Why Streamline Your Payments with Purchase Order Software?

A common question asked by many businesses is: "Why do I need purchase order software?"

A simple question, but one that requires a nuanced answer.

Typically, a PO undergoes multiple stages of internal approval before it is issued to the vendor. In essence, a PO represents pre-approval of a future expense. POs can be specific to a vendor, or in some cases, they can serve as a blanket document granting certain departments approval to spend a designated amount on specific categories of goods or services.

Of course, all company expenses eventually pass through finance. But why is purchase order software essential for any organization? 

Here are some examples highlighting how purchase order software can streamline operations and enhance financial management.

Example 1: Handling Unanticipated Expenses

Consider a situation where the AP team receives an invoice for $50,000 from a vendor, covering marketing, engineering, or sales-related expenses. Finance had no prior knowledge of this expense, even though other departments have been working with the vendor for several months, and the costs fell within their annual budget.

In this case, finance would likely require approval for the invoice before processing payment. If the invoice exceeds a certain threshold, approval from a C-level executive may also be required. Here, the benefits of purchase order software is clear:

• Enhanced Forecasting: Purchase order software informs finance and management of upcoming expenses, enabling better forecasting and overall fiscal health. Knowing when significant expenses will occur allows a company to plan proactively, improving agility when cash flow is limited.

• Proactive Expense Management: Instead of reacting to unexpected invoices, companies with a PO management system can manage vendor expenses upfront. This proactive approach increases negotiation power and ensures that spending decisions are well-considered.

• Improved Collaboration: Purchase order software facilitates communication between departments, fostering collaboration and promoting transparency in financial decision-making.

• Early Vendor Communication: Engaging with vendors earlier in the contract process brings any potential issues to light sooner, preventing costly surprises down the road.

• Informed Decision-Making: Finance and upper management can adjust forecasts midstream based on upcoming expenses visible through the purchase order software, ensuring clearer expectations and improved communication.

• Fraud Mitigation: Approval workflows at the PO level greatly reduce the risk of unauthorized expenses or fraud. When approvals are only sought at the invoice stage, management is more vulnerable to unnecessary or inflated costs.

• Expense Control: If an organization decides to curb spending on a particular vendor or expense category, purchase order software can prevent these costs before they are incurred, offering greater control over financial resources.

Example 2: Managing Vendor Relationships

Many companies without purchase order software rely on periodic budget versus actual profit and loss (P&L) analyses, which focus on historical results. This reactive approach may uncover problematic vendor patterns, but often too late to rectify them. Purchase order software, in contrast, provides the following advantages:

• Identification of Problematic Vendors: Over time, patterns can be detected, allowing you to remove underperforming or overcharging vendors.

• Ensuring Fiduciary Responsibility: As companies grow, relationships with vendors that may have been based on personal connections in the early stages must be managed with greater oversight. A PO system supports this by enforcing arm's length transactions, ensuring that relationships do not interfere with financial integrity.

• Budget Maintenance: Adhering to a budget is challenging if spending limits were never established. With a PO system in place, vendors are required to reference the PO when submitting invoices or accrual estimates. This oversight encourages both vendors and internal teams to remain mindful of budget constraints and financial goals.

• Vendor Accountability: PO systems ensure vendors adhere to the agreed-upon terms, providing a framework for monitoring vendor performance and ensuring that organizations receive maximum value for their expenditure.

While there are numerous scenarios where purchase order software provides value, the common benefits include increased oversight of expenses, adherence to budgets, and enhanced communication within the organization. 

Importantly, purchase order software does not set the budget; rather, it helps the organization stay within it. Without a PO system, expenses can accumulate unnoticed until they appear on financial statements, at which point it may be too late to take corrective action.

For businesses seeking to manage their resources prudently, implementing a purchase order management system is essential.