The procure-to-pay (P2P) process is an integral part of every organization. Any company that hires outside vendors or suppliers needs to have a procure-to-pay process in place in order to track and complete external payments.
It’s a complex process that can be both time-consuming and prone to error when run manually. But when it’s done right, organizations can see major benefits that can spur growth. Learn more about the procure to pay process and how to maximize its efficiency below.
What Is the Procure to Pay (P2P) Process?
The procure to pay process (P2P) involves requisitioning, purchasing, receiving, invoicing, and paying for goods and services. Essentially, as the name suggests, P2P involves all of the steps involved in obtaining and paying for goods or services.
Since P2P is such a cornerstone of successful business, the benefits of implementing a well-oiled P2P process can be substantial. Those benefits range from reducing manual data entry, avoiding late fees (and sometimes even receiving early payment discounts) and minimizing data errors and compliance issues to reducing overall cost.
But before you can realize any of these benefits, it’s critical to understand exactly how the procure-to-pay process works.
The Process Flow of Procure to Pay
The procure to pay process may vary in small ways from business to business, depending on how each functions, but generally, the flow is as follows.
1. Identify Needs
First, a company must identify their needs and how to meet them. That means determining who to hire to provide the goods or services necessary to meet their needs. For example, the marketing team might determine that they need an email marketing management platform. Or, human resources might need help with hiring and decide that they should purchase an applicant tracking system.
This step includes the identification of the team’s needs as well as potential vendors and cost of the goods or services in question.
2. Create Purchase Requisition
Next, once the department that wants the purchase decides on the vendor, cost, scope and timeline, that department must submit a purchase requisition—i.e., a formal request to make a purchase—to accounting. The purchase requisition remains within the buyer’s company and does not pass to the vendor.
3. Generate Purchase Order
Once the department has created and submitted a purchase requisition—and accounting has approved it—a document called the purchase order (PO) goes to the vendor. A PO is a document sent to a vendor stating the scope of work being agreed upon. Both the buyer and vendor must approve this document.
4. Receive Purchase Order Approval
Next, the purchase order must be approved by various stakeholders. The first party that needs to give the green light to a PO is the buyer’s accounting team. Often, purchase orders are rejected and must go back and forth within the organization until all of the information is correct. Once the necessary teams on the buyer’s side have signed off, the vendor receives the purchase order and must then agree to it.
The process of approving purchase orders is a necessary step, particularly when companies have a manual P2P process, since approval can catch important errors. However, approval can be a cumbersome step of the overall P2P process, since the purchase order must pass through several hands and may encounter many bottlenecks.
5. Issue Goods Receipt
Once the buyer has actually received the goods that they’ve requested, they’ll then check the quality of the order: Did the vendor ship the right number of products? Is the product itself in good condition? If these sorts of things are in order, then the buyer will issue a goods receipt. The goods receipt triggers a couple of actions: 1. The supply chain department uses this document to adjust inventory accordingly. 2. Once a goods receipt has been generated, then the buyer can proceed with approving the vendor’s invoice (step 6).
6. Receive and Review Vendor Invoice
After the services or goods requested have been completed or received, the vendor will then send an invoice. This invoice goes to the accounts payable team who will need to review it to ensure the information lines up with some of the previous documents generated throughout the procure-to-pay process, namely the PO and the goods receipt. This comparison of the three documents—the PO, the goods receipt and the invoice—is known as three-way matching.
7. Approve Vendor Invoice
If everything checks out after three-way matching, then the invoice can officially be approved. Usually, this requires that the invoice be routed to someone who has the authority to approve invoices. However, teams that still rely on manual processes to route invoices for approval can quickly run into bottlenecks and delays—particularly if the designated approver is out of town or has a backlog of other invoices they’ve yet to approve.
In workflows that leverage AP automation, though, these sorts of roadblocks are easily avoided with processes like automatic approval routing with built-in scripts that reroute invoices to a secondary approver if they haven’t been approved in a certain amount of time. This way, payment can be processed more quickly.
8. Pay Vendors Through Accounts Payable
The accounts payable team must ensure the vendor invoice lands in the company’s accounting system. Some companies do this process manually, but this approach is prone to human error and is time-consuming.
To eliminate mistakes and speed up the process (thus avoiding late fees) many companies use automation software. This software can use technology such as optical character recognition (OCR) to convert image text into readable files. Without automation, each vendor invoice passes from vendor to accounts payable team to accounting system, then eventually gets paid out. With P2P automation, it instead goes straight into the accounting system.
9. Track Supplier and Vendor Performance
You can argue that the P2P process is complete once the buyer actually pays the vendor or supplier. However, it’s important to remember that your processes, including procure-to-pay, should be based on robust data. As such, businesses need to track metrics of vendor performance such as on-time delivery, accuracy of invoicing, and so on. Tracking these metrics will help you gauge how suppliers contribute to the working relationship you have with them.
Best Practices for the Procure-to-Pay Process
Clearly, the procure-to-pay process can get messy. The following best practices will reduce errors and streamline the process.
Keep it Transparent
Lack of visibility into the P2P process can leave vendors or suppliers in the dark, creating confusion and the need for excessive buyer/vendor communication. Ideally, your procure-to-pay solution will provide a self-service portal so that vendors can track the status of their invoices whenever they want.
Improve Supplier Relationships
When a company finds a vendor that meets their unique needs, it’s vital to maintain a positive relationship. Things like making early or on-time payments and providing easy access to vendor portals helps keep vendors happy so they’ll want to keep working with the buyer on a regular basis.
But this relationship, as with all relationships, is a two-way street. Companies shouldn’t just track their own performance in meeting vendor needs and expectations—they should also examine how those vendors treat the relationship. Do vendors or suppliers deliver goods and services on time? Do they send accurate invoices? Do they invoice promptly? Being able to measure these sorts of things can help your organization keep better track of the P2P process. But it’s important to keep in mind that monitoring these metrics manually is a difficult task and doesn’t scale well. Ideally, companies should use an automated P2P system to carry the burden of this work.
Integrate with Your ERP
To keep the process flowing smoothly, all of the data that’s relevant to the procure-to-pay process should live in one, easy-to-access place. By integrating your P2P process with your enterprise resource planning (ERP) system, you can knock down data silos, making sure all relevant data and documents are easily accessible to everyone who needs it, when they need it.
Find out more about ERP Integrations
Get Better Buy-in by Streamlining Workflows
Help employees do their jobs better by eliminating the tedium. Incorporating automation in areas like invoice routing, approval and processing, and 3-way matching makes everyone’s jobs easier. The more complication you remove from workflows, the more likely your team is to get on board with the workflows and stick to them.
Use the Right Procure-to-Pay Software
To help you improve your process, a good P2P software should offer tools like workflow automation with invoice processing, routing and approval, vendor portals, ERP integration, and more. These solutions improve efficiency by reducing the need for employees to focus on manual entry and management.
P2P vs R2R vs Q2C vs O2C: Discover the Differences
What’s Next? Find the Right Procure-to-Pay Solution
The procure-to-pay process is critical to any business, but it can be complicated and time consuming when performed manually. Many companies struggle with juggling the documents involved in P2P, including purchase requisitions, purchase orders, and vendor invoices.
When there are delays in routing these documents to the appropriate parties, or when data within the documents is incorrect, businesses can incur late fees and their relationships with vendors may suffer. But the right P2P automation software eases these common pain points.
With features like OCR technology, automatic approval routing capabilities, and vendor self-serve portals, MHC’s procure-to-pay software can streamline your P2P process in no time. As a result, your business can reduce data entry errors and potential compliance issues, give vendors better visibility, improve overall communication, and save time and money. Learn more about MHC’s procure to pay management solutions today.