Having worked with businesses at various stages of their journey, I have seen that in the early stages, the owner will be responsible for making any purchases decisions. As the business grows and takes on employees, this task will likely need to be delegated to one, or several people. However, like many informal business arrangements, it can be hard for the business owner to keep track of spending as there are no day-to-day controls in place. As such, I’d recommend establishing a purchase order system to help a business keep track of its spending.
A purchase order (known as a PO) demonstrates a company’s plan to purchase a certain amount of a product or service at an agreed price from a supplier. Crucially, once the supplier accepts a PO number, it is a legally binding agreement.
Setting up a purchasing policy
It is a good idea to establish a purchasing policy to act as a guide for the person or people who are involved in purchasing. There are several questions to consider when drafting the policy –
Who has purchasing authority? This may be one person or several.
What items are they authorised to purchase?
Is there a cap on their authorised spending limit?
What information does the company deem confidential?
What is the company’s policy on accepting gifts?
What is the process for managing legal queries?
Benefits of a PO system
There are many benefits of having a PO system in place, which can include –
A PO contains accurate details which reduce the risk of mistakes and is more reliable than a verbal order.
It enables a business to keep in control of stock and see what its financial commitment is which helps prevent either underordering stock or overspending. In turn, by having costs under control, it helps keep a business’ prices at a competitive level and increases profitability.
It allows for a business to purchase items efficiently and reduces the risk of duplication and waste.
It can help with planning, especially for cash flow, as by issuing a PO number, it shows upcoming spend earlier.
It makes sure that the correct information goes to suppliers, which helps cement relationships by saving time at their end. Detailed records also allow any potential issues with suppliers to be addressed quickly.
The PO ensures that the goods received are the goods ordered, and the PO number can be matched to the invoice to make sure the price is correct. This is especially useful if a company orders a lot of the same products.
When the supplier sends an invoice quoting the PO number, because it matches the original system’s PO, finance employees do not need to spend as much time reviewing it as they know it is valid.
Having all the spending information in one place, allows a business to track spending more easily.
It adds credibility to a business by demonstrating the business is financially well organised and some organisations will only do business with companies that can issue PO numbers.
Crucially, it can provide peace of mind for the business owner knowing that relevant checks are in place and spending is under control.
Technology that can help
There are many different approval automation apps that can help with PO systems however, the one I use with my Xero based clients and can recommend is called ApprovalMax. The benefits of using an online system like ApprovalMax can include –
It reduces the risk of human error and paper-based or email-based processes.
As we move to more remote working, or for companies based in several locations, it provides centralised controls.
It makes it easier to trace all payments and authorisations.
It helps improve operational performance.
It reduces the time it takes to find the paperwork needed to make time-critical finance decisions.
Employee’s time is spent on high-value services, not chasing approvals for payment.
Information is audit-ready.
Reduced paper and printing is better for the environment.
If your business needs help establishing a PO system, moving to an online system, or have any other queries regarding your SME finances, then please contact me. As a part-time Finance Director, I tailor my experience within large corporates to benefit SMEs and I have a passion to help business owners achieve their potential.
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