Which to Implement First: Purchase Orders or Invoices?

which to implement first

Purchase order processing and supplier invoice automation are both available in OnePosting and I am often asked which should be implemented first. Personally I believe that invoice automation should be implemented before purchase order processing for reasons outlined below, but that is not a view universally shared by my colleagues in OnePosting.

It is also something that divides people that I meet. Some are adamant that purchase orders start the purchase to pay process and as a result, this is where automation should begin. I have to admit that a smaller number of people suggested that electronic invoicing should be first as it is easier to implement.

There are vary valid points on both sides of this argument that I am going to explore in this article and leave it to you to decide what is best for your specific circumstances.

Why implement purchase orders first?

A purchase transaction begins with a purchase order, progresses through one or more deliveries, to an invoice and finally a payment.

Therefore it would seem to make logical sense to begin the automation process with the purchase order.

Spend control

One of the most important reasons for beginning with purchase orders is that if you control purchase orders, you control spend. If a policy is adopted that every purchase requires a purchase order and this is rigorously enforced, then you will improve control over spending.

This must be supported by a workflow that ensures that all purchase orders have the appropriate levels of approval before any are issued to suppliers.

Ensuring that all purchase orders follow this process is the major challenge and requires discipline and adherence to guidelines for staff and management alike.

In many instances, purchase orders are created after invoices arrive. This is mainly for items with variable pricing or where the quantity is not known at the time of order. This is particularly true for service type purchases where the value of the service may not be known until after the service has been provided.

Ensure correct items ordered

Minimise the risks of misunderstandings between the person ordering and the supplier’s employee taking the order.

Sending purchase orders electronically to suppliers leaves little room to misinterpret what is being ordered.

This sounds great in theory but in practice we often rely on the expertise of an order taker to guide purchase decisions to ensure we get the items that meet our needs. After all, they know their products in detail and can offer alternatives that might be more appropriate than the ones specified on our purchase order.

Invoice coding

The nominal or GL code for each item ordered can be specified at the time of order. After all, the people ordering items are often best placed to code them because they understand what they are ordering and where the items will be used.

Coding errors can occur even when people ordering who know what products are and where their costs should be allocated. If alternate items are provided by a supplier to the items ordered, coding may have to be undertaken when invoices are received.

No external dependencies

Once purchase orders are created, they can be distributed to suppliers by email, sent electronically by EDI to suppliers using EDI orders, or they can be faxed (if anyone still uses faxes), or even printed and physically handed to a supplier.

With no external dependencies, electronic purchase order processing can be implemented quickly. If there are any ‘system related issues’ they should not affect the overall operation of the business.

If your purchase order system can verify that purchase orders have been delivered and accessed, you can be confident that they have been received. However, not all purchase order systems can do this.

There will also be suppliers who cannot accept orders by email and those that will require orders to be input on their portals. If this happens, you are now faced with multiple methods of distributing purchase orders to suppliers.

Spend analysis

A purchase order system facilitates spend analysis. This is critical to effective management of purchasing but there care needs to be taken not to succumb to information overload. Spend analysis provides a rich source of information that can be used to lower purchasing costs.

There can be differences between purchase orders and invoices so spend control should really be undertaken on invoices. This is especially important if there are potential currency exposures where a shift in exchange rate between time of purchase and time of payment can make a very significant difference to the cost of items.

Invoice Header

Why implement eInvoicing first?

While my personal preference is to implement invoice automation before purchase order processing, I will for the sake of balance include the rebuttals to each of the reasons I put forward.

Easy to automate

Given the history that many people have with new technology, it may be difficult to believe that accounts payable automation is easy to deploy. However, with a cloud based solution, most of the complexity is managed in the cloud so there is a minimal footprint in each organisation. In fact, the only technology required is access to the Internet and the only interface is often the file of approved invoices that has to be imported to the finance system.

When has it ever been easy to implement new technology? The experience of most people is that projects take longer and cost more than planned. Often the anticipated benefits are not fully realised either.

Get immediate benefit

It takes time for a return to be earned by implementing purchase order automation. In reality the system must be operating for close to 12 months before you can be sure that you are getting a return. In the meantime, staff time spent creating and approving purchase orders may actually increase. The benefits are in ensuring adherence to pricing agreements but with electronic invoicing, staff effort is actually reduced and better pricing can be achieved because your accounts are easier for suppliers to manage.

Adherence with agreed purchase terms through the use of purchase order processing will deliver results in terms of consistent pricing which I turn will deliver benefits.

Minimal disruption to operations

Electronic invoicing is very easy to implement and offers faster invoice approval. It is not disruptive to the normal working day and required little or no training.

Any change has implications for workflow and operations. Electronic invoicing introduces new ways of working which have to be managed no matter how trivial they are.

Suppliers have little or nothing to do

One of the biggest barriers to invoice automation has always been trying to get suppliers on board. Whenever suppliers are asked to provide invoices in data format, the take up is very slow. The OnePosting service only requires suppliers to send their invoices to a specific email address. That’s it! Many invoicing systems can send invoices by email and as it reduces costs for suppliers, they will be enthusiastic to participate.

What about suppliers with handwritten invoices? Or those that can only issue invoices in paper format? You will never get 100% of supplier invoices by email.

No IT projected needed

With cloud-based services, all of the infrastructure required to operate the solution is already in place. Therefore there are no servers to setup and configure. From the service provider perspective this means one less variable to worry about. Software can operate on a well defined and understood platform.

While there may not be a traditional IT project, the IT team may still need to be involved in managing interfaces with core systems. Importing invoices into the purchase ledger may not always be straightforward, especially if a standard import function is not available.

Conclusion

I declared my own personal view at the start and having thought about it more deeply as I wrote this article, my opinion has not changed.

If you want to achieve an immediate financial benefit, then there is no doubt that electronic invoicing delivers this far faster than purchase order processing ever can. In fact, the resources released from electronic invoicing can be used to manage a smooth transition to effective purchase order management.

If you have a critical issue where incorrect items are consistently being delivered, then I would suggest purchase order processing as a first step but always with the knowledge that electronic invoicing can deliver far greater financial benefit than purchase order processing ever can. After all, why did all of the large supermarkets implement electronic invoicing before purchase order processing?

Sending Invoices

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Finbarr McCarthy