Procure to Pay, also known as P2P, is the process of obtaining the raw materials needed for
manufacturing a product or providing a service, and making payment for these. Every manufacturing
concern or service provider needs to run this cycle efficiently if they are to continuously manage their
cash flow, build goodwill with suppliers and make profits.
Steps of the Procure to Pay (P2P) Cycle:
The process begins with planning what materials are required, when they are required, and
the price that the company can afford to pay for them.
Then the company prepares a list of vendors that they think can provide the materials for
them.
The company asks each of the vendors to submit a quotation, which includes the price, terms
of delivery, quality of materials, and any other information that they need for making their
decision. This stage could also involve negotiating with the vendors for the best deal.
Once a vendor has been chosen, the buyers create a purchase requisition form that includes
information such as the description of goods and services, department account number,
signatures of the authorized managers, delivery instructions and quotation from the
authorized vendor.
A formal purchase order is sent to the vendor to supply the goods along with instructions as to
the conditions under which they have to be supplied.
Once the company receives the goods from the supplier, the purchase department prepares a
Goods Receipt. This is an important document which can later be used for reconciling if
what the seller delivered was indeed what they asked for.
The Goods Receipt is compared with the Purchase Order to validate if the two match. If there
are any discrepancies, the buyer can contact the seller and post a complaint. Checks are
made if the goods are suitable for use or not, if the correct quantity has been delivered, if
all the goods meet the ordered specifications, and they are priced according to the terms of
the purchase order. If any goods are damaged then the buyers will have to contact the
sellers and ask either for a replacement or a refund.
Once the verification of the goods is done, the payment invoice is created and the necessary
approvals from the project managers are obtained.
When the company makes the final payments to the vendor, the cycle comes to a close.
Procure
to Pay Cycle flowchart
Challenges of Procure to Pay and Their Business Impact
Procure to Pay has considerable impact on the business since the process is spread across so many
departments that encompass purchase, production and accounting.
There are many checks and balances put in place, and the authorizations of numerous
managers are required.
There are companies that conduct these operations manually and use extensive paperwork
thus facing the risk of documentation errors and delays in processing.
In some firms there is a lack of communication and cohesiveness between the various
divisions, and even among the personnel working in the same unit. The purchase
department might place orders at a price beyond the budget of the finance department.
Invoices might inadvertently get written for goods that were rejected.
Orders might be placed for raw materials that the production unit does not need.
There could be delays in the documentation travelling across the various departments causing
late payments, which might harm the buyer-vendor relationship.
With the Procure to Pay process being fraught with the possibility of risk and inefficiency, which would
have an adverse impact on the business in a competitive market, many companies are now finding
ways of streamlining the procure-to-pay process.
Outsourcing key tasks in the Procure to Pay process allows managers to maintain tighter control over
the system, and save cost by reducing manpower and closing down redundant and wasteful roles.
Selection of the right Finance and Accounting Outsourcing Services providerwhich has the experience,
talent and technology for optimized invoice and purchase order data processing will enable the
outsourcer organization to derive positive business results and the desired advantage in the market.
