Everything comes at a cost. From your Netflix subscription to the pen that keeps getting lost on your desk, every good or service has a value—which is why everything comes at a price. Companies must charge for the materials and services they use to create the final product, plus a little extra to ensure a return on investment of raw goods. In the B2B world, this process is known as procure-to-pay.
What is Procure-to-Pay?
The procure-to-pay (or purchase-to-pay) cycle is the process in which businesses inquire, request, receive, and then pay for raw goods and services. This procure-to-pay process involves numerous tedious steps to complete just one order.
How does the Procure-to-Pay Process Work?
Most procure-to-pay processes include the following steps:
- Supply management –The method of connecting to and managing supplier relationships for the purpose of ordering.
- Vendor selection – Researching and selecting the preferred vendor to purchase from.
- Requisition – The internal process of formally getting approval to order a product for fulfillment.
- Purchase order – Creating a formal document which contains specific order quantities and requirements for the vendor.
- Receiving – Accepting the physical shipment and entering the accepted order into inventory, tracking, and accounting systems.
- Invoice reconciliation – Comparing the invoice to the purchase order to ensure all costs and charges are as expected.
- Accounts payable – The final step in the procure-to-pay process is focused on handling the purchase order for payment, sending the payment, and entering the amount into accounting systems.
For most companies the procure-to-pay process works like this:
Let’s say there’s a need for more office supplies. Your procurement specialist researches the best vendor and requests a quote. Based on the quote, there may be a negotiation phase for a better price or quantity. Once the details are agreed upon, the supplies and invoice are sent. Your finance department does their job to process the invoice and pay the vendor for the supplies sent.
But imagine handling all of these steps manually for each vendor your business works with. These steps don’t include other critical procure-to-pay processes including contract management, inventory management, or measuring vendor performance. Some companies may also include three-way matching in the purchasing process to easily match the purchase order with the invoice and the receiving report.
The State of Modern Procure-to-Pay Processes
Procurement processes have come a long way since the Stone Age, but most companies are still not up to speed on modern procurement trends. A recent PayStream Advisors report points out [quote text=”56% of surveyed businesses have a centralized procurement department with standardized processes for the organization.”]However, it doesn’t mean the current processes are controlled. Most centralized processes are a mix of manual steps and electronic systems.
There are a few procure-to-pay problems some companies still need solutions for. Most current procure-to-pay processes have limited visibility into what was previously purchased or ability to track spending in real-time. They suffer from maverick spend which negatively impacts the budget. Some organizations even suffer from departments spending over the budget. Of course, all of these procure-to-pay problems impact auditing, reporting, and processes.
“Only a little over half (56%) of surveyed companies currently have a centralized procurement process throughout the business.”
Others suffer from scattered processes that are a mix of centralized and decentralized and are throughout different departments. Some companies are even plummeting their business by allowing each department to handle their purchasing processes.
Homegrown vs Cloud-Based Procurement
Most companies (41%) are pairing their accounting or ERP system with eProcurement tools to make the most of their current system without a steep learning curve. However, only 20% of businesses use a cloud-based eProcurement solution. So which is best for the business?
If your company is trusting internal or homegrown tools or AP automation software, they may suit your needs perfectly for now, but there are a few concerns to keep in mind. Chances are if your business chooses to modify processes, it could take a great deal of time and resources to change the homegrown tool for your needs. Customization and updates may also be very limited. Naturally, after years of change, the homegrown system becomes outdated and leads your business down a path of broken, inefficient procure-to-pay processes.
On the other hand, cloud-based purchase order software gives companies better visibility and flexibility while leaving the heavy lifting of updates to the SaaS provider. Cloud-based eProcurement allows companies to manage and streamline the procure-to-pay process in a centralized, cloud-based system. Today, eProcurement has the ability to manage purchase orders, invoices, expense reports, and payments from a centralized, cloud-based hub. With cloud-based eProcurement, companies have improved flexibility by accessing the SaaS anywhere with a network connection.
Your company’s procurement software preference all boils down to business size. PayStream Advisors explains the difference.
“Thirty-three percent of enterprise organizations have adopted the software, compared to 10% of SMEs and 16% of middle market companies.”
This is related to things like PO count and the size of the supplier base. It also has to do with the number of full-time employees (FTEs) working in the procurement department.
So what works best? When it comes to implementing procurement software, most companies use a procurement solution that integrates with their accounting or ERP system. But there’s a problem with trusting your ERP or accounting system with their version of procurement software.
“ERP-based procurement software is often outdated, expensive to maintain, and very difficult to customize.”
