Purchase
July 4, 2023
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Materials are needed for every business, whether they are manufacturers, retailers, construction companies, or consultants.
Basic office supplies, raw materials, equipment, machinery, and services – are the materials needed by most businesses.
The question is how to manage these purchases properly; by allowing department heads to directly place orders with vendors, it could lead to increased or fraudulent expenditures.
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Let’s understand this with an example:
The IT department in a company needs a few printers as the workload has increased as have employees.
Do you tell the IT department manager to go out and purchase the printers they want?
If you do, there is always the possibility of misuse of company funds: bills can be inflated either by showing more printers or higher price when it is not so in reality. Or they may buy more than what your company budget can allow.
This can harm your financial planning and have a negative impact on your cash flow.
Budget overshooting can happen inadvertently too; employees may not be aware of budget restrictions and accidentally overshoot it.
Therefore, most companies have standardized processes for purchasing, with proper approval workflows.
In the event your company has increased scrutiny over expenditure, is on a tight budget, or is facing problems with cash flow, it would be wise to put in place a standard purchase process so that unnecessary expenditure can be controlled.
The entire process begins with a purchase requisition form, which gives rise to a purchase order.
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Once the purchase department receives a purchase requisition and approves it, they generate a purchase order with all the details like quantity, specifications, and so on, and send it to the vendor.
A PO is a binding contract that mentions exactly what a company wants to purchase.
Purchase requisitions are typically used when purchases are required to be made by different departments on the organization’s behalf.
It is a form used by department managers to inform purchase officers about a requirement for materials for which purchase is necessary.
This triggers the purchase process and the finance team in turn uses the document to coordinate with the accounts department and make necessary entries in the company’s books.
It’s an internal document used by employees to purchase goods or services for their company.
They may be inventory, manufacturing requirements, or office supplies and equipment necessary for business operations.
The first step in the purchase process is submitting this form to the purchase department; it also creates a proper audit trail for the purchase.
On approval of the purchase requisition, the purchase department generates the PO and sends it to the relevant vendor.
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A purchase requisition form has the following information:
While individual companies may have their own steps for purchase requisition, the basic workflow goes something like this:
When a staff member identifies that there is a need for certain goods, he requests purchase of those items.
This is done when they fill out a form which contains details of what they want to buy.
This can be done manually or using software.
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An internal approval process takes place where the line manager of the requesting employee’s department checks if the need is genuine and legitimate.
They will also verify that the purchase value does not overshoot the allotted funds for the department.
The next step in the process is sending the purchase requisition form to the inventory department, where they check if the requested product is available in the company’s inventory.
if it is in stock, the department is so informed, and the products are sent over.
If there are no products in stock, the form is forwarded to the purchase department.
Once the purchase department receives the request, the purchase manager or designated employee processes the form.
They will identify the business need, verify the legitimacy of the request, and check if the form is properly signed and authorized.
If any details are missing, the officer may either return the form to the requesting employee for filling them in or complete them himself.
If he finds that the request is not valid or genuine, or overshoots the allotted limit, he may reject the requisition form and return it to the department or requesting employee with reasons for the rejection.
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Once the requisition form has been approved completely, the purchase department generates a purchase order with all details and sends it to the supplier.
On accepting the PO the supplier is legally bound to fulfil the terms of the document.
The products are shipped by the supplier, and on arrival, the purchase department or warehouse staff verifies that the quality and quantity delivered are as per the purchase order.
A three-way verification process is carried out to check the invoice, packing slip and purchase order to confirm order accuracy.
This way, the company ensures that they are only paying for the items that were ordered and received, nothing more.
Returns if any are handled by the warehouse staff or the purchase department’s receiving team.
Once the delivery is verified as correct, the PO is closed and the invoice is sent for approval to the finance team.
They enter it in the books of account as accounts payable, and make payment on the due date.
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We have already seen that if individual department managers are allowed to directly place orders for products they require, there is a higher chance of fraud and overspending.
It is to eliminate this that organizations create a procurement department with standardized procedures to procure goods and services on behalf of various departments.
When a specific process or workflow is followed by the purchase team, it not only minimizes possibility of fraud, but also creates an audit trail so that responsibility is fixed on every individual involved in a particular purchase.
An important internal document used to make purchases is a purchase requisition form.
This form enables teams to convey important information regarding purchase requirements to the purchase team who can then place orders correctly for the various departments.
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Let’s say the marketing team needs to purchase some office supplies; they have to fill out a purchase requisition form detailing their needs and send it to the purchase department.
Merely telling the purchase department what they need does not help in reducing fraud as there is no paper trail and it leaves space for deniability.
Purchase requisition form allow companies to validate purchases, and based on these forms, the purchase department triggers the procurement purchases till the marketing department gets the supplies they need.
The purchase department has to act on the requisition forms they receive.
They can approve, deny or change the requests made by different departments.
Rejections must be accompanied by reasons so that the department can make necessary changes.
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When departments submit a requisition form to the purchase department, it initiates the entire process.
The purchase department generates a PO based on this form.
In case of any problems, this form becomes important evidence to check facts and affords better protection of organizational assets.
It is followed and acted upon, and thus creates a paper trail.
Without checks and procedures, staff may commit fraud – order materials not required and pocket them, for instance.
However, with a formal written request, the possibilities of fraud are minimized as the request has to go through several people for validating it.
All the scrutiny before approval ensures that it is a valid purchase.
You could say that it’s a formal method of issuing a purchase notice, with evidence that a department requested a purchase.
The responsibility for that expenditure will be transferred to the purchase department from the requesting department.
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By centralizing purchases, a business can save time and money; you can see at a glance what you’re buying, how much you’re buying, and at what cost.
As purchase managers receive several requisitions, they can bundle orders and use this as buying power leverage.
This can help you negotiate better with suppliers and get better prices and payment terms.
As audits require seeing approvals from proper authorities for purchase decisions, purchase requisition forms are ideal.
They contain details of the requesting employee, approvers, and materials that were requested.
With a whole department just to handle purchases, companies can use purchase requisition forms to track all requests and ensure that no duplicate requests are there.
This way, accidental multiple orders for the same item can be identified and eliminated.
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Purchase requisition forms are proof that a specific department needed certain products and that they had ordered them.
After matching the delivered goods with the requisition, a paper trail is created from the time of requisition till they are ordered.
This assigns accountability to all individuals involved in the process from start to finish and increases security for the organization.
In the event any fraud or mistake is detected at a later stage, none of the employees involved can deny their role as their details are recorded, and they can be asked for an explanation.
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Final Thoughts
Though it is a simple document, a purchase requisition form is a critical tool of spend control, especially for medium and large organizations where there are numerous departments and thousands of items that are used and required to be purchased frequently.
It is essential to authorize purchases for an organization and can be used to prevent fraud.
However, if you have to fill out a form manually every time someone in the company needs to purchase something, it can still lead to errors, and take up precious time of your employees.
The wise thing to do would be to implement robust business software like Tranquil to automate repetitive and cumbersome tasks and streamline your workflows.
Leverage the feature-rich procurement module to keep the cost of procurement low, while always having adequate stocks to operate your business.
If you’re not sure how this works, do schedule a free demo at your convenience, and we will walk you through our software. Our team will be happy to answer any queries you have.
