The Advantages of PO-Based Invoicing

 

For PO-based invoices, approval to purchase the goods or services occurs before the purchase. This invoicing approach offer advantages over non-PO invoicing.

 

  • Faster, better matching to ensure invoice accuracy.

Once the invoice is submitted, a three-way match can be made between the invoice, a purchase order, and a receipt for the goods or services (or similar document). This allows the buyer to ensure that the order was delivered and invoiced correctly. If a signed contract exists, the PO can pull the contracted rate off an item master or match the order to the contract. If the match is successful, the buyer processes the invoice and makes payment. If the match is unsuccessful, the invoice goes through an exception resolution process, which usually involves the buyer’s purchasing department as well as the supplier.

  • Improved spend visibility.

PO-based invoicing provides visibility into spending “as it happens.” Contrast this to non-PO invoicing, where companies may receive an invoice 15 days after an employee has made a purchase, and it may take another 20 days to get the invoice into the AP system. In this environment, there is about a 35-day window when a company may not know its liabilities for purchases (what’s “out there”) and whether these purchases exceed the budget.

  • Fewer errors due to pre-coding.

Because PO-based invoices are pre-coded, they can be processed faster and more accurately than non-PO invoices. Often, without good end user tools, a generic account code is applied to non-PO invoices, which complicates the data entry process and forces AP staff to manually add the correct account code later on—creating another potential source of invoice errors that require exception handling.


Because of the operational shortcomings of non-PO invoices and lack of spend control over non-PO purchases, many companies are seeking ways to increase their volume of PO-based invoices. For example, a large media company in the northeastern United States recently mandated that a PO must be issued for all purchases valued at more than $3,000. The company will no longer approve non-PO purchases “after the fact,” because doing so creates the false impression that this spend is under control. This is another key to the rising popularity of PO-based invoicing. By moving approval for purchases to the beginning of the process, PO-based invoicing gives companies greater control over the goods and services their employees are buying—which improves compliance with procurement policies, negotiated prices, and preferred vendors.

 

The Ongoing Need for Non-PO Invoices

 

While non-PO invoices add complexity to the invoice approval process, few organizations will abandon them altogether. In some cases, non-PO invoices are more practical, such as when field employees have good working relationships with vendors and need goods or services “on demand.” Moreover, companies must sometimes procure services whose price or quantity cannot be estimated up front; the requester just knows “something needs to be done.” With maintenance expenses, for example, they may not know how much labor is involved or what parts will be required in a repair. Small dollar purchases offer another example, where the expense of approving and issuing a purchase order can’t be justified. This is especially true if such purchases are a one-time or occasional rather than recurring expense. In addition, companies with a decentralized or weak purchasing structure, or remote offices that place orders with local suppliers, tend to have a larger proportion of non-PO invoices. Because these invoices by definition lack pre-spend approval, the need to continue accepting them complicates the effort to manage spend and track outstanding liabilities.

 

Using Automation to Effectively Manage Non-PO Invoices

 

So how can an organization effectively process its non-PO invoices? One good rule is never to enter a non- PO invoice directly into your ERP system without first performing some kind of validation or having the invoice go through an approval workflow. Today, electronic workflow is part of many e-invoicing solutions, making it easy for end users to code and approve invoices in tools like email or with a mobile device.


When non-PO invoices represent a large volume of spend, automation provides an opportunity to capture the spend for analysis, streamline accruals, 7-11-2011 7-57-19 AM.pngand eliminate manual touch points. The right automated solution can break down the non-PO invoice processing problems, apply  technology and enforcement procedures to improve controls and visibility, and increase straight-through processing rates.


Another good practice is to require vendors to enter the requester's email address on all non-PO invoices. An automated workflow solution can detect the email and route the invoice directly to the business unit that ordered the product or service. Non- PO invoices without an email address can be rejected and returned to the supplier. This approach helps suppliers to quickly resolve the problem, avoiding further payment delays. The best automated solutions also make it possible to preserve line-level details on non-PO invoices, including commodity codes, so procurement has visibility into vendors and spend details. In fact, some companies have justified e-invoicing projects based on the ability to capture line-level data alone. By making procurement aware that a purchase may be a good candidate for PO spend or that one-time vendors may be creating leakage in negotiated pricing for a given commodity, organizations gain a strategic benefit.

 

Next: Ariba Knowledge Nuggets: The Problem With Paper - Invoice Automation Pt.3

Previous: Ariba Knowledge Nuggets: The Problem With Paper - Invoice Automation Pt.1

_________________________________________________________________

 

Beverly Dunn is a Customer Success Manager with Ariba. All customers are invited to join the private Customer Success group on Ariba Exchange, where you can access the Customer Success    Spotlights, Lunch 'n Learn Webinar calendar and replays, and the   Ariba   Knowledge Nuggets.