What is a Requisition Order in the Procurement Process?
What is a Requisition Order?
The procurement system starts with a requisition order and moves through the purchasing department to become a purchase order. In this process, 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 before they generate a purchase order.
What is the difference between a Purchase Order & a Requisition Order?
When it comes to weighing a purchase requisition vs purchase order, the main difference lies in their nature. A purchasing requisition is a document in which one department is asking another for permission. It is always for internal record keeping and is asking to buy certain goods or services. A purchase order is a document you use to actually purchase those goods or services.
A requisition order comes before a purchase order in the purchase requisition process. It is an order request form in which one department is asking permission from another to generate a PO. A requisition order paves the way for purchasing supplies. 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.
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.
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
How does the Purchase Requisition Process work?
Standardizing the process of ordering within an organization requires documentation and every buying policy and procedure is different, so it’s important to first understand these two systems and how they can streamline your operations.
The purchase requisition process starts with a purchase requisition or purchase request form. These are internal documents that are 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 is a Purchase Requisition Order needed?
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.
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. A business should never spend money on labor just to track down paperwork.
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 is a Purchase Order (PO) needed?
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.
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.
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.