What is the industry's norm for purchase order tolerance? (How much is the acceptable dollar/percentage over or under the PO limit?)


TAPN's benchmark study, Invoices Placed on Hold or Blocked, and DPO contains data on PO use and tolerances, by industry.

The answer for your organization will depend upon your management team's risk tolerance and materiality threshold as it relates to variances. It will also depend upon the dollar value, or possibly the type of purchase. One TAPN advisory board member whose experience is with organizations with over $1 billion in sales, reports that their current organization requires a PO for all purchases above $2,000 and for all capital purchases; on POs of $2,000 and above, policy allows a tolerance on the invoice of 5 percent. "This varies a lot among companies. It really depends on what you are trying to control," the board member says.

Another advisor with years at a Fortune 50 company says there was no tolerance; if there was any variance from the PO, AP contacted purchasing. The advisor concurs that each company will have its own policy. As you research this you may want to obtain sample data from your monthly purchases and segregate them between vendor types and dollar value amounts. An analysis could be performed on your sample data where you assume all of the PO invoices are different from the PO value. Analyze the dollar amount, percentage, or combination of dollar/percentage tolerance limits to see the financial impact on the business. This type of analysis would help management see what tolerance limit would be acceptable without materially impacting the financial results of the business. This would be a worst case scenario; you could do various scenarios.

There may be certain kinds of purchases where there should not be any tolerance allowed and should, therefore, match exactly between the invoice and the PO. In our research we note that many organizations use a combination of a maximum dollar amount per PO/invoice transaction along with a percentage of the invoiced value up to the maximum dollar cap. Your tolerance limits will of course be limited to the capabilities of your accounting system.

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