Purchase Requests & POs: Everything You Need to Know

Purchase Requests vs. POs: What's the Difference?

Purchase requests and purchase orders (POs) are often used interchangeably, but they are two interrelated, subsequent steps in the procurement process that are key for effective spend management.

A purchase request is an internal process used to gain approval for a purchase.

A purchase order is a formal document issued to a supplier to confirm the purchase of goods or services.

Understanding and implementing both steps properly ensures streamlined procurement and financial control.

Why Companies Use Purchase Requests

Purchase requests offer several advantages that help businesses maintain control over their spending:

• Financial Control: Purchase requests provide a mechanism for companies to control spending by ensuring that all expenditures are pre-approved before any money is committed.
• Accountability in Spending: Implementing a purchase request system creates a culture of accountability, preventing unauthorised or maverick spending by ensuring that all purchases are documented and approved.
• Cost Negotiation Opportunities: By identifying multiple requests for similar items from the same supplier, companies can leverage their purchasing power to negotiate better prices.

Why Companies Use Purchase Orders

There are several reasons why companies implement purchase orders in their procurement processes:

• Predict Outgoing Money: POs help predict outgoing money by providing a clear record of committed expenditures, aiding in budget management and financial forecasting.
• Establish Expectations with Suppliers: They establish clear expectations with suppliers regarding the quantity, price, and delivery of goods or services, reducing the likelihood of disputes.
• Legal Protection: POs serve as a legally binding document that protects both the buyer and the supplier by clearly outlining the terms of the purchase agreement.
  
  

The PO Process

The PO process is part of a wider Accounts Payable or Procure-to-Pay (P2P) process, which you can read more about here. Here’s a concise overview of just the PO process. 

1. Raise a Purchase Request: The process begins with an employee identifying a need to make a purchase. The request would detail the supplier, item description, quantity, price per unit, and any additional fields like office location or department.

2. Approve Purchase Request: The next step involves the approval of the purchase request. Approvers, such as line managers or finance team members, evaluate the necessity of the spend and the supplier selected. They can approve, reject, or request more information.

3. Generate PO: Once approved, a purchase order is generated. Automated systems can pull data directly from the approved request to create the PO, ensuring accuracy and efficiency. This formal document is then sent to the supplier.

4. PO Approval from Supplier: The supplier reviews the PO terms and confirms their ability to meet the order. This includes verifying item availability, delivery dates, and price, ensuring alignment before proceeding.

Common Issues in PO Processes

While it is a beneficial process, many organisations have a hard time implementing these systems, and POs often have a bad reputation:

• Minimal Employee Buy-In: Employees might bypass the PO process if they find it too cumbersome, leading to unauthorised spending.
• Approval Bottlenecks: A flawed PO system can slow down the process, causing delays in procurement and frustration among employees. You can read more on how to tackle this issue here. 
• Inappropriate Approval Workflows: Not having tailored approval workflows can lead to inefficiencies, such as overburdening senior managers with minor approvals.
• Lack of Visibility: Without a clear overview, finance teams may struggle to track purchase requests, approvals, and POs, leading to potential oversight and financial discrepancies.

Purchase Requisition and PO Management Software

The software provides the user interface for both business-side and finance users. It allows finance teams to configure the processes, such as approval workflows, and have visibility of requested spend, while business-side users can request or approve spend. It is important that this software has different types of accounts. As well as providing the infrastructure for raising and approving spend, software can also provide some automation features to streamline the process.

• Automatic Assignment to Approval Workflows: Automating the routing of purchase requests to appropriate predefined approval workflows ensures efficiency in processing and timelines. Faster approvals reduce the risk of unapproved spend and improve the agility of the company, enabling quick and strategic responses to changes in circumstance.
• Approver Insights in Emails: Allows approvers to see how a spend will impact their budgets before approving, enabling informed decision-making.
• Automatic PO Generation: Once approvals are complete, POs are generated automatically, reducing manual workload and ensuring accuracy.

The scope for automation is more limited due to the inherently human nature of raising and approving spend. However, there is more scope for automation in invoice management.

Features to Look for in a PO System

There are lots of solutions available, but it is important to pick one that is going to help mitigate common problems:

• User-Friendly Interface
• Integration Capabilities
• Customisable Approval Workflows
• Real-Time Tracking and Alerts
• Comprehensive Reporting and Analytics

For a more detailed look at what to consider when choosing a PO system, refer to our buyer’s guide.

Are POs Worth It?

While POs add an extra step in the accounts payable process, they are essential for preventing unapproved and maverick spending, gaining visibility into expenditures before invoices arrive, and avoiding financial surprises. Read more about the benefits of POs here.

The Bottom Line

Implementing a robust purchase request and PO system is essential for maintaining financial control and accountability. These systems ensure all expenditures are necessary and justified, preventing unauthorised spending and fostering a culture of accountability. A well-designed PO system helps predict outgoing money, establishes clear expectations with suppliers, and serves as a legal safeguard. Automation features like automatic assignment to approval workflows, approver insights in emails, and automatic PO generation streamline the process, reducing manual errors and speeding up approvals.

While challenges exist, such as gaining employee buy-in and avoiding approval bottlenecks, the benefits far outweigh the hurdles. The right software can mitigate these issues with user-friendly interfaces, customisable workflows, and comprehensive reporting tools. Ultimately, purchase requests and POs provide control over spending, improve financial visibility, and prevent unexpected expenses. Investing in a robust PO system helps businesses achieve financial discipline, enhance procurement efficiency, and drive overall success, bringing long-term benefits to financial health and operational effectiveness.