Purchase to Pay process explained
- 06 Apr 2018
New to the term Purchase to Pay, also known as Procure to Pay? Or want to refresh your memory? In this blog, we will explain the term Purchase to Pay, the process involved, and see why this process is important for your business. We will also look into a Purchase to Pay system, in terms of how it works and the pros and cons of implementing this system.
So, what is Purchase to Pay / P2P?
Purchase to Pay, also known as Procure to Pay and abbreviated to P2P, comprises a number of stages that describe the end-to-end process from an organization ordering a product or service from suppliers, through to making the subsequent payment for those products or services. The main stages of this process are product ordering, supplier requisitions, budget authorization, receipting of delivery, and invoice processing.
It starts with a buyer establishing his/her needs for goods or services. The request is then validated with available suppliers, which they will then provide the buyer with the pricing and terms. The buyer can then raise requisitions with the selected supplier.
Depending on the structure of the organization, some requisitions may need approval, or budget authorized before raising a Purchase Order (PO). Once approved, the PO will then be sent to the supplier, and they will fulfill the order and deliver the goods or services required.
Typically, the buyer receipts successful delivery of the order to the supplier and then the supplier raises an invoice quoting the PO number issued previously. And when a three-way match is validated, the buyer issues the payment to the supplier.
Hang on, what is a three-way match?
A three-way match is a methodology used by the Accounts Payable (AP) or finance team when processing invoices received from suppliers. This is a great way for organizations to safeguard their assets, as it helps them to avoid fraudulent invoices or pay the incorrect amount. The AP team checks the following documents for a three-way match:
- The invoice issued by the suppliers to the buyer
- Purchase order raised by the buyer
- The goods receipt note
Once there is a match in terms of the quantities, price per unit and terms and conditions, the invoice is validated, and payment can be processed.
How about a Purchase to Pay software? / What is an online procurement system?
So now you should have a clear understanding of the P2P process. As for a P2P system, more commonly known as an electronic procurement system, it basically does all the steps mentioned above with full automation, which means no more manual data keying in or knocking on your boss’ door asking for approval. For instance, once the requisition is raised, the P2P system automatically routes it to the right person for approval, issues the PO and good receipts to suppliers and facilitates the three-way match – it’s basically a completely touchless process.
In fact, P2P processing accounts for nearly one-third of the overall cost of the finance and procurement operations, and the best-of-breed system can help boost administrative efficiencies and reduce such costs by as much as 80%.
P2P software also helps organisations ensure spend compliance and reduce maverick spend. With a purchase order system, employees find and select goods and services for purchase really easily, just like how you do your online shopping, whether on the platform or through controlled access to remote supplier websites. With this guided shopping experience, organizations can ensure their employees are always buying from the right suppliers at the right price, and subsequently, reduce the dreaded maverick spend.
So, what do you need to consider before implementing a P2P system?
First of all, you have to fork out the initial investment, but you should be able to see a return on your investment pretty soon. Also, implementing a P2P system involves many different stakeholders in an organization. Training sessions, user materials and internal communication programmes are essential. You will need time and resources, and a detailed project plan to ensure implementation success and a high user adoption rate. After all, the more people are using the system, the more you’re benefiting from it!
Our spend culture quiz can help you start the process of identifying if your business should consider implementing a P2P system.
At this point, you probably won’t be surprised to hear that we have an eProcurement system called Medius Procurement which does all these. If you want to know more about it you can download our product guide HERE.