What is a Purchase Order Flip and How Does it Work?
Technology is drastically altering the way we do business. Every aspect, sector, and environment is shifting because of how data is processed. The financial industry is no different and when it applies to these systems, it’s called “fintech” which is short for “financial technology.”
According to a recent survey by Accenture, AI technologies are projected to increase labor productivity up to 40% by the year 2035. It could double annual economic growth rates while making more efficient use of time.
The procurement process is a workflow that benefits greatly from technology. Especially since it requires a lot of manual data entry and cross-comparison. This is where a digital system can improve purchase orders. For accounts payable, paper invoices are a thing of the past. It’s all about the PO flip.
What is a Purchase Order?
A purchase order is the first official offer issued by a buyer to a seller. Think of it as a “pre-invoice.” It is external paperwork designed to list out the essentials needed to fulfill a request. The issue of a PO only forms a contract when there isn’t one in place. It is the acceptance by the seller of the PO number that initiates the relationship.
It’s important for a purchase order to have detailed line items, including:
- Buyer contact
- Shipping details
- Payment terms
- Vendor data
- Order information (product, price, quantity)
The more specific the order, the more details needed. This is particularly the case for a purchase order flip. It’s useless to create invoices that don’t match up properly to PO details. The process is more than just matching the invoice number with the purchase order number.
What Does a Purchase Order Flip Involve?
A purchase order flip happens when a PO invoice is created digitally. Every line level of the purchase order is received electronically and the data is used to generate e-invoicing. The PO information is transferred in real-time through the system and ends up as an electronic invoice.
The process starts when a customer files a PO online (generally through a supplier portal). This allows orders to be submitted into supplier accounts electronically. It is then assigned an invoice date and number and returned to the buyer.
The usage of automated tools is where the term “flip” was coined. The system is instantaneous. Not only does this expedite the invoicing process, it increases efficiency and leaves much less room for error.
If your company is currently using a paper-based procurement system, your manual procedures are inefficient. During the purchasing cycle, a business can process up to 7 separate documents for every order. This can include documents like:
- Purchase orders
- Order acknowledgments
- Advice notes
- Received notes
- Packing slips
Clearly, this is excessive. Especially in our green-minded society. It’s a lot of paper to push just for a single purchase.
Additionally, paperwork can get lost, damaged, or destroyed. It’s not always easy to spot duplicate requests. Especially if you have a high volume of POs. A set of human eyes only goes so far. It will never be able to scan at the rate of a computer.
The inability to spot missing or replicated data costs a business time and money—not to mention the need to file all this paperwork somewhere. Now you’re looking at space consumption too.
This is what makes a digital purchasing system so effective. Menial tasks can be automated, creating a more efficient workflow and leaving less room for error. It keeps all your documents in a centralized system that makes them easier to manage and process.
Tools for a PO Flip
There are a variety of web portals and sites available to convert a purchase order into an invoice. One of the most popular tools on the web is Ariba Network by SAP. They’re a dynamic digital marketplace designed to help millions of buyers and suppliers interact throughout the purchasing process. Flipping a purchase order in their system is easy. Here are a few quick steps:
- Locate the email containing the PO
- Click “Process Order”
- Click “Create Invoice” and select “Standard Invoice” from the drop-down
- Enter header level data (invoice number, tax ID, etc.)
- Enter tax and shipping
- Create line items with quantity and cost
- When the invoice is complete, click “Next”
- Review a summary of the invoice before a final submission
In just 8 simple steps you can achieve a part of the procurement process that could take hours of data entry, line-item matching, and proofreading.
When to Use a Purchase Order Flip
Electronic purchase order management is easier than it sounds. There are many cases where the purchase order will match by invoice line exactly. For example, corporate software licenses. This involves a catalog of only one product. There is no delivery charge or variance from one user to another. The item is simple and easy to process.
In this case, a PO flip works wonderfully every time. You can rest assured most subscription-based purchases have little to no opportunities for change.
It’s only when you start to introduce other factors into the procurement process that the purchase order flip becomes flawed. It doesn’t work for every business model or purchasing structure. So, it’s important to understand (prior to submitting a PO) if a supplier has digitized their system.
Automated invoice generation makes the assumption that everything on the PO is correct. However, there are potential financial aspects that need to be considered. This includes things like shipping and price changes.
There’s also an assumption that the full content of the P.O. is always shipped by the supplier. What if they only send you half of the quantity? Then the invoice information is incorrect. This can cause accounting issues down the road. Auditing becomes a real challenge.
A business should only use an electronic approach if they have direct and straightforward transaction structures that don’t unload the extra costs on consumers. If you can find a supplier with product and pricing that remains constant, then the PO flip is a system that should streamline your business relationship and create a tighter supply chain.