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Effective Purchase Order Systems

If you review operating expenses each month and feel there are times when spending at your company goes through the roof, you are likely overdue for a purchase order system. A well-designed and enforced purchase order system can significantly reduce monthly expenditures, thereby boosting bottom-line profits. If you need to begin a system, or improve on an existing system, follow these five steps:

Step One – Establish individual staff spending authorities.  This should include both dollar limits and types of purchases. Many companies make the mistake of imposing the same low dollar spending limit on every employee. This is foolish and simply detrimental to the efficient functioning of your business.

Instead, designate thoughtful spending limits for each staff member. Ideally, discuss the limit with the employee to be sure the limit you have in mind is appropriate for their job efficiency and comfort level .

In addition to dollar limits, specify the types of purchases each employee may make. For instance, you may want your office secretary ordering office supplies, but not purchasing dispensing equipment.

Step Two – Design a user-friendly system.   The system should work easily for the initiator of the purchase as well as vendors and payables clerks. The easier any system is to use, the better the chances for full compliance. Often, your GL software vendor can help you both with design and implementation.

Step Three – Notify vendors of your change in policy. Establish a start date for your system and notify your vendors in writing that any invoices without a purchase order number beyond your start date will not be honored.

Step Four – Enforce the system. There must be a consequence for anyone who chooses to ignore or go around the system. One frequently encountered problem is users who fail to get the price on an ordered item. Leaving the price blank could potentially give your vendor a carte blanche to charge whatever they want. Insist that P.O.’s be completely filled out, including price.

Next, at the payables level, be sure bills for purchases are never paid without a completed purchase order. Undoubtedly, slip-ups will occur, but you must insist that the system be followed. Track the number of “after-the-fact” P.O.’s. This will give you an accurate measure of system use and efficiency.

Step Five – Conduct an annual review of the system. As with any other business process, you should perform a check-up annually. Review authorities, vendors and the payment process. Fix whatever isn’t working. If you follow these five steps, you’ll enjoy savings and profit.

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