Procurement

What is procure to pay? Your step-by-step guide


Procure to pay (P2P) is the process an organization follows to purchase goods and services that are required  to run business operations effectively. 

This process typically involves purchase requisitioning and approval processes, vendor selection, purchase order creation, receipt of goods, and invoice matching and approval. However, not every business has a sound procedure in place to ensure that these steps are followed, or that the policies relevant to these steps are enforced or adhered to.

Regardless of the size of your business, you could be experiencing inefficiencies and spend leakage with no defined procure to pay process in place. Manual processes, human error, and a lack of visibility and control could be leading to reactive processes that waste time and money.

If your business is experiencing any of the following challenges, it may be time to consider investing in procure to pay software:

  • Unauthorized expenditure
  • Approval delays and bottlenecks
  • Out-of-contract or rogue spend from a large unmanaged supplier base
  • AP inefficiencies and inaccuracies due to lost data and documentation or failure to match invoices
  • Duplicate invoices and overpayment
  • Fraud
  • Overspending
  • Retroactive processes

While this isn’t an exhaustive list of the day-to-day procurement challenges facing businesses everywhere, the risk factors in these examples alone make the case for digitizing your procure to pay process.

Gartner defines procure to pay software as “a fully integrated solution designed to support an end-to-end process that begins with goods and services requisitioning and ends with ready-to-pay files for upload into an accounts payable system. In addition to core e-procurement functionality (including e-requisitioning, approval workflow and e-catalog management), procure-to-pay solutions offer purchase-order-to-invoice matching and processing for invoices that don’t match or when goods are returned.”

Procure to pay connects the procurement function with the accounts payable department, to achieve greater accuracy, collaboration, visibility, process efficiency, and cost containment. This process can be a significant contributor to improving a business's financial health and operational efficiency.

For any business that’s scaling, developing a solid P2P process underpinned by procure to pay software can fast-track the route to reducing processing costs and increasing buying power to ultimately purchase goods and services at the lowest price.

In this article we’ll share insights into the P2P process and the benefits of procure to pay software.

The procure to pay process flow

The first step of the procure to pay process is identifying business needs. Having a clear understanding of business-critical vs non-essential items is fundamental to making the right decisions when it comes to effective spend management. This means understanding what all the business functions and departments need on a regular basis to do their jobs well and assigning budgets accordingly.

With this information you can take action and rely on procure to pay software to provide an effective framework for purchasing control and efficiency. At the appropriate P2P stage, you can leverage your solution to submit purchase requisitions, create purchasing templates for repeat purchases, or set up internal catalogs with approved suppliers so that essential items can be re-ordered with ease, and delivered before items run out and cause unnecessary delays.

In addition, practicing cost avoidance is easy when you’re able to track maintenance costs to assets using procure to pay software: knowing when it’s time to replace rather than repair equipment can drive down your operational costs significantly.

Purchase requisition

After determining what your business needs you need to ensure that a sound requisition-to-PO process is in place to ensure that all expenditure is tracked, approved, in budget, and policy compliant.

In organizations that have not automated their procurement process, a purchase requisition is usually a paper-based document or an email that an employee completes and submits to request the purchase of goods or services. These manual processes are difficult to track, fraught with inaccuracies and delays due to backlogs and out-of-office approvers. Replacing these inefficient processes with automated requisitioning capabilities will introduce newfound visibility, accountability, and efficiency, and swiftly deter any unauthorized spending activities.

Submitting a purchase requisition does not mean anyone is buying anything. Instead, they’re just beginning the purchasing process by asking for internal approval.
You’re able to track each requisition, including:

  • Requester’s name
  • A description of the required product or service
  • Supplier details
  • Price
  • Quantity of items
  • Currency and tax rates
  • Cost centers

Users can upload supporting documents to verify purchase requisitions and the data is centralized for easy access throughout the procure to pay process.

Furthermore, higher value items might require quoting, another activity that’s simplified by procure to pay software through collaborative workflows and internal controls that ensure your team purchases goods and services at the best price.

You can empower all employees to submit purchase requests from a cloud-based or mobile application, wherever they are. Giving them access to solutions that guide responsible spending and ensure proactive financial control. This brings us to our next key step in the procure to pay process, determining which suppliers you should be channeling your indirect spend to.

Vendor selection

During the purchase requisitioning process and prior to purchase order creation, vendors need to be onboarded (if not already listed and authorized) in the procure to pay system and approved by the procurement team. This is an effective way to eradicate rogue spending and ensure that purchasing only occurs with authorized, high performing suppliers.

In defining your procure to pay process, it’s vital to understand how many suppliers you’re purchasing from, how much you’re spending with them, and which suppliers are providing the best value to your business.

Armed with the transactional data you’re able to retrieve from procure to pay software, you can negotiate favorable payment terms and best value contracts. Working with strategic indirect sourcing partners relieves you of having to vet new vendors and assess the quality, speed, prices, and reliability of their goods and services.

