Procure To Pay Cycle | 4 mins read

9 Steps of the Procure-to-Pay Cycle

9 steps of the procure to pay cycle
Hanh Truong

By Hanh Truong

Before making transactions for business operations, organizations should establish a process that defines how they will purchase and receive goods and services. Known as the procure-to-pay cycle, this process involves various steps, including identifying product needs and approving invoices.

Developing an organized and efficient procure-to-pay flow will optimize business spending and ensure that inventory orders are made promptly.

What is the Procure-to-Pay Cycle?

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The procure-to-pay cycle is the systematic process that a business follows to purchase and pay for raw materials and services.

The cycle integrates procurement activities with the accounts payable department of an organization. This department's main functions are monitoring the amount of money a business owes its suppliers and creditors and ensuring that proper payments are made to these entities. By connecting these two processes, the practice of procurement will be streamlined and efficient.

Well-developed pay processes will also enhance transparency since it requires accounts payable teams, procurement departments, and suppliers to communicate. Additionally, being in constant contact with vendors will help businesses with supplier management.

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9 Steps in the Procure-to-Pay Process

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The procure-to-pay cycle is a sequence of steps, which involves procurement and financial procedures. To ensure productivity, organizations should follow each step in the cycle in strict order.

1. Identify Needs

Management teams must identify and approve specific products and services that their organization needs.

Procurement staff should then define the different specifications for each of the goods and create statements of work (SOW) and terms of reference (TOR). These are documents that thoroughly describe all the aspects of a business's project and its requirements.

2. Develop Requisitions

Following the initial step, a formal purchase requisition should be created. This is a document that informs the purchasing department that an order for a product or service is needed.

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3. Purchase Requisition Approval

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Once the purchase requisition is developed, it is then submitted to department and procurement executives. After assessing the organization's needs, budget, and priorities, the administrators will either approve or reject the requisition.

If a requisition is dismissed, the author of the document will typically make corrections and resubmit for a second review.

4. Make Purchase Orders or Spot Buy

After a purchase requisition is approved, procurement teams can make orders for the goods. If the organization plans to only purchase the products a single time or if the order is in a small volume, staff can perform a spot buy, which is the practice of immediately paying for and receiving products.

5. Purchase Order Approval

The purchase orders are then sent to executives for review to make sure the specifications are accurate. Once it is approved it is forwarded to suppliers who will accept, reject, or negotiate the requisition. If accepted, the supplier will proceed to gather their inventory to satisfy the purchase order.

6. Review Receipt of Goods

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Once the products and services are delivered, the organization should inspect the goods to ensure that it contains the right quantity and expected quality. Management can then update their goods receipts to formally acknowledge that the delivery was received and to track their new stock orders.

7. Evaluate Suppliers

Suppliers should be assessed based on their timing, service, product quality, and contract compliance. This will help for future reference when the organization needs to re-order products.

8. Invoice Approval

If there are no discrepancies between the purchase order and goods receipt, the invoice should be approved and then sent to the accounts payable department.

9. Vendor Payment

With the order invoice approved, the finance team or accounting system will be able to process payments to suppliers. There are various ways a supplier can be paid, such as partial, installments, and final.

Benefits of the Procure-to-Pay Cycle

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An effective purchasing process can improve many business functions, such as-

  • Optimize Procurement Processes - The cycle defines each step that must be taken to transform requisitions to purchases. This promotes transparency and organization, which can improve the overall efficiency of procurement.
  • Reduce Processing Costs - The latest inventory management software can help businesses reduce procurement processing costs by promoting paperless inventory tracking. These systems also have online ordering capabilities that allow