No-Purchase Order, No-Payment a troublemaker policy?

Many companies and P2P managers are proud of having a No-Purchase Order, No-Payment policy. While I clearly understand the intent of this policy and consider it a necessary control, I personally believe that this policy alone is not sufficient. It causes a lot of problems, especially for the Accounts Payable (AP) team. As an old proverb says “the road to hell is paved with good intentions”.

Many people would disagree with me, so let me explain why I believe this policy has become a trouble maker.

Firstly, I will review the “No Pay” policy. In my opinion, this sends the wrong message. It suggests that a Purchase Order (PO) is only required to pay the supplier invoice. I hear this all the time, from the PO Requestor team, the Sourcing team, even the finance community, who say that they only raise a PO for the AP team to pay the supplier invoice. This is a total misconception and inadvertently, it leaves the AP team high and dry, and suddenly, it becomes an obstacle, as I will explain.

A purchase order is, by definition, a legally binding document between a supplier and a buyer. A PO is powerful mechanism to gain control of company expenditure. It allows the business to see clearly how money is being used across the entire organisation and therefore shows where there are opportunities to save money and move more spending to a specific purchase order process and/or supplier. You don’t know where to focus time and effort until you get that critical spend visibility and also introduce the correct approval workflows.

Some of the additional benefits of using a PO process are:

• It guarantees that the correct approval and budget are reviewed
• Proper vendors are selected, including the right subsidiary
• It recognises the correct cost of goods/services and allocates it to the relevant entity, cost centre, project and/or management code owner
• It defines whether the buying item is a good or service, as well as CAPEX and/or OPEX
• It facilitates booking the inventory adequately by using the correct quantity/unit of measure
• It selects the correct ‘ship to location’ and ‘need by’ date.
• It avoids irrecoverable taxes and  will negatively impact on the financial gain of the deal
• Invoice processing becomes a simple 3-way match process, instead of trying to track down additional approvals
• It facilitates the supplier payment process

Clearly, POs are not raised only for the AP team “to pay” an invoice.

Unfortunately, this has been interpreted as the AP team needs a PO, irrespectively weather the PO is correct or not. Surprisingly, the Accounts Payable team constantly receives feedback from PO Requestors who provide a purchase order that was originally raised for a completely different good / service, period, unit price and/or quantity and it is intended that the supplier invoice to be paid based on that PO, simply because ” it is still open and has sufficient funds”.

Believe it or not, there have been occasions when an AP team have been requested to pay an invoice for some new laptops with a PO that was originally raised for employees’ training courses.

Worse than not having a PO is having an incorrect PO, this always causes unnecessary friction among the teams and puts the AP team in a very difficult position.

So, the question now is, “What should be considered as a “good PO”?

For me, a good PO is one which will complete the 3 way matching and/or 2 Way automatically. So, in other words the supplier invoice and PO details are aligned and match perfectly.

Many organisations spend enormous amounts of time, resources and technology creating POs that unfortunately are not used by the suppliers at all.

There is still another key element that this policy overlooks and that is the supplier invoice.

If a supplier invoice is not aligned to the quoted PO. It prevents the invoice from being process electronically and requires a great deal of manual intervention by the AP team in requesting clarification and additional approvals.

For instance, POs are raised in single units, but suppliers consolidate it, so the billing is done using completely different units of measure and unit prices and/or the invoice comes from a different supplier’s subsidiary or country which in some cases lead to irrecoverable taxes.

To make things even worse, in some cases, the suppliers are not even interested in receiving the buyers’ POs. On the contrary, they expect the buyers to order using the supplier’ tools which are not linked to the buyer’s ERP system. Basically, these orders may not be the same (including order numbers). If we accept this, then we should ask ourselves why we are still generating those POs.

The true is that if we create POs for AP teams to pay the invoices, we should know that they (as well as the e-invoicing solution) expect to receive a supplier invoice which matches the PO.

But if a supplier is not paying attention to the PO, the process is totally disrupted.

My personal suggestion here is that the supplier’ billing and distribution model needs to be clearly understood and agreed by both parties.

This is especially relevant if you are automating your purchasing process by introducing an e-procurement and RPA solution. Therefore, it may be a waste of time and effort if the supplier invoice is different from your PO.

One more remark, a PO is an extremely powerful tool that brings enormous value to any organisation. However, we have to consider that sometimes it is not the sharpest tool in the box. Indeed, the idea that the PO process can be followed for all types of expenses is a bit unrealistic, but this is something I will like to cover in another blog. Please follow me for this.

To summarise, if a PO is needed to pay then a supplier invoice is also required; and not just any invoice, but an invoice that is billed as per the PO details.

This is my takeaway for you. This policy should be amended as follows: “No-Good PO…No-Good Invoice… No-Pay”