Financials, Part 2 - Do you need Purchase Order Processing?
In his first article David Carter argued that, when thinking about Financials packages, you have to go right back to the beginning of your procurement cycle. In practice, this boils down to one question: do you install Purchase Order Processing (POP)? There are several good reasons for implementing POP, but there are also some good reasons for NOT implementing it. It depends on your company culture.
Purchase Order Processing (POP) has long been available as part of a set of Financials, but it's always been something of a Cinderella. Quite a few companies bought POP as part of their new accounts package, but in the end decided not to install it. In this article we'll look at the pros and cons of POP. First, however, what does POP actually do?
What a Purchase Order Processing module does
In an accounts package the POP module handles the earlier stages of the purchase transaction. In the first article we identified these as:
Raise a requisition ' raise a purchase order - take delivery ' match supplier invoice to delivery note ' generate purchase invoice
Within a larger organisation in particular this can involve multiple departments. The staff member who requires the item may raise the requisition, then send it off to their manager for authorisation. The manager passes the requisition on to the purchasing deptartment, who get prices from suppliers, then send off a purchase order.
The items arrive and goods inwards or the staff member record delivery. Then the supplier's invoice arrives. It is sent to the staff member who confirms the items were received satisfactorily. Accounts then key the purchase invoice into the computer and the POP sequence is now complete.
Benefits of POP
Purchase Order Processing can yield major benefits in two areas. First, it can streamline internal buying procedures. Second, it yields valuable management information about costs.
More efficient, no paper
POP is particularly effective within large companies and those where staff are distributed across different locations. This is because a single centralised system is now linking all the various departments together.
In particular, technology can greatly speed up the movement of documents between departments. The various documents ' requisitions, orders, delivery notes, purchase invoices - used to be in paper form and circulated via 'snail mail'. Now they are in electronic format and staff can circulate them to each other pretty well instantly via email and the internet.
No need to key in the invoice
When supplier invoices arrive in the post, the usual procedure is for Accounts dept to get them first, and then type them onto the computer in an invoice register. They then post the invoices off to the relevant member of staff for authorisation.
But when a POP system is in operation, the invoice is passed direct to the staff member, who simply recalls the order to the screen, checks that the items and prices are correct, and converts the order into the purchase invoice automatically. This is the benefit of an integrated package. There's no need for accounts to do any data entry, and the invoice is authorised for payment immediately.
See your committed costs
POP also improves management information. It enables management to see committed costs - the costs which the company has incurred because an order has been placed upon the supplier, but no invoice from the supplier has yet been received.
Instead of these costs only appearing on the radar screen when the invoice finally arrives, you now see them instantly as soon as they are committed in the form of a purchase order.
Improved cash forecasting
This month's purchase orders are next month's purchase invoices, which are next month's payments. Recording purchase orders enables you to look farther ahead when making your cashflow forecasts.
Better control over expenditure
One thing that often worries accountants is that staff are committing the company to expenses which management know nothing about. The first thing they know about it is when the supplier's invoice arrives and it's too late to do anything.
By ensuring that all purchase orders go through a system, managers get control over what is being spent and make sure there is no big black hole of committed costs. Maverick spend ' staff buying things without going through the proper procedure ' is eliminated.
Disadvantage of POP ' it's bureaucracy
The problem with POP however is that, however you dress it up, it's really about bureaucracy.
If you install a Sales Order Processing (SOP) system, for example, employees will be pleased because it will enable them to do their work much faster. But no-one could argue that POP helps an employee do his/her job faster. After all, the quickest way for an employee to get what they need is simply to pick up the phone and talk to the supplier direct, or send them an email.
The whole process of raising a requisition, getting authorisation, issuing an official order is simply for the benefit of central staffs who want to keep an eye on the workforce. POP is not about doing the job more effectively, it's about control.
What are budgets for?
When I installed my first job costing system in a contract publishers, I was really keen to try installing POP as well. I trotted out the usual justifications ' control of committed cost as well as invoiced ones, opportunity to see cost variances earlier, give top management better control, and so on.
But the FD, a remarkably laid back character, simply wasn't interested. "They've agreed a budget, haven't they. Leave them to get on with it." His staff were professionals and he trusted them. Forcing them to put everything through some computerised ordering system would simply slow them down and make them irritated.
His view of a budget was that it cuts two ways. Once a budget has been agreed, the employee will be held to that figure when the costs are finally totted up. But until then management should leave her alone. It was up to her how she wanted to work within her budget.
Needless to say, morale in this company was very high and it was one of the most profitable in the industry.
It depends on size
So, it depends very much on the culture of the organisation. Bigger companies feel the need for control and for formal systems. In the public sector, in particular, where managers have to account for every penny, control over expenditure and committed costs is essential.
But smaller companies often like to stay flexible, to trust their people, and leave them to deal one to one with their suppliers. For these companies POP may be a mistake. They'd be better not to try to impose a formal system.
With small companies, of course, there's also the question of whether they are actually capable of operating a formal system. I often ask accountants this simple question: "OK, if you get POP, then everyone in the organisation has to stick to the procedure, right up to the top. Right now your directors are used to ringing up their suppliers direct. But once POP is installed they'll have to do it through the computer instead. Can you see them doing this?' Brief silence.
"OK, forget it.'