Procurement is at the heart of your business activities. How much your business spends and how often it does that is one of the essential key performance indicators as it reflects productivity and efficiency of your day to day operations.
The activities related to procurement involve a certain set of steps that happen every cycle. It’s called an order-to-pay(O2P) or a purchase cycle. Your procurement cycle includes all those activities that help to order, procure and pay for materials that your business needs.
The purchase or the O2P cycle starts with identifying the needs. Where a specific department or godown needs goods or materials is identified. A reasonable specification about required goods and materials is made which is your purchase requisition. The requisition is sent to the purchase department for approval.
The purchase department then reviews the requisition against the budget and if everything seems good to go, is validated. The purchase orders are then sent to vendors for further negotiation.
A purchase order is the first commercial offer made between a buyer and a seller that documents the quantity of materials needed, agreed upon prices, delivery place and date along with specific terms and conditions. Once the vendor approves the purchase order, it becomes a legally binding contract.
After this, the vendor delivers the materials ordered on the specified date and the destined department or godown. A thorough inspection is done against the contract terms in the purchase order and if everything checks out, the goods receipt is approved.
The bill or the vendor invoice of the purchase goes to the accounting department. The accounting department then compares and evaluates the purchase order, the vendor invoice and the goods receipt for discrepancies. If there’s no errors, then the vendor invoice is approved and a payment is made.
For a business the whole purchase cycle may span for a number of days, given the above number of steps. It might take even longer when the business relies majorly on manual processes. Many businesses, especially MSMEs, still use manual or semi digital tools for the procurement process.
If your organization still relies on the same, you might be familiar with following challenges:
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The purchase cycle is inevitable. As long as you run the business, you will have to make purchases to make sales for generating revenue. So, removing redundancies and outdated processes becomes essential in this aspect. In fact, automating the whole process may cut down various steps in the cycle and make it efficient. Automation would remove bottlenecks and help in streamlining details of several purchase orders. Handling of delays becomes simple and the whole cycle is properly documented with no scope of errors.
A cloud accounting software adept in inventory management will make up for your inadequate manual processing of the purchase cycle.
RealBooks is a GST compliant, cloud-based accounting and inventory management software. Our robust features helps in transparent documentation of the procurement cycle.
With RealBooks, you get to reap the following benefits in your purchase cycle-
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