Taking stock of POP: how SMBs should address their fragmented purchase order processes
Small and mid-sized businesses (SMBs) could be missing out on all sorts of efficiency savings and everyday spending intelligence according to a survey commissioned by Invu. The survey of finance personnel from public and private sector SMBs reveals that even when purchase order processing systems are in place, often the rigour they are designed to enforce is not followed through.
Our survey has revealed some surprising findings about how finance is structured and processed in small and mid-sized businesses, one being how many organisations had formal purchasing departments and structures in place. This was true for 80% of mid-sized companies (those with 50-250 staff). Although the trigger for having a formal purchasing department was often to handle goods for resale, where such departments existed they were also being used for internal purchasing by 93% of survey participants.
However, it is the gulf between where these organisations could be and where most of them are in reality that has proved most significant. The majority of businesses taking part in the survey applied rigour to purchase order processing (POP) only partially – controls which were undermined by more haphazard processes at other points in the purchase order management cycle. Typically this has resulted in unnecessary additional layers of manual administration and a lack of visibility across spending. It has also created bottlenecks in Finance departments, where all of the information has been centralised. This has left budget-holders and functional decision-makers overly dependent on Finance teams and disempowered from making informed decisions about new purchasing.
For small public and not-for-profits organisation, attempts at formal POP appear relatively advanced from the research – presumably because of the need to be seen to perform due diligence processes in line with government targets on securing the best value for money. By comparison, small private companies were the least likely to have a formal purchasing function for internally-consumed goods and services – by extension probably because they are not bound by the same external requirements.
Where a hybrid approach was allowed for purchase requisitions, Forty-three per cent of organisations recognised immediate inadequacies in their PO practices and almost two-thirds (64%) indicated ‘urgent’ plans to address purchase order management inefficiencies in the future.
Even where businesses do have formal systems in place for purchase order processing, too often the loop isn’t closed. Purchase requisitioning is inconsistent, even chaotic, and receipts of goods and services are not being tallied with POs until the invoice comes in, by which time the spend has been committed.
As well as rendering the business vulnerable to the cost of human error, late-stage PO/receipt matching fails to prompt budget-holders to think about the purchases they are sanctioning and how this will affect their remaining resources for the period. It also makes a mockery of the approvals process.
All too often, there is a lack of uniformity in the way that requests are submitted – it is common to see a mixture of paper-based forms, intranet-based forms, email requests as well as those made in person or by phone. How POs are raised gave rise to the widest range of responses. Only 9% of respondents said they were systematically raising purchase orders using their ERP system; 23% used a separate PO system, 20% used a Microsoft Office-based system, 15% managed everything manually, and 20% didn’t use POs at all.
Few SMBs participating in the survey had a joined-up purchase requisition-to-order system and it is this missing element that is restricting their ability to streamline processes, and introduce greater intelligence and discernment into the purchasing process.
Staff should be weaned off old habits of estimating budgets based on “last year plus 5%”, and give more consideration to what they need to be spending and where better deals can be found. Once able to break things down, purchasers will find they start to perform spend analysis as an ongoing discipline rather than a one-off project.
Whether the ‘business’ is a public sector organisation needing to provide evidence that it has shopped around for the best quote, or a private SMB needing to look more professional to its suppliers, ‘make do’ solutions from spreadsheets and other cobbled-together manual processes no longer cut it. They don’t look good and they don’t support data mining or the level of governance that growing companies aspire to. The goal should be to move controls up to the front of the process and to encapsulate the PO lifecycle in a fit-for-purpose system which is reliable and can be interrogated, audited and measured.
About the Author
Since joining Invu as Finance Director in 2009, Ian Smith has overseen the financial evolution of Invu from a loss-making and cash-consuming business to a profitable and cash-generative business. More recently he has additionally taken on the General Manager role becoming more closely involved in sales, marketing and product strategy.
Ian, a Chartered Accountant, started his career in the Accountancy Practice at Arthur Andersen and then developed his skills and experience in the technology sector with senior management roles at Fisons Instruments, nCipher plc and Pursuit Dynamics plc. Ian’s experience has been that the only constant is change on both a personal and a business level. He has uprooted his family several times relocating them first Switzerland and then to the USA and then back to the UK. He has managed people, processes and systems in small and medium sized business in the full range of business environments, growth, recession, acquisition and disposal.