This is not efficient for smaller, scaling companies with evolving infrastructure needs, or enterprise organizations with multiple back-office systems and widespread purchasing processes. It’s all about efficiency.
Your business should be able to easily handle vendor contracts, spend, and purchasing documents under one platform. Scattered, manual, paper-based purchasing processes lead to less visibility into what has been ordered and the inability to analyze spend.
Protecting Your Purchasing Processes from Fraud
It’s no secret fraudsters prey on finance departments for account information and as much money as possible. The procure-to-pay cycle is no exception to the fraudster’s attack. There are common procurement scams every organization should be aware of—especially SMBs. There’s the risk of sending fake invoices for payment.
President of Doxey, Inc., Chris Doxey, shared three parts of the procure-to-pay cycle that could plummet the process if not controlled. The top three crucial controls include segregation of duties, delegation, and system access. Doxey provided an extensive list of best practices to avoid procure-to-pay fraud. First, separate procure-to-pay responsibilities to various individuals throughout the procure-to-pay process.
Regularly evaluate the segregation of duties to reduce errors and overlooked risks. A streamlined, automated procurement solution and more people reviewing each step, reduces the chance of inaccuracy or fraud going unnoticed. Doxey pointed out some businesses review procure-to-pay duties quarterly.
“One individual should not have access rights which permit them to enter, approve, and review transactions.”
And most importantly, limit access to information and accounting systems. Keeping restricted access to files, transactions, and approvals reduces the likelihood of unauthorized steps from the wrong people. Lastly, regularly review system access (monthly or quarterly) to stay up to date.
The Influx of Procure-to-Pay Automation Adoption
eProcurement software has been proven to improve the procure-to-pay process from start to finish. Trusting software improves cycle time, visibility, and control. To take full advantage of eProcurement and its procure-to-pay cycle perks, there are a few best practices to follow. Paystream Advisors shares an extensive list. A few include:
- Put the business’ best interest first. It’s important to remember that eProcurement systems aren’t one size fits all. What are your goals for the next 3-5 years? Predicting the company’s future growth and demands will help you choose the best solution. Think about how these goals impact your relationships with vendors including procurement processing time, costs, and departmental needs. Putting the company’s needs first, you’ll have a solution that works best for your business.
- Don’t bite off more than your company can chew. If your business is taking the first leap into automation, consider starting small. Focusing on automation and improving select procurement steps also makes a safer bet on budgeting. Start with automating one process, then consider automating other processes that fit your allotted budget.
- Build a strong business case for eProcurement. Finance leaders may argue eProcurement solutions offer little to no ROI, or there’s no budget allotted for P2P automation. Building a business case selling P2P automation and its benefits could persuade leaders. Highlight the P2P process before and after automation, the impact, and ROI.
- Add up the solution costs. Consider all expenses your business should budget for when considering an eProcurement solution. PayStream Advisors suggests including implementation, integration, and comparing costs of current systems and processes.
Handling Supplier & Vendor Contracts
The vendor contract is designed to hold your vendor accountable for all negotiated and agreed upon terms. Failure to implement processes and controls around vendor contracts opens the door for several spend problems including inefficient spend and overspend.
Some purchasers may not consider purchasing against supplier contracts at all, much less checking a requisition against one. This means they may be paying much more for an item than the rate on the contract—a rate their Sourcing or Procurement team could have spent a great deal of effort negotiating.
PayStream Advisors reports that the majority (41%) of surveyed companies understand that their vendors have contracts, but they rarely double-check their purchase requisitions or purchase orders against them. Manually managing piles of printed supplier contracts leaves room to overlook contract terms easily. With eProcurement solutions, contract management is simplified to ensure compliance, order tracking, and visibility.
How the Procure to Pay Cycle Impacts Vendor & Supplier Relations
The electronic payment process for vendors starts long before goods are received. It begins in the vendor vetting phase. When companies are researching vendors, it’s critical to meet your company’s payment and product needs first before signing on the dotted line. In the early stages of the procurement cycle, your company should consider a few factors beyond price negotiation. It’s crucial to discuss delivery and production expectations, payment schedule, and other preferences that work best for your business.
First and foremost, share your goals and expectations of procurement and growth with your supplier. Having a clear understanding of immediate expectations and future growth plans could be helpful for your vendor to understand how their services and goods directly impact your business.
Even understanding the days sales outstanding (DSO) is critical to determine if your company will be able to make payments on time, especially if you’re sticking to a net-30 payment schedule. Understanding goals and expectations fosters a partnership both parties can benefit from.
“Ask the question: Is your business playing fair? When negotiating payment terms, it’s important to play by the rules.”
Spend Matters explains working capital trade-off when negotiating with vendors. If your cost of capital is 7%, a 1% early pay discount has the same value as a 52-day increase in payment terms. The higher your cost of capital, the more valuable discounts are. However, it is important to balance terms extension with increased discounts.
A few other points are simple but critical. Remember to slow down and know when to walk away. Do not rush into payment and product negotiations that put your business in jeopardy in the long run. Take time to justify your negotiation and understand your vendor’s pricing. If both parties cannot come to a fair agreement, remember it’s okay to walk away.
The Procurement Vendor Selection Process
In the P2P process, one of the most important decisions is the selection of the vendor. Procurement specialists spend hours researching vendors, products, and pricing. But before signing the contract with the preferred vendor, your company should send a Request for Quotation (RFQ) to gather more information about the business and all critical details. After your company has all the required information from potential vendors, you’ll need to negotiate. The key to selecting a vendor is to keep both the product and P2P process cost as low as possible. Always keep in mind you want the best deal for your bucks. According to a recent Balance SMB article, procurement specialists should practice a few negotiation points.
For starters, negotiate fairly. Don’t try to “get over” on your vendor. Treat your vendors like your partners and work with them just as they’ll work with you. In the same way, don’t be afraid to inquire about available incentives. If your vendor doesn’t offer any rewards, feel free to offer appropriate suggestions. If you believe the quote or contract doesn’t meet industry standards, don’t be afraid to walk away.
Most importantly, put pen to paper. Make sure the agreed upon terms are detailed in the contract. Even the small negotiations should be noted. Also, think about negotiations and incentives you and your vendor may want in the foreseeable future. Thinking long-term during negotiation ensures a long-lasting partnership supporting your business growth and goals.
Improving Visibility & Control
In the procure-to-pay process, organizations send purchase orders to vendors before the order is filled by the vendor. After the order is complete, the vendor sends the invoice. Why does your business need both?
First, let’s understand the difference between the invoice and purchase order. Today, most companies send vendors purchase orders via email, while larger companies trust purchase order software to safely and quickly send them. The purchase order is created by your business to inform the vendor of the order details. This includes the exact products, quantity, cost, and other product specific details. After the vendor receives the purchase order, the order is filled, and the vendor sends the invoice to your organization with all the details from the purchase order, including the invoice information—the invoice number, the date the order was complete, and the total amount.
But if all the details are the same, why does your company need the purchase order and the invoice? It’s all about visibility and control. Managing both the invoice and the purchase order keeps track of all orders that don’t have matching invoices as well as goods which haven’t been received. If your business has a purchase order without an invoice, they are aware of what’s outstanding.
Even better, if your organization has both the purchase order and the invoice, your auditors will thank you. The more documentation the company is able to provide around payables, the better. There’s less room for errors, unauthorized payments, and duplicate orders. However, keeping track of all purchasing information isn’t the most effective when mixing paper-based, manual processes and electronic ones. There’s still the risk of losing the purchase order or invoice or having floating copies which increase the risk of duplicate payment.
When researching procure-to-pay automation, it’s critical to find a solution that organizes purchase orders and invoices without paper. PayStream Advisors points out, regardless of the company size, average purchase order processing cost decreases with an eProcurement solution. If your auditor and procurement department have to search through hundreds of emails and filing cabinets, your business is still left in the dark wondering which purchase orders are outstanding and what invoices need to be paid.
Picking a Procure to Pay Solution
Building a business case to convince leaders to buy into an eProcurement solution can seem impossible. But leaders have their reasons for hesitation which explains why there’s minimal executive sponsorship. The reason why most companies don’t buy into procurement solutions is that there’s no need to fix current processes that aren’t broken. For others, there’s so much
Fintech noise that it’s hard to understand current purchasing solutions. Other common reasons include fear of low ROI and no allocated budget.
Despite all of these reasons, every leader has one common goal—to reduce spending while increasing profits. Automated procurement solutions may seem pricey and unnecessary, but the benefits should remove all doubt. eProcurement solutions improve accountability, controls, and purchase reporting to improve purchasing and payment processes.
The Benefits of eProcurement
As a solution, organizations are leaning on eProcurement to solve a host of problems. Most eProcurement solutions solve problems in many ways:
- eProcurement improves accountability for all employees and departments. Automated solutions simplify reporting to categorize and analyze spending efficiently.
- Automated P2P solutions enable purchasing controls with automated approvals and thresholds for specified dollar amounts.
- Handle streamlined P2P workflows that generate purchase reporting, create electronic audit trails, and ensure compliance.
With eProcurement solutions, your procurement department is bound to have a controlled, streamlined procure-to-pay process that improves visibility and effective spend. The most significant improvement most businesses see with eProcurement solutions is reduced time-to-fill cycle times at 56%. Automated P2P solutions solve many challenges that purchasing directors struggle with, including improved purchasing effectiveness, cost reduction, and purchasing speed without risking compliance. Other big benefits businesses reported include better procurement visibility and transparency, improved control and security, and optimization of the supplier base.
Adding Up The Savings of eProcurement Solutions
To help decide if a procure-to-pay system is worth the cost, look at the procurement budget from end to end. Include every step of the P2P cycle. How much would your savings be if you cut costs across the board by 5-10 percent? Start by thinking about the amount of time and money spent on paper-based, manual procurement processes. What part of the procure-to-pay cycle is the longest, and how can your company improve efficiency? What are common procure-to-pay problems? When answering these questions, consider other departments involved and the typical roadblocks.
Below are a few clarifications and definitions between similar concepts in procurement.
Procurement vs Purchasing
In many industries, procurement and purchasing are terms used interchangeably, but there’s a difference between the two terms. Procurement can be defined as the process of obtaining goods and services. That includes researching products and vendors, managing the supplier contract, and determining value and price. The best way to think of procurement is the blueprint or detailed plan for obtaining products. On the other hand, purchasing is the process of paying for these items. The purchasing cycle often includes ordering goods, approving the vendor’s invoice, and sending the payment.
Today, procurement and purchasing automation solutions handle the procurement and purchase (or pay) cycle. P2P solutions streamline the process from start to finish by handling mundane, manual processes including managing invoices, requisitioning purchase orders, and handling vendor contracts. Businesses can also manage capital expense projects, reports, and payments under one platform.
Purchase-to-Pay vs Source-to-Pay
Often, companies use the terms purchase-to-pay and source-to-pay, and it’s helpful to know the difference. We know purchase-to-pay is the process of inquiring about goods and services from vendors. The procure-to-pay cycle includes the inquiry of the goods or service, followed by the purchase order giving product and pricing details for review before agreeing to purchase.
The purchase order is sent by your business to the vendor confirming all product and service details before purchasing.
Source-to-pay focuses on the strategies and solutions that impact the procure-to-pay process. Think about all of the work it takes before companies can inquire about a good or service–anything from the spending strategy, vendor research, and negotiations. The goal of source-to-pay cycles is to control the procure-to-pay flow with details and data reducing the likelihood of spend problems that could be incurred if your business doesn’t take time to dig through the details.
Direct vs Indirect Procurement
What’s the difference between direct and indirect procurement? Think of indirect procurement as the services and equipment used to handle the daily duties of your business. This includes the Internet, cleaning supplies, and even the electricity bill. Although these costs aren’t directly factored into the final product cost, they still should be added up.
Direct procurement is the costs of goods and services used to make the final product. For example, if your business is a bakery, these expenses may include baking ingredients and branding supplies.
So which procurement department roles are responsible for indirect versus direct spend? Often, the Director of Procurement is responsible for managing sourcing, the supply chain, and inventory management which directly impact direct spend. The CFO or controller’s role focuses on functions that handle indirect spend including spend visibility, budget tracking, and contract management. These responsibilities will mix depending on the size of the business or number of vendors.
The Difference Between Purchase Requisition and Purchase Order
Purchase requisitions are documents that request approval to begin the process to buy items on behalf of the company. Think of it this way. Your department needs new computers. Instead of creating a purchase order with all of the product details to send to a vendor first, you’ll want to submit a purchase requisition to get the OK to begin the purchasing process. Purchase requisitions often include all details needed to get approval including the vendor, product, quantity, cost, and other business specifications.
The purchase order is the document you will send to the vendor after you’ve received approval from your company to purchase the goods or service. Often, it has the same information as the purchase requisition but may also include your specific information as it pertains to your business. This may include payment information, goals and objectives, and other particular requirements.
Unfortunately, 29% of businesses rely on the purchaser to check their purchase requisitions and purchase orders against the budget themselves. Most companies suffer from manual processes where approved requisitions are concerned. Very few companies (18%) have an internal budget manager to approve all requisitions. Even worse, for most businesses (46%), purchase requisitions are submitted to the managers of each individual department. Purchase requisition and purchase order processes widely suffer from lack of control, visibility, and efficiency which results in a downward spiral of ineffective spend and long-term fails in budget forecasting.
The bottom line is your organization needs both. With purchase requisitions, your business is able to compare the request against the budget and business needs before speaking with a vendor. With both documents, your leaders have visibility from start to finish to eliminate surprises and improve spend.