Additional vendor management benefits gleaned from implementing procure to pay software include:

  • Business intelligence and reporting tools that enable analysis of spend by supplier, price variations by supplier, and complete visibility into spending behavior.
  • Easy consolidation of suppliers
  • Vendor PunchOut catalog integration that gives you access to business-only pricing and volume discounts, certainty of supply, convenient shipping, and fulfillment processes.
  • Contract compliance that fosters longer-lasting, more trustworthy vendor relationships that can lead to shorter delivery times, better purchasing power and early settlement discounts.
  • Simpler accounts payable processing with fewer suppliers and payment terms to manage                                                                                                                                   

Purchase requisition approval

Post request submission and vendor selection, each request is automatically routed through a defined requisition-to-purchase order cycle and approval workflow that ensures budget and policy compliance and escalates according to configured rules and approval thresholds. Wasteful or unnecessary expenditure is quickly identified, and requests are rejected, before any costs are incurred. Reasons for rejection could include that the request is:

  • Out of budget
  • Showing signs of noncompliance
  • From an unauthorized vendor
  • Too expensive or the goods and services are unnecessary
  • Or even if it’s lacking sufficient supporting documentation

     

If this is the case, it will be routed back to the relevant user to provide more context, motivation, or additional documentation.

This effortless process, powered by automation gives business leaders peace of mind, while the workflow engine does the heavy lifting.

You can eliminate delays and bottlenecks and reduce approval cycle times from weeks or days to mere hours with an efficient process automated by procure to pay software.

Purchase order creation

Next, purchase orders are generated from approved purchase requisitions. A purchase order is a contract between a buyer and seller, committing the buyer to paying for goods or services that will be delivered in the future, without the need for immediate payment.

POs can be auto generated by your procure to pay software, contingent on all supplier authorizations and approvals being met. Emailing suppliers directly from the system is as easy as ticking a checkbox and each activity, date and time stamp is logged in an audit trail for easy access and retrieval for auditing or general financial purposes.

Further to this process efficiency, procure to pay software enables users to submit change order requests to revise POs. These requests are logged and routed on the same approval track as purchase requests to mitigate any potential risks.

Once a purchase order is submitted to a supplier, they can approve or reject the order and once approved, the buyer and supplier enter into a legally binding contract.

Receiving

In the receiving step of procure to pay, goods are shipped, or services are rendered. Once the items arrive, the procurement team or the relevant user can track the cost or quantity of items received in the procure to pay system and attach the delivery note.

This is one of the points where collaboration between procurement and accounts payable is necessary and the touch points are streamlined and optimized by the procure to pay software.

Invoice matching and approval

An essential and risk mitigating component of an accurate procure to pay process is three-way matching. This simply refers to cross referencing your received supplier invoices, your organization’s purchase order, and the receipt. These also need to match the delivered goods.

More specifically, three-way matching compares the following information:

  • The description, quantity, cost, and terms on the company's purchase order.
  • The description and quantity of goods shown on the receipt.
  • The description, quantity, cost, and terms on the supplier invoice.


Comparing these records manually can lead to hours of administration, especially if processes are manual or paper-based with no centralized data repository. Procure to pay software streamlines this process with electronic matching capabilities and centralized visibility of all relevant documents, so you can guarantee that your organization realizes better management of exceptions and avoids the risk of duplicate invoices and overpayment. If there are no discrepancies between the purchase order, goods receipt and invoice, the invoice is electronically captured, approved, and routed to accounts payable.

Vendor payment

After receiving an approved invoice, the accounts payable team processes payments according to the contract or purchase order terms. When reviewing procure to pay software options, it’s wise to consider a solution that enables integration with ERP or accounting systems to ensure your records are accurate and effortlessly maintained, and all approval, budget and compliance checks take place prior to any payments being released by the financial system. Choosing such procure to pay software will enable:

  • Improved accuracy, accounts payable efficiency and fewer resource requirements.
  • API-enabled flexibility to integrate new systems to your procure to pay software as you scale and new technologies emerge.
  • Enhanced collaboration between procurement and finance.
  • Identify spending trends and saving opportunities for improved forecasting, scenario building, and budget building.
  • Better visibility and control over your organization’s spending behavior.

Optimize your organization’s spending processes with Fraxion’s procure to pay software

The proven benefits of a digitized procure to pay process extend beyond the obvious operational efficiency and cost containment advantages. You can capture more value by improving supplier relationships, and boost morale by empowering employees with adequate technology to simplify and fast-track their processes and inform their decisions. With system-driven policy compliance, your procurement team is freed from the burden of policing spending activities, while their interactions with accounts payable are streamlined and collaborative, bridging the gap between these key departments to drive strategic initiatives.

Fraxion is empowering remote and dispersed teams to achieve these objectives by guiding purchasing behavior and enabling fast, accountable, and efficient P2P cycles. You can proactively manage your business spend with insights, transparency, and compliance – request a procure to pay software demo to see the solution in action.

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