Standardizing the process of ordering within an organization requires documentation. Putting a procurement system in place controls costs and creates a paper trail for easier auditing. Obtaining a purchase order vs purchase requisition are both key processes in acquiring items a business needs to survive. Every buying policy and procedure is different, so it’s important to first understand these two systems and how they can streamline your operations.
Purchase Requsition vs. Purchase Order: What is the Difference?
A purchase requisition is an internal document in which one department is asking another department for permission to buy goods or services. A purchase order is created after the requisition and is a document that is used to actually purchase those goods or services from an outside vendor.
Purchase requisitions are more interdepartmental forms that allow larger organizations to handle their accounting and finances better. The bigger the business, the more the need for a procurement process. You simply cannot track the flow without putting it on paper.
What is a Purchase Requisition?
A purchase requisition is a form submitted by an employee to their company’s finance department to request permission to purchase external goods or services. When a purchase requisition has been approved, the actual purchasing of goods or services can now happen with the use of a purchase order.
The purchasing request forms are documents developed by the purchaser and submitted to the finance department. It’s a means of getting permission to start the procurement process with an outside vendor. You’re waiting for the “thumbs up” to buy goods or services needed to complete a job.
You can’t go crazy with company cash. You need an approval process for validation purposes. This serves as the first step in creating an efficient audit trail with transparent records. It shows the IRS you care about keeping track of business finances.
The purchasing department will only look at a purchase requisition form over a certain dollar amount. Every company differs, but the average cost is anything $5000 and over. Each requisition order requires certain information. This can vary by industry and need but a requisition typically requires data like:
- Name of the department requesting
- Purchaser’s location and mailing address
- Exact amount of items
- Description of items
- Legal name of the outside supplier
- Expected price of purchase
- Requested delivery date
The more information the accounting department has, the more it facilitates the purchasing process. A good purchase requisition example would be when an employee needs equipment or ongoing services for their job.
Why Do You Need a Purchase Requisition?
When a proposed purchase exceeds a certain amount, you want to document that for tax purposes. Every organization needs to buy things, but without a paper trail, the likelihood of fraud vastly increases. A business must maintain some form of control over their pocketbook. To prevent this, a procurement department serves an important role in the supply chain. They are a second set of eyes on the money going out. This is an essential strategy for small businesses where every penny counts.
What is a Purchase Order?
This is the next step in a purchasing system. Once a requisition is approved, it is assigned a purchase order number and sent to the vendor. This external document initiates the sales transaction and is a binding contract for all parties involved. The purchase order system is designed for organized recordkeeping. The PO number that is assigned generally matches the requisition number, and they are filed together. Just like a purchase requisition, a PO requires certain information, like:
• Name of the purchasing office
• Items to be purchased
• Payment terms
• Invoicing instructions
• Ship to address
• Purchase order number
Purchase orders serve as key documents in the entire accounting system and expedite recordkeeping. They help companies properly prepare for audits. You don’t want to be scrambling last-minute for a receipt from 10-months ago. Efficient processes save a business money.
Purchase orders can also be requested for internal transactions. This happens when one department in a business wishes to purchase goods or services from another. In this case, an interdepartmental purchase order is required to track the exchange of goods and services. This can be particularly helpful for larger businesses that have departments with separate operating budgets.
Why Do You Need a Purchase Order?
A business should never be satisfied with a verbal commitment. There is a great amount of legal risk involved. Purchase orders put things on paper. When new posts are made, they help to avoid duplicate orders. This is particularly important as your business scales up. It will be harder to track purchases without an assigned number like a PO.
Certain financial audits also require you turn in purchase orders. This serves as evidence a manager has approved a purchasing decision. It’s quicker and more efficient than digging through a drawer of receipts. It also keeps you from losing track of funds or complicating accounting practices.
Purchase orders can help a company avoid surprise price increases. If a supplier changes its cost between the date of order and the date of delivery or invoice, a PO will clarify the original price. The vendor must hold to the contract since a PO is a legal document. This clears up any potential for miscommunication or misappropriated funds.
The PO process will also keep your orders and invoices in check. It makes it easy to identify which products are coming in at any time and aids inventory management. If you have repeat orders, it helps to sort invoicing down the road.
The Future of Purchasing
All of these exchanges and documents seem like busywork. Especially considering the capabilities of modern e-procurement technology. Purchase order software can automate and oversee the entire process. This means no more waiting for a signature on someone’s desk. When the purchasing process is digitized, no balls are dropped. Permissions can become almost instantaneous and resources expedited. People can focus more on driving business and less on menial tasks.
An electronic procurement system integrates easily with other financial platforms. A business that utilizes sophisticated digital processes rather than relying on excel or email can enjoy a significant reduction in cost, greater control over spend, and a streamlined purchasing process. Automation is the future of purchasing.