What is a Requisition Order and Why is it Important to your Business.
Effective supply chain management starts when a business can thoroughly track purchases. It’s part of the procurement process a company goes through to acquire goods and services from an outside source.
Every department must navigate the correct channels to order supplies. Not only does this give the accounting department more control over cash flow, it creates a paper trail that facilitates auditing.
The procurement system starts with a requisition order and moves through the purchasing department to become a purchase order.
What is a Requisition Order?
Many people have heard of a purchase order but some are still asking “what does a requisition order mean?” Although it used to be a formal request within a larger organization, more companies are getting on board with the benefits of a requisition order. Even a startup benefits from this business plan.
The purchase requisition process begins when a department (or individual) submits a purchase requisition form (also called a requisition order form or purchase request form). These internal documents are put through a purchasing system and approval process for validation purposes.
You need to be accountable for the company cash you spend. Not only is it a means of starting the procurement process, but accounting uses these key documents to coordinate expense reporting.
A requisition order requires enough data to create an efficient audit trail for the IRS. It also helps match up documents and send out the proper invoicing. Information on the order request should include:
- Vendor location and mailing address
- Legal supplier name
- Number of items
- Description of product
- Name of requesting department (any department managers)
- Expected cost
- Requested delivery date
The more information you give the accounting department, the faster they can create a purchase order. This is important if an employee is waiting for supplies to finish a job.
It should also be noted that not every purchase needs to go through a purchase order system. A finance department will only consider a purchase requisition form after a specific dollar amount. Otherwise, it’s a waste of time and labor.
Every organization is different, but usually, if the purchase is less than $5,000, it can be handled by an internal department head.
Why is a Requisition Order Important for Your Business?
There are a variety of reasons why a requisition order is important for your business. Larger purchases must always be documented for tax reasons. You never know when something is a write-off.
The likelihood of fraud also increases when you have no system of accountability. If no one is tracking the expenses, what are people buying?
A requisition order initiates the process. It is the first document to list out and detail everything accounting needs to not only process paperwork, but report back to the IRS when necessary. It keeps the company better prepared for an audit and more transparent about cash flow. A business should never spend money on labor just to track down paperwork.
It’s critical for a business to always maintain control of expenses. The more organized you are about the process, the better. This is why a procurement department serves an essential role in the supply chain. It’s a double-check on money going out to make sure everything is accounted for.
Benefits of a Requisition Order
One of the key benefits of the requisition process is accountability. Especially when people need to make large purchases. If you find it challenging to oversee financial control of expenses, consider an e-procurement system. This is taking the entire operation digital. Purchase order software can automate accounts payable tasks and eliminate errors.
When permissions are given in real-time, resources can be expedited. The process is no longer reliant on a human signature for approval. That means, if your boss is sick, the requisition accounting doesn’t have to stop. You can submit your requisition order template and let the program streamline the purchasing process. This eliminates delays and increases productivity levels.
A requisition order can also help to trace goods. This is useful if multiple departments are ordering the same or similar items. Each purchase order form will have who ordered it and the correct amount to distribute. This quickly eliminates any issues regarding organization assets.
What is the Difference Between a Requisition Order and a Purchase Order?
When it comes to purchase orders vs. requisitions, many people consider them the same thing. But that’s like asking the age-old question of “which came first? The chicken or the egg?” In fact, it’s the requisition order.
This is the document required before you can even think about a purchase order. It is a form in which one department is asking permission from another. A requisition order paves the way for purchase.
Once a requisition order is approved, it moves along the pipeline until it becomes a legitimate purchase order. Data on a P.O. includes:
- Payment terms
- Invoice instructions
- Ship to address
- Name of purchasing office
- Items to be purchased
The main difference between a requisition order and a purchase order is what the documents are attempting to achieve. One is asking for permission, the other for product.
A Centralized Procurement Process
It’s incredibly important for a business of any size to have checks and balances in place to discourage fraud and elevate productivity. One key benefit overlooked when centralizing the procurement process is the opportunity it creates for departmental collaboration.
When a company requires all requisitions to be made centrally, departments can bundle purchases and leverage the buying power of the company as a whole. This helps departments negotiate for more favorable terms and it saves the business money in the long run.
A unified system also speeds things up. That means departments receive their goods faster and jobs get done quicker. It creates a new level of efficiency where more people are working together toward a common goal.
Ultimately, when establishing solid controls within a business, the first step to consider is establishing a process for requisition orders. Once a purchasing system is in place, people can focus more on driving business growth and improving the company culture.