This may be the most unsexy topic ever.
Your team probably hates the idea of purchase orders. POs slow them down. There is too much detail required. Rarely do you have all the information needed to complete one the first time around. Then, someone in accounting expects the supplier invoice to actually match what was described in the PO.
The nerve. Don’t they know how busy you are?
Purchase orders are not just about satisfying the OCD tendencies of accounting-types. They are probably the single most important process change my clients undertake to improve cash flow, increase profitability, and maximize communication.
If you have more than five employees, I don’t know how you can work efficiently without a PO system.
Here’s what happens if you don’t figure this out now:
I work with companies of all sizes and yes, even 500 employee companies can forget to comply with business best practices. One of my clients asked me to look into a significant cash flow problem that had apparently been developing for years.
Cash flow challenges are usually a combination of low profit, inadequate collections or payment terms, and unforeseen expenses. A quick check of their P&L for budget variances told guided me to look into the travel department.
Remember when the AMEX bill only came by mail once a month? Imagine finding that the monthly Amex bill for travel was one hundred thousand dollars more than it was five years ago. This was just one unforeseen expense that made the cash flow problem worse.
The issue was there was no easy way to see what was happening in real time or how it related to billable projects. Ten percent of airline tickets purchased were duplicates because one person didn’t know what the other had booked. Communication between cost centers and the project team responsible for profitability was almost non-existent.
Dig a little deeper and we find that the Travel department was using old pricing and policy criteria that said they could spend a lot more money than was necessary. However, no one was reviewing purchase decisions to find out how overall profit was down. Why? Because there weren’t purchase orders to make it simple to review those decisions.
As we moved through the entire organization, we found many other instances of poor PO Compliance. Purchase orders were regularly being created after the invoice was received. The result was really inaccurate cash flow projections.
The company was using its maximum line of credit almost every month. To make matters worse. the bookkeeper would close out a month then receive a invoice for that period that basically wiped out the profit they thought they had.
It’s really difficult to fix this sort of problem after the fact.
In the end, simply opening up the travel procurement process to the light of purchase orders (and fixing some of their buying criteria) reduced annual travel spending by 25% the first year to the tune of over one million dollars.
Similar adjustments throughout the company restored profits to pre-neglect levels.
Purchase Order compliance is a non-negotiable best practice in my opinion. Most management teams are capable of implementing more stringent processes, but if that is beyond the scope of your team, then investing in outside support will certainly get the job done.