Life is often very busy in small business. As a result, you may feel you have no time for anything but the bear essentials. Purchase orders might seem one of these luxuries. On the contrary, they can save you both time and money in managing costs in your business. They also can fortify your business against fraud.
What are purchase orders?
A purchase order is a document control. In addition, it is an accounting system control. Your accounting software system, such as Uwazi, is likely to have functionality to create and manage purchase orders.
Purchase orders in your accounting system
What separates a purchase order from a purchase invoice or bill is time. You create purchase orders before you receive the supplier’s invoice. They can look much like a purchase invoice does including:
- Supplier name and address
- Purchase details, including: Date, purchase order number, supplier address, freight details and order comments
- Payment arrangements such as expected payment terms
- For inventory items, a line per item type, with quantity ordered, item price, item description, total price and inventory account
- For other items, such as services, a description, total price and inventory account. Enter services on an hourly basis like inventory items.
You can generate paper or PDF documents from your purchase orders once you have entered them. Send these documents to suppliers as required.
Some accounting systems allow you to enter purchases even before you have order intent. At this stage, the document does not form an instruction to your suppliers. It therefore does not need approval. Uwazi accounting calls these quotes. Your staff can use this first stage to draft purchase orders. In addition, they can manage the result of pricing discussions with your supplier. You then change the state of the purchase from a quote to an order when you have decided to proceed with the order.
Your organization can impose controls or checks when creating purchase orders. These can be as comprehensive as you feel they need to be. If you are a smaller organization, then they will tend to be simpler. This could be, for instance, the business owner reviewing orders for approval. These checks will tend to be more elaborate in larger organizations. For example, there might be several people checking purchase orders. One person may check for correct account codes, descriptions and any GST/VAT codes. A department head may approve all new orders from their department. Your organization needs to balance the ease of creating an order vs the protection afforded by controls.
Internal controls during the purchase order creation process are stronger than merely controlling related payments later in the cycle. Checking order content is far more detailed than simply checking payments. If an order is inappropriate, it is easier to stop. This is because the company has not made any commitments yet. Conversely, when the time comes for payment of an order previously made, the company is very likely to be legally obliged to pay. It will then be unable to avoid paying.
Invoice fraud is becoming more common these days. This fraud consists of sending false invoices to businesses, requesting or demanding payment. You do not need to pay for something that you have not entered into an agreement for. It follows that this fraud exploits control weaknesses in a business. The business pays an invoice that it didn’t need to, or shouldn’t have.
Using purchase orders will help protect you against this fraud. Ignore invoices without purchase order numbers. Same applies to invoices that do not match the purchase order:
- Supplier name and details
- Supplier payment details, including bank or online account (eg Paypal email address). Be careful here because inside scammers can send a fake invoice to you ahead of the real one from your supplier. Payment terms should also be as expected.
- Line items. Sometimes invoice line items will differ from your order, but the general nature should be similar
More information is available at: 5 Safeguards You Can Use to Defend Yourself Against Fake Invoices.
Procurement cards and Petty Cash Replenishment
It is quite common to enter expenses arising from procurement cards and petty cash replenishments as cash disbursements. Cash disbursements are simpler than using purchase orders. The record of expense being made directly against the payment results in this simplicity. Purchase orders allow the separation of these two records. Controls can then be placed on the order element – what authorized expenses have occurred. If the value of these expenses does not match the payment, then the company can resolve this as a settlement issue. Any payment in excess:
- may be recoverable from the staff member. This is appropriate for unauthorized expenditure which the staff member should have known of in advance
- could be written off. These expenses are normally recorded against various expenditure accounts. Record these instead against a special account. This allows board members to see the value of these kinds of expenses.
Purchase orders are a great tool in giving you more control over costs and protecting you against fraud. They give you consistency in your dealings with suppliers. They also allow you to better manage procurement cards and petty cash replenishments. If you are using cash transaction management, then you miss out on most of these benefits. If so, then it’s time to move over!