In theory, it’s a simple enough concept. In practice, however, procure-to-pay can be quite complex. That’s because it often involves multiple departments and software systems within a company.
As a business grows, the complexity of product purchasing grows with it, and suddenly, as margins start to shrink because of procurement issues, an all-in-one solution is required.
If your business is struggling with this process right now, you’re in luck. Below, we’ll examine:
- What is the procure-to-pay process?
- What are the benefits of procure-to-pay?
- What procure-to-pay software is available?
- How to choose a procure-to-pay solution
- Challenges you may face in the procure-to-pay cycle
When you’re ready, let’s jump in!
What is the procure-to-pay process?
The procure-to-pay process is the cycle of purchasing and paying for goods or services. It includes everything from identifying a need within the company to issuing payment to the supplier.
There are five main steps (plus an optional sixth) in the cycle.
The first step in the procure-to-pay process is the requisition. This is when an employee (or group of employees) identifies a need for a product or service. A requisition can be generated manually or automatically through software that tracks company spending.
For example, if your sales team needs a new CRM system, they would create a requisition. This would outline the specific product or service they need, how much it will cost, and when they need it.
These requisitions should then be:
- Approved by a supervisor
- Added to the company’s budget
- Sent to the procurement department
Once it has been approved, we move on to the next step of the process.
The second step is the purchase order (PO). This document is generated by the procurement department and sent to the supplier. It includes all of the information from the requisition, plus any additional details that have been negotiated with the supplier.
For example, if you’re purchasing a new CRM system, your PO would include how many licenses you’re buying, what type of support you need, and how long the contract will be for.
Once the supplier has received the PO, they will:
- Confirm that they can provide the product or service
- Agree to the terms and conditions outlined in the PO
- Ship the product or provide the service
Once everything has been confirmed and the product is on its way, you can move on to the next step.
The third step is receiving. This is when the product or service arrives at your company and is checked for quality before adding it to your inventory. The receiving department will:
- Inspect the products or services
- Verify that the order is complete
- Ensure that the products or services meet quality standards
- If there are any issues with the order, they will be documented and sent back to the supplier.
Importantly, at this step, you should also update your accounting software with the new purchase (or have the automated solution do it for you). This will ensure that all of your financial records are up-to-date and accurate.
If everything is good to go, we move on to step four.
The fourth step is invoice processing. This is when the supplier sends you an invoice for the products or services that have been delivered. The invoice will include:
- The total amount due
- The payment terms (e.g. net 30)
- Instructions on how to make the payment
At this point, you should check the invoice against your purchase order to ensure that everything matches up. If there are any discrepancies, you’ll need to contact the supplier and resolve them before you can move on.
Assuming everything looks good, you’ll need to approve the invoice for payment. This approval will likely happen in your accounting software. Once the invoice has been approved, you can move on to step five.
The fifth and final step is payment. This is when you send the money to the supplier. The payment will be processed according to the terms outlined in the invoice.
After the payment has been made, you’ll want to update your accounting software again. This end-to-end documentation of the procure-to-pay process is essential for keeping accurate financial records.
At this point, some would classify the procure-to-pay cycle as complete, though there is sometimes one more step included.
The final (optional) step in the procure-to-pay process is performance tracking. In this step, you’ll review how well the supplier performed and whether or not they met your expectations.
This information can be used to help you make future purchasing decisions. For example, if you were unhappy with the quality of a product, you might choose to purchase from a different supplier next time.
Performance tracking is often done through surveys or other feedback mechanisms.
Now that we’ve gone over the basics of the procure-to-pay process, let’s look at some of the benefits it can offer your business.
What are the benefits of procure-to-pay?
The benefits of procure-to-pay are many and varied but can be boiled down to two main points: cost savings and efficiency gains.
When done correctly, procure-to-pay can save your company money and resources in several ways. For example, by centralizing purchasing power, you can negotiate better prices with suppliers. And by automating the process with supply chain outsourcing, you can eliminate manual errors and speed up payment turnaround times.
In addition to cost savings, procure-to-pay can also lead to efficiency gains. For example, by automating the process, you can free up your employees’ time so they can focus on higher-level tasks. And by centralizing data, you can make it easier for decision-makers to access the information they need to make informed decisions.
Let’s take a look at an example scenario:
You run a small business with 10 employees. Currently, when someone in your company needs to purchase a product or service, they send an email to the supplier with their request.
The supplier then sends an invoice to your accounts payable (AP) department. After the AP department verifies that the invoice is correct, they issue payment to the supplier.
This process wastes a lot of time and prone to errors, and likely needs more resources than you have. For example, if an employee forgets to cc the AP department on their purchase request, the invoice may get lost in the shuffle. Or, if an AP department employee is out sick, payments may be delayed.
Now, let’s say you implement a procure-to-pay solution. With this solution in place, employees can submit purchase requests through a centralized system. The requests are then routed to the appropriate approvers — including the AP department — for approval.
Once approved, invoices are generated automatically and sent to the AP department for payment.
This process is more efficient and less prone to error. For example, because purchase requests are submitted through a centralized system, it’s easier to track them. And because invoices are generated automatically, there’s no risk of them getting lost in the shuffle.
In this example scenario, implementing a procure-to-pay solution leads to both cost savings and efficiency gains. But that’s not always the case. In some situations, the cost savings may not be significant enough to justify the investment. And in other cases, the efficiency gains may not be enough to offset the implementation costs.
What procure-to-pay software is available?
Let’s look at a few available different types of procure-to-pay software, and how they can help.
Requisition management software
This type of software helps streamline the requisition process by giving employees a central place to create and track purchase requests. It can also automate the approval process, so requisitions are approved more quickly.
Contract management software
Contract management software gives you a way to manage all your company’s contracts and documents in one place. With this type of software, you can keep track of which contracts are coming up for renewal, who is responsible for each contract, and what the terms of the contract are.
Spend analysis software
This gives you additional visibility into your company’s spending patterns. With this type of software, you can see where your company is spending its money and identify areas where you may be able to save.
Supplier management software
The ability to manage your relationships with suppliers is key for any growing business. With this type of software, you can track supplier performance, manage supplier contracts, and find new suppliers.
Procurement management software
This helps you streamline the procurement process. With this type of software, you can automate the Request for proposal (RFP) process, track supplier performance, and manage contracts.
The key for all of these software solutions is to find ones that provide an integrated end-to-end view of the procure-to-pay process. This will give you visibility into every stage of the process and help you to identify bottlenecks and areas for improvement.
How to choose a procure-to-pay solution
When it comes to choosing a procure-to-pay solution, there are a few factors you should consider.
First, what type of business do you have? If you’re a small business with only a handful of employees, you might not need all the bells and whistles that come with enterprise software. Conversely, if you have hundreds or even thousands of employees across multiple locations, an enterprise solution is probably your best bet.
Second, what’s your budget? Enterprise software can be quite expensive, so if you’re working with a limited budget, you may want to consider a smaller solution or even an Excel spreadsheet.
Third, what features do you need? The procure-to-pay process can be simple or complex, depending on the size and needs of your business. Make sure the software you choose has all the features you need to streamline your process.
Finally, take some time to read online reviews. Procure-to-pay software is a big investment, so you want to make sure you’re getting what you pay for.
Challenges you may face in the procure-to-pay cycle
The procure-to-pay process is not without its challenges. The most common challenge is getting employees to use the software. For the software to be effective, employees need to be trained on how to use it and then actually use it.
Another challenge is data entry. The more data you have, the more difficult it can be to keep track of everything. This is where a good software solution can help. A good solution will have features like data validation and import/export capabilities to make data entry easier.
There is also the scalability problem. As your business grows, the procure-to-pay process can become more complex. This is why it’s important to choose a software solution that can grow with you. Look for features like workflow automation and supplier management to make the process easier as your business expands.
Sometimes there are issues with change management. Any time you implement a new system, there will be a period of adjustment as employees get used to the new software.
This is normal, but it can be disruptive to your business. To minimize the disruption, make sure you choose a software solution that is easy to use and has good customer support.
Finally, you may also face challenges when it comes to integration. If you’re using multiple software systems, you need to make sure they all play nice together.
Otherwise, you could end up with duplicate data or other issues. A good procure-to-pay solution will have built-in integration features to make this process easier.
Here’s a handy checklist to work through when researching or analyzing a potential solution:
- Is the software easy to use?
- Is the software affordable?
- Does the software have all the features I need?
- Are there any integration challenges I should be aware of?
- What do online reviews say about the software?
If you can answer all of these questions, you should be well on your way to finding the right procure-to-pay solution for your business.
There you have it! That’s everything you need to know about procure-to-pay and how to streamline the process with software.
If you can avoid some of the common challenges, while finding procure-to-pay processes that work for you, and dominating the supply chain there’s no telling how much your business can grow.