Can you explain why it's a best practice to get a purchase order?


Accounts payable is part of a larger process that begins with identification of a need in the organization for products or services, and moves through sourcing and procurement on credit, resulting in an invoice to be processed and paid by accounts payable. A purchase order is an effective control tool in this overall process; there is important value to the company’s purchasing—ensuring authorization, controlling rogue spend, accounting against budgets, ensuring GL code has been validated, etc. There is also value to payables in terms of efficiency. POs provide control over purchasing, but also set up a smoother, faster payables process.

When a company requires a purchase order, the effect felt in AP is that authorization/approval and coding have been done on the front end of the process. As a result, when an invoice arrives, an invoice against a PO must merely be matched to the PO (and receiving documentation confirming actual receipt) to be approved for payment. This speeds the approval process, allowing invoices to be paid on time, or even paid early in exchange for a discount.

Here are reasons for using purchase orders:
• Provides control over the purchase of goods or services
• Ensures that the pricing, quantity, and materials or services ordered is what is actually billed
• Approves the commitment of a purchase by authorized employees
• Adds fiscal control to your purchasing
• Can provide visibility into your purchasing amounts and quantities including:
     — identifying opportunities for quantity discounts with vendors
     — quantifying purchase commitments with your vendors
• Can enhance your internal control systems:
     — match price, quantity and item using three-way match of PO, invoice and receiving report
     — identify price discrepancies
     — only allow authorized employees to make purchase commitments
• Streamlines the invoice approval process through the three-way match

Note that there are different types of purchase orders:

• Standard – typically for non-inventory products
• Contract – for services or projects
• Planned – for inventory purchases
• Blanket – typically set up for products purchased regularly throughout the year (one blanket PO anticipates the year’s need and addresses it at one time – avoiding the need to create multiple POs for the same vendor/products throughout the period. Invoices through the year are checked against the blanket, and their amount deducted from the allowed amount, which gradually reduces to zero.)

These benefits do not mean that 100% of purchases should be through a purchase order.  Some kinds of purchases may be better handled outside the PO process, for example, utility payments.

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