 

Martin Peirce is the CEO and founder of Zahara which is a flexible and friendly purchase order solution used across the world. Having worked in the IT space for over 20 years and knowing how buying is undertaken with a "send us a po" ethos, he set about to create a solution that was easy to use and fast to configure.