Managing cash flow within your business is paramount to financial success – that’s a no-brainer. While accrual accounting lets you tweak and massage stats to reflect non-cash expenses, all businesses live and die on cash accounting: are your products or services bringing in more cash than you’re sending out?
While selling a superior service or product relies on forces outside of your control, like market and economic factors, you can manage your cash outflow to a decent degree. But, like business legend Peter Drucker said, “You can’t manage what you don’t measure.”
Properly managing your cash outflow first demands understanding who is expensing what 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 Requisition: What’s the Difference?
A purchase requisition (PR) and purchase order (PO) are both key junctures within your procurement strategy. The difference lies in their order within your company procurement workflow. The difference between PO vs. PR is simple:
- A purchase requisition is for internal use and links the product or service end-user (employee) with approval authorities via documentation detailing the expense.
- A purchase order originates from the requisition and goes to the vendor or supplier to fulfill the need.
Both serve critical functions, including documentation management, budget control, and audit-proofing your business’ financial functions.
What is a Purchase Requisition?
A purchase requisition can be as complex or simple as you need it to be, with larger organizations often needing greater checks and processes within the PR’s workflow than smaller shops with only a handful of employees. In both cases, though, a PR’s core essence is the same: its purpose is to serve as a formal request by an employee to buy or procure goods or services routed through your workflow.
Why Do You Need Purchase Requisitions?
Remember, you can’t manage what you don’t measure, and measuring your expenses starts with a solid understanding of how money flows outward. Unless you’re personally initiating every purchase within your organization with zero employee input (unlikely), you’ll need to closely track who is ordering what, for what purpose, and for how much. A purchase requisition satisfies all these criteria, ending in a final check 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 comes knocking for an audit. In either case, a well-oiled purchase requisition process automatically builds and maintains a comprehensive accounting system for company expenses.
How Does a Purchase Requisition Work?
As I said, specific workflows vary between companies. For this workflow, we’ll look at how a medium-sized business with 100 employees might route a purchase requisition. Depending on your size and scope, your purchase requisition workflow might be more streamlined or much longer and more complex.
Here’s a basic outline of typical purchase requisition sequencing:
- The employee identifies a need – whether routine or a special case – and submits a purchase requisition form. The form usually includes:
- Employee or department name
- Location (if offices are geographically disparate or you primarily work remotely)
- Quantity and type of items requested
- The vendor’s business name and address
- Exact or estimated price
- Due date/when the item or service is needed
- The first manager or approval recommending authority validates that the product or item isn’t already part of your inventory/isn’t on hand and sends the requisition to the financial management team.
- Finance ensures the vendor is compliant with your company’s standards and practices, ensures a valid need exists that justifies an expense, and that the requisition aligns with your budget.
Once blessed off on by finance, you generate a purchase order to satisfy the requisition.
What is a Purchase Order?
A purchase order is a formal request sent to the vendor for the goods or services outlined in the requisition. The purchase order is often much more complex than the purchase in scope and includes legal language to bind each party contractually to the transaction. It’s also organized according to your internal management systems. If the vendor is large enough or you have an ongoing relationship, it is likely formatted according to their CRM tools.
Why Do You Need Purchase Orders?
The purchase order exists to formally and legally request goods or services from a vendor. This legal agreement binds each party to the transaction and ensures a common understanding of what is expected, for how much, and when it’s needed. This helps avoid billing surprises and keeps everyone involved in procurement accountable and honest with one another while avoiding miscommunication or human error that often occurs during verbal transactions or handshake agreements.
And, like purchase requisitions, a purchase order exists to serve as an auditable paper trail for your internal management or in case an outside agency inspects you.
How Does a Purchase Order Work?
Once the requisition is approved, your finance department completes the purchase order and continues the procurement workflow.
- The finance team sends the purchase order to the vendor and receives the invoice. From there, the vendor is paid immediately, or the invoice is held in accounts payable for a specified duration or until the purchase order is fulfilled (depending on the item, your internal processes, and vendor agreement).
- A key part of your finance team’s due diligence is three-way matching. This is an accounts payable department function that cross-checks the purchase order, invoice, and delivery receipt to validate there’s no fraud or human error that can cause unexpected expenses.
- Once the item is delivered or service rendered, a responsible party (either the original requestor or finance team) generates a receipt and files it with accounts payable to facilitate three-way matching and show that the purchase order is satisfied.
Conclusion
This was a very basic breakdown of purchase requisition and purchase order workflows. In actuality, the back-and-forth process of requesting and receiving goods from an outside vendor 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 recordkeeping.
And, like many administrative business functions, these aspects of procurement are increasingly digitized or automated. That’s great news for business owners and employees – while optimized workflows can speed things up, you can’t optimize past the speed of handing paperwork back and forth, particularly in remote work setups or if your headquarters and offices are dislocated.
Effective accounts payable automation tools include comprehensive purchase requisition and purchase order management. Innovations in the workflow include:
- AI-powered screening tools to generate formal requisitions from employee emails or Slack messages.
- Automated AP approval for certain categories or requisitions under a certain dollar amount that doesn’t need human screening.
- Synchronization with your accounting software to migrate requisitions, invoicing, and receipts to enable three-way matching and reconciliation quickly.
- Long-term data storage within a secure cloud ensures you’re compliant and ready for audit.
These are just a few of the innovations shaping procurement, but each uniquely streamlines your purchase requisition and purchase order workflows. And the more you develop and nurture your procurement management and AP automation, the greater the ecosystem you build – and the easier you can manage administrative tasks that otherwise detract from your operational focus.
No matter your level of finance automation, understanding purchase order vs. purchase requisition is the first step to managing spending and keeping cash coming in – if you manage what you can now measure.
