Mastering The Purchase Order Process

Before reading this guide, there are a few important things you should be aware of.

Purchasing in a business environment is a complicated process to master.

‍While the steps involved in processing a purchase order (PO) are similar between businesses, the exact procedures used for each step of the purchasing process vary based on different company policies and practices.

‍In other words, as you research different procedures and policies, always be sure to orient your understanding in a way that will be beneficial to the way your own particular business operates.

By the end of this guide, you’ll gain a comprehensive understanding of how a PO is processed in most businesses by using a procedural method for each step of the document’s life cycle.

Who this guide is written for

Make sure you’re in the right place before getting started. This guide contains a wealth of information and links to educational resources that will benefit you if:

You’re learning about the purchasing and procurement process for the first time
You’re an experienced purchasing professional looking to make a digital transformation
You’d like to outline the benefits of an optimised purchase order process for your team
Your role within a business is linked in any way to a financial processing department

If you’re already a purchasing pro, you can also skip straight to this guide’s section that focuses on how to make a digital transformation within a business (and the advantages of doing so).

What exactly does “P2P” mean

Understanding purchase order management doesn’t offer any favours in the form of a simple description, due to the misleading terminology commonly used to describe it.

First and foremost, let’s clarify any confusion surrounding a popular abbreviation within the procurement and purchasing profession: “P2P”.

‍“P2P” can either stand for “Procure to Pay” or “Purchase to Pay”.

That’s right, one abbreviation can mean two similar sounding but different things. Go figure.

An available resource for understanding the difference between the two is available in this blog on purchasing vs procurement.

The difference between procurement vs purchasing in summary:

“Procure to Pay” refers to the “complete” cycle that exists within businesses for acquiring goods or services. It’s much more involved than purchasing (with purchasing being only one part of the “Procure to Pay” cycle), and can involve procedures and steps such as strategic sourcing, contract management, supplier evaluation, and much more.
“Purchase to Pay” is a more contained process that focuses on the steps required to initiate a purchasing transaction with a supplier, and is the focus of this particular guide. The different steps, documents, and standard procedures that businesses often use to process each document within the purchase to pay process will be covered in this guide.

To further clarify what “X to Pay” is really trying to convey with the way it’s phrased, these abbreviations seek to concisely refer to the entire process (either procurement or purchasing) in completion, while also referring to the point at which something “is paid for”, and the procedures associated with paying for something in either process.

In other words, one can interpret and read these phrases as saying “Procurement Process to Payment Process” and “Purchasing Process to Payment Process”.

If you’d like to expand your understanding of the procure to pay process specifically, you may want to check out this Techopedia article, or read up on the definition of procure to pay from Wikipedia.

To learn more about the purchase to pay process in particular, continue reading!

Purchase order processing steps reviewed in detail

As covered, the complete PO management life cycle is often referred to as the “purchase to pay” or the “P2P” cycle.

A traditional purchase to pay cycle usually involves six primary steps which can be managed in different ways depending on the policies of the business creating (or “raising”) the PO.

Core steps involved in the purchase order process

The creation of a purchase order: a document shared with a supplier, used to communicate what needs to be purchased, for what price, and terms of the transaction
Internal approval controls: to confirm that the PO aligns with budgets and other spend control functions (approvals can apply to other steps in the P2P process as well)
PO dispatch: the process of forwarding an approved PO to a supplier for the supplier’s own review, approval, and confirmation of delivery based on the terms of the transaction
Delivery: the process of receiving the goods or services that were ordered from the supplier, and confirming that the quantity and quality of the received items are accurate
Invoice: a document provided by the supplier to the buyer, used to issue a request for payment of the goods delivered or services rendered to the buyer
Three-way matching: the process of ensuring the PO, the delivery information, and the invoice details align before paying the supplier and closing the PO for documentation

While this is the core set of procedural steps in the purchase to pay process, additional steps may sometimes be added, typically before or after the purchasing process begins or concludes.

Additional process steps found in some purchasing procedures

Depending on the size of a business, the P2P process can include one or more additional steps.

While these steps increase the processing time of a standard purchase order, they also provide increased planning and cost control options for the business that uses them.

For larger businesses that purchase goods and services regularly, the increased processing time is worth the monetary savings and other efficiency advantages gained by using these procedures:

The creation of a requisition form: an internal business document shared by employees within a business to communicate what needs to be purchased and why (this step takes place before the creation of the PO document).
The creation of a request for quotation (RFQ): this document is sent to multiple suppliers to confirm details and select the best supplier candidate to order from. This document is also part of an extended process called “S2P” or “source to pay” (this step takes place before the creation of the PO document).
Establishing a contract: a longstanding timeframe agreement that allows the buyer to create multiple purchase orders by using a set of pre-established contract terms.
Supplier evaluation: an additional step which takes place after the purchasing process concludes to determine the overall effectiveness of the supplier for future consideration.

Purchasing process variations for different types of purchase orders

Further variations within the purchase order process can be found in organisations depending on what type of purchase order is being raised.

‍That’s right, there’s more than one type of purchase order.

‍Sorry to be the bearer of additional complexity.

While the core of the purchase order process remains the same for most of these purchase order variants, certain procedures may be adjusted to accommodate the specific functions of each document type.

‍Here's a full list of the four different types of purchase orders with their functions explained in detail.

Guidelines and best practices for developing a new company purchase order procedure

Once the purchase order process is understood, it’s time to put the procedure to work to begin generating value for your company.

Beyond simply cutting costs, a well established purchase order procedure reduces purchasing process time, improves data accuracy to enhance cost forecasting, and can indicate where supplier adjustments can be made to receive better quality goods and services.

Establishing a new purchase order procedure requires careful planning - especially in mid sized organisations where procedural updates can take several months to roll out. To unlock the benefits of a fully optimised P2P cycle, consider the following guidelines in relation to your particular company (while keeping in mind things like team size, industry, frequency of purchasing, and existing policies and procedures).

Manage the process with an online purchase order system

Creating a purchase order process is one thing - ensuring it operates smoothly is another.

‍It’s important to understand how much value a purchase order system can generate for your business when paired with well structured procedures for managing POs.

‍As an additional benefit to financial departments, purchase order systems typically offer integration connections with accounts payable software like Sage and QuickBooks.

Tradogram is an online purchasing system that provides complete P2P coverage for both procurement and purchasing needs. You can schedule a demo for free to learn more about how a purchasing system can support your PO process.

Curious about the difference between a “procurement system” and a “purchase order system”?

PO systems focus on PO procedures and steps (mentioned earlier in this guide), while procurement systems include sourcing, negotiation, contract management, and other functions that fall outside the scope of purchasing.

Involve all stakeholders when updating existing purchasing procedures

Efficient purchasing often requires many, if not all departments and team members within an organisation to communicate with one another clearly and effectively.

Depending on the scope of purchasing requirements for different teams, and whether a centralised or decentralised purchasing strategy is being used, a lot of involvement from different department managers may be required for the planning of an effective P2P process.
One of the biggest mistakes organisations make when restructuring their procedures is not involving all of the necessary stakeholders in the process.

Even non-executive team members can sometimes have valuable contributions to make to a procurement and purchasing transformation process, so be sure to evaluate and plan your discussions accordingly.

Define your company’s purchase order approval process

Like most aspects of establishing purchasing procedures, purchase order approval processes can range from being very simple (or even non-existent in some cases, which is not always a bad thing depending on the situation to highly involved multi-step workflows.

To add to the palette of available options, some companies even employ the use of both simple and complicated approval processes, based on factors like the category of items being purchased, specific price thresholds, and which department is raising the PO.

While smaller companies tend to lean towards streamlined processes, large companies can benefit by specialising their processes based on the needs of specific departments.

‍Determine which types of purchase order approval processes make sense for your company by asking these questions:

Does the company have multiple departments, and would each department benefit from having a unique approval process?
Are documents outside of just purchase orders being used in the process, and do those documents also require approval?
How many levels of approval are required to ensure the PO is cleared for release by all stakeholders?
Would different approval processes for different categories of orders be useful?
Do temporary approval processes need to be established for different projects on a frequent basis?
Do certain stakeholders need to give approval on orders above certain price thresholds?

It’s a lot to take into consideration for just one step of the purchase order procedure, but spending the time to ensure that documents are routed correctly for approval is a must-take measure for ensuring the P2P process operates smoothly within the business.

Establish beneficial policies for managing your purchase orders

Unnecessary bureaucracy can sometimes lead to slowdowns in operational efficiency, but when it comes to purchasing, the use of beneficial policies can prevent financial disputes from occurring in the long term.

An example of one practical policy related to purchase orders is the “No PO No Pay Policy”, which is used by businesses to protect themselves against unsolicited invoices sent to their company.

In general, purchasing policies should be avoided unless they provide a well defined and specific benefit to the overall purchasing process.

Otherwise, you’ll just be adding unnecessary slowdowns to your operations!

For more tips on creating custom policies to support your PO process, check out this great article on the topic - how to write a purchasing policy.

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