Purchase request vs purchase order: the differences

Managing cash flow within your business is paramount to financial success; that’s a no-brainer. While accrual accounting allows you to tweak and modify statistics to reflect non-cash expenses, all businesses live and die by cash accounting: Are your products or services generating more cash than you send out?

While selling a superior service or product depends on forces outside your control, such as economic and market factors, you can Manage your cash outflow to a decent degree. But, as business legend Peter Drucker said, “You can’t manage what you don’t measure.”

Properly managing your cash outflows first requires understanding WHO it’s expense that within your organization. Establishing clear guidelines for purchase requisitions and purchase orders is an important first step in measuring what you intend to manage.

Purchase Order vs. Purchase Request: What’s the Difference?

A purchase requisition (PR) and a purchase order (PO) are key points within your procurement strategy. The difference lies in their order within your company’s procurement workflow. The difference between PO and PR is simple:

• A purchase requisition is for internal use and links the end user of the product or service (employee) to the approving authorities through documentation detailing the expense.
• A purchase order originates from the request and is directed to the seller or supplier to satisfy the need.

Both serve critical functions, including documentation management, budget control, and audit verification of your company’s financial functions.

What is a purchase request?

A purchase request can be as complex or simple as you need it to be, and larger organizations often need greater controls and processes within the PR workflow than smaller shops with just a handful of employees. However, in both cases, the core essence of a PR is the same: its purpose is to serve as a formal request by an employee to purchase or acquire goods or services sent through their workflow.

Why do you need purchase requests?

Remember, you can’t manage what you don’t measure, and measuring your expenses starts with a solid understanding of how money flows out. Unless you are personally initiating every purchase within your organization without any employee involvement (unlikely), you will need to follow up closely. WHO is ordering thatfor what purposeand to how much does it cost. A purchase request satisfies all of these criteria and ends with a final verification by designated personnel to prevent financial fraud, waste and abuse within your business.

You also need to maintain accurate expense records for your financial management systems in case the IRS requests an audit. In any case, a well-oiled purchase requisition process automatically creates and maintains a comprehensive accounting system for company expenses.

How does a purchase request work?

As I said, specific workflows vary between companies. For this workflow, we’ll look at how a medium-sized company with 100 employees could submit a purchase request. Depending on your size and scope, your purchase requisition workflow can be more streamlined or much longer and more complex.

Below is a basic outline of the typical purchase request sequence:

1. The employee identifies a need, whether routine or a special case, and submits a purchase request form. The form usually includes:
   1. Name of employee or department
   2. Location (if offices are geographically dispersed or if you work primarily remotely)
   3. Quantity and type of items requested
   4. The trade name and address of the supplier.
   5. Exact or estimated price
   6. Expiration date/when the item or service is needed
2. The first manager or approval recommendation authority validates that the product or item is not part of their inventory or is not available and sends the request to the financial management team.
3. Finance ensures that the supplier meets your company’s standards and practices, ensures that there is a valid need to justify an expense, and that the request aligns with your budget.

Once finances benefit you, you generate a purchase order to satisfy the request.

What is a purchase order?

A purchase order is a formal request sent to the supplier for the goods or services described in the request. The purchase order is typically much more complex than the purchase in scope and includes legal language to contractually bind each party to the transaction. It is also organized according to its internal management systems. If the supplier is large enough or has an ongoing relationship, it is likely formatted according to your CRM tools.

Why do you need purchase orders?

The purchase order exists to formally and legally request goods or services from a supplier. This legal agreement binds each party to the transaction and ensures a common understanding of what is expected, how much, and when it is needed. This helps avoid billing surprises and keeps everyone involved in procurement accountable and honest with each other, while avoiding miscommunication or human errors that often occur during verbal transactions or handshake agreements. .

And, like purchase requests, there is a purchase order that serves as an auditable paper record for internal management or in case it is inspected by an external agency.

How does a purchase order work?

Once the requisition is approved, your finance department completes the purchase order and continues the procurement workflow.

1. The finance team sends the purchase order to the supplier and receives the bill. From there, the The seller receives payment immediately.or the invoice is held in accounts payable for a specific period or until the purchase order is fulfilled (depending on the item, your internal processes, and the agreement with the supplier).
   1. A key part of your financial team’s due diligence is three-way matching. This is a accounts payable function of the department that verifies the purchase order, billand delivery receipt to validate that there is no fraud or human error that could cause unexpected expenses.
2. Once the item is delivered or the service is performed, a responsible party (either the original requester or the finance team) generates a receipt and files it in accounts payable to facilitate three-way comparison and demonstrate that compliance was met. the order of buy.

Conclusion

This was a very basic breakdown of the purchase requisition and purchase order workflows. In reality, the back-and-forth process of ordering and receiving products from a third-party supplier is laborious and can be lengthy. That’s why creating a standard operating procedure for purchase requisitions and purchase orders is key to ensuring smooth procurement and quality record keeping.

And, like many business back-office functions, these aspects of procurement are increasingly digitized or automated. This is great news for business owners and employees: while optimized workflows can speed things up, you can’t optimize beyond the speed of paperwork delivery and delivery, especially in remote work setups or if Its headquarters and offices are displaced.

Effective accounts payable automation Tools include comprehensive purchase requisitions and purchase order management. Workflow innovations include:

• ai-powered screening tools to generate formal requests from employee emails or Slack messages.
• Automated AP approval for certain categories or requests below a certain dollar amount that do not need human evaluation.
• Synchronize with your accounting software to migrate requests, billing and receipts to enable quick reconciliation and three-way reconciliation.
• Long-term data storage within a secure cloud ensures you are compliant and audit-ready.

These are just a few of the innovations shaping procurement, but each uniquely optimizes purchase request and purchase order workflows. And the more you develop and care for yourself Procurement Directorate and AP AutomationThe larger the ecosystem you build and the easier you can manage administrative tasks that would otherwise detract from your operational approach.

It doesn’t matter your level of financial automationUnderstanding the purchase order vs. purchase request is the first step to managing expenses and keeping cash coming in, if you manage what you can now measure.