The Purchase Order Process: Step-by-Step

A purchase order (PO) is an official document issued by a buyer committing to pay the seller for the supply of specific goods or services to be delivered in the future. This document forms the first stage in the accounts payable process, detailing the types, quantities, and agreed prices for products or services. Employed to streamline buying processes and enhance financial control, purchase orders help organisations manage their spending more effectively.

Purchase orders and purchase requests make up the crucial first page of the procure-to-pay process, as they are important in controlling the purchases made by a business. Hence, a robust purchase requisition and PO process helps protect a business against committing maverick spend, bolsters its financial control, and helps to establish a clear audit trail in line with financial compliance regulations.

In this guide, we aim to provide you with a comprehensive understanding of the PO and purchase requisition process, and dive into each step that follows to help provide some clarity over what each step involves. Confusion often arises between purchase requisitions and purchase orders; however, as we will unpack in the process, these are two distinct, sequential steps in the procurement process.

The Process

Raise a Purchase Request

The process begins with somebody in an organisation identifying a need to make a purchase, either for physical goods, a service, or a software product. For instance, a company has 25 new employees joining soon and HR needs to buy laptops for the new joiners. The request  would detail the supplier, the description of the items (e.g., laptop model), quantity needed, and the price per unit, as well as any custom fields that a company chooses e.g. which office is the purchase for? Which department of the company?

Approve Purchase Request

The next step involves the approval of the purchase request. Approvers in the workflow might include line managers, department heads, or members of the finance team who will evaluate the necessity and justification of the request. They can approve, reject, or request additional details to better understand the proposed expenditure. Beware- this step is a hotspot for bottlenecks and delays in the process!

Generate and Issue the PO

Once the purchase request receives approval, a purchase order is generated. This step has evolved from manually filling out paperwork to automated systems that pull data directly from the approved purchase request. PO automation ensures accuracy and efficiency, transforming the request into a formal document that is sent to the supplier.

Once the PR has been approved, the PO can be created after prices, delivery, terms, and conditions have been agreed. For large purchases, organizations usually issue a Request for Proposal (RFP) to their preferred suppliers.

Before the order can be issued, some level of financial authority is required to sign off the purchase. The PO is usually then issued electronically to the chosen supplier.

POs generally include the name of the company purchasing the goods or services, the date, PO number, the description and quantity of the goods or services required, price and payment information.

PO Approval from Supplier

Upon receipt of the purchase order, the supplier reviews the terms and confirms their ability to meet the order as specified. This confirmation might include verification of item availability, delivery dates, and price agreement, ensuring that both parties are aligned before moving forward.

Now that we've covered the essential steps involved directly with purchase orders, let's continue to explore the subsequent invoice management process to understand it in the broader context of the procure-to-pay cycle. 

Goods Received

Once the supplier dispatches the goods, the buyer's responsibility is to ensure that the items received match what was ordered. This is particularly crucial in environments like retail, where managing large inventories is common. Receiving reports are often used to document the receipt of goods, verifying that the actual items align with the purchase order specifications.

Invoice Received from Supplier

Following the delivery of goods or services, the supplier will issue an invoice to the buyer. This invoice should reflect the terms agreed upon in the purchase order, detailing the quantities delivered, unit prices, total cost, and payment terms.

2- or 3-Way Matching

Invoice matching is critical to ensure that the transactions are accurate and valid. This process can be a two-way match between the purchase order and the invoice or a three-way match that also includes the receiving report. This step helps prevent discrepancies and ensures that only authorised purchases are paid for.

Approval

Before proceeding with payment, the invoice undergoes an approval process. Similar to the purchase request, this involves an internal workflow where the invoice is reviewed and approved by the appropriate stakeholders. This step is crucial to ensure that all financial commitments are authorised and recorded correctly.

Payment

The final step in the purchase order process is the payment of the invoice. Payment can be made as a standalone transaction or as part of a scheduled payment run, depending on the company's accounting practices. It is essential that payments are processed within the agreed terms to maintain a good supplier relationship and financial health.

Why do Companies Use Purchase Orders?

As we have already covered and seen demonstrated, POs can have a multitude of benefits for businesses to manage their procure-to-pay processes and stay on top of their purchase management. Despite their low adoption rates, purchase orders have a variety of benefits and use cases, for example:

• Defining the exact needs and clear expectations of the supplier
• Formalising the purchase process and allow us to track progress
• Assisting with budgeting and cash flow
• They work as legally binding agreements between a company and the supplier
• Contributing to the creation of a robust audit trail

Understanding Purchase Order Automation 

PO automation can transform the traditional process by utilising centralised software to manage and oversee purchase requests automatically. This includes tasks from raising and approving to generating orders within an ERP system. By reducing manual data entry and the need for physically routing POs, this technology enhances both efficiency and accuracy.

How Kloo Boosts Efficiency and Accuracy with AI-Driven Automation

While automation can greatly enhance purchase order management, human involvement remains essential and strategically valuable during the internal approval process. Balancing human oversight with automation is key.

Tasks like approving or rejecting requests benefit from human judgement, while automation handles administrative duties, providing decision-makers with valuable insights for smarter spending.

Here are four ways automation can streamline your organisation's PO process:

1. Automated Approval Routing: Automating the routing of purchase requests to pre-set workflows ensures timely approvals, reducing unapproved spending risks and increasing agility in responding to business needs.

2. AI-Driven Insights for Approvers: Kloo leverages AI to provide approvers with critical insights, such as budget alignment, past spending, supplier information, and potential duplicate alerts, all directly to their inbox.

3. Automatic PO Creation: Once a request is approved, Kloo generates the purchase order automatically, improving the speed and accuracy of the process.

4. Automated PO Transmission: After approval, Kloo sends the PO directly to the supplier, ensuring prompt delivery and minimising manual errors.

The Bottom Line

Understanding the purchase order process is fundamental to controlling organisational spend, preventing unauthorised expenditures, and maintaining visibility over financial commitments. This process not only supports efficient financial management but also establishes a clear audit trail from the initial request to the final payment, safeguarding the company's resources and financial integrity.

PO automation is a vital advancement for finance teams looking to enhance their workflows. By adopting this technology, businesses can attain unmatched levels of efficiency, precision, and cost-effectiveness, putting an end to time-consuming and error-prone manual purchase order processes.

Kloo’s platform simplifies the entire purchase order management process, eliminating redundant manual tasks such as PO creation. It also offers strategic support where human involvement is essential, equipping approvers with the insights they need to make quicker and more informed spending decisions.

The full P2P process infographic:

To learn more about Kloo's automation solution for purchase order management, check out our Purchasing Copilot module.