Purchase orders (POs) are legal documents that are drafted to finalize contracts between a buyer and a supplier. Nowadays, the purchase order has become an indispensable part of modern business.
It always participates when goods or services are acquired and plays a fundamental role in
- formalize agreements
- order tracking
- control expenses
- resolving disputes
However, managing these purchase order documents manually is a big hassle.
- Manual purchase order processing can increase cycle times by up to 50%.
- The error rate in manual data entry can be as high as 30%, resulting in costly rework and delays.
- Companies that use manual processes spend almost twice as much on procurement operations compared to those that have automated systems.
All of this leads to the need for a digital system that can create, track and process purchase orders in an agile manner. This is what a PO system does.
What is a purchase order system?
A purchase order (PO) system is a digital platform designed to automate and streamline the purchasing process. It allows companies to create, track and manage purchase orders electronically.
By integrating with other business systems, such as inventory and finance, a purchase order system ensures accuracy, reduces manual errors, and improves efficiency.
Today, both small and large businesses are increasingly adopting automated PO systems. These PO systems are effective in
- automate purchases
- reducing errors
- control expenses
- saving time
- improve spending/budget planning
- improve relationships with suppliers
- Ensure compliance with documentation for audits.
How does a purchase order system work?
We now know that a purchase order system streamlines the purchase order workflow.
Let's look at an example of a typical manual PO workflow and then explore how introducing a PO system streamlines the workflow.
Manual Purchase Order Workflow
1. Purchase request:
An employee at a small manufacturing company identifies a need for new raw materials. The employee completes a purchase request form and sends it to the purchasing department.
2. Creation of purchase order:
The purchasing manager reviews the request and manually creates a purchase order (PO) in a spreadsheet or on paper, detailing the required items, quantities, and prices.
3. Approval of the Purchase Order:
The purchase order is sent to the finance department for approval. This could involve printing the document and obtaining physical signatures.
4. Purchase order submission:
Once approved, the purchase order is emailed or faxed to the supplier.
5. Delivery of goods or services:
The supplier processes the order and delivers the merchandise to the company's receiving department.
6. Invoice comparison:
The supplier sends an invoice to the company. The accounts payable team compares the invoice to the purchase order and receiving report to ensure consistency.
7. Payment processing:
After matching, the accounts payable team processes the payment according to the agreed terms.
By reviewing the above workflow, we can see that the tasks involved are manual, error-prone, and time-consuming. The company can introduce a purchase order system to eliminate these challenges. This is how an automated PO system like Nanonets handles the above workflow.
Purchase Order Workflow with Purchase Order System
1. Purchase request:
An employee uses the Nanonets portal to submit a purchase request electronically.
2. Creation of purchase order:
Nanonets automatically generates a purchase order based on the request details.
3. Approval of the Purchase Order:
The purchase order is routed through an automated approval workflow within Nanonets.
You can establish predefined rules and conditional controls to maintain consistency across all procurement activities, minimizing errors and preventing unauthorized spend.
Approval notifications are sent and can be easily managed with popular communication tools like Slack and Microsoft Teams.
These approvals include direct calls to action (CTAs), simplifying the process and facilitating quick decision-making.
4. Purchase order submission:
Once approved, the system automatically sends the purchase order to the supplier via an integrated email or supplier portal (e.g. SAP Ariba, Coupa).
5. Delivery of goods or services:
The supplier processes the order and updates the delivery status on the supplier portal, which is synchronized with Nanonets.
6. Capture and collate invoice data:
Nanonets extracts data from invoices, purchase orders and delivery notes automatically, minimizing manual entry and errors.
Automated triple matching ensures accuracy by automatically matching invoices, purchase orders and packing slips before processing payments.
7. Payment processing:
Nanonets facilitates seamless payment processes, ensuring that all transactions are completed efficiently and on time. This helps maintain good relationships with suppliers and avoid penalties for late payments.
8. Integration with ERP/accounting software:
Nanonets integrates with multiple ERP and accounting systems for a unified procurement and financial data management experience.
By automating purchase order workflow with a purchase order system like Nanonets, businesses can ensure smooth data flow between multiple applications, reduce manual errors, and improve overall efficiency.
Are purchase order systems necessary for small businesses?
Larger companies necessarily need a complete purchase order system set up to manage the procurement process. Multiple purchasing transactions involving a large number of employees require complete monitoring and tracking of the entire process.
Small businesses often operate with limited resources and may question the need to implement a purchase order (PO) system. However, there are several compelling reasons why even small businesses can significantly benefit from a purchase order system:
- Improved financial control: A PO system helps small businesses keep track of their expenses, ensuring they stay within budget. By documenting each purchase, businesses can easily monitor expenses and identify any unnecessary expenses.
- Simplified purchasing process: With a purchase order system in place, the purchasing process becomes more structured and efficient. Helps keep a clear record of what was ordered, when and to whom. This reduces the risk of errors, such as duplicate orders or incorrect quantities.
- Improved supplier relationships: Using a purchase order system can improve supplier relationships by providing clear, formal documentation of orders. This ensures that both parties have a mutual understanding of the agreed terms and amounts, reducing the chances of disputes.
- Better inventory management: A PO system helps track incoming inventory, ensuring stock levels are properly maintained. This prevents overstocking or stockouts, which can be particularly detrimental to small businesses with tight cash flows.
- Compliance and audit monitoring: Small businesses are often subject to audits and regulatory requirements. A purchase order system provides complete document tracking, making it easy to comply with legal and financial regulations. This transparency can be crucial during audits as it provides clear evidence of financial transactions.
- Cost savings: While there is an initial investment to set up a PO system, the long-term savings can be substantial. By avoiding over-ordering, negotiating better terms with suppliers, and reducing administrative expenses, small businesses can achieve significant cost efficiencies.
- Scalability and growth: As a small business grows, its purchasing needs become more complex. A PO system can scale with the business, providing the infrastructure needed to handle higher order volumes and more complex supply chains.
Many PO systems, such as Nanonets, are now offered as software as a service (SaaS) with subscription-based pricing. This means that small businesses can access sophisticated software without requiring a large initial investment. Flexible pricing plans allow businesses to pay only for the features they need.
In conclusion, while the initial effort of implementing a PO system may seem daunting for small businesses, the benefits it provides in terms of financial control, efficiency, and scalability make it a worthwhile investment.
Adopting a purchase order system can help small businesses streamline their operations, reduce costs, and establish a solid foundation for future growth.
Conclusion
The purchase order (PO) system has become indispensable for modern businesses as it addresses the inefficiencies and errors of manual purchase order processing. Digital purchase order systems streamline procurement, ensure accuracy, reduce cycle times, and reduce costs.
A PO system like Nanonets automates workflows from purchase requests to payments, integrates with other business systems, and improves supplier relationships. Provides better financial control, compliance and scalability, essential for business growth.
For small businesses, purchase order systems offer significant benefits, including cost savings, increased efficiency, and streamlined processes. With flexible and cost-effective pricing models, modern purchase order systems are affordable and make sense for businesses of all sizes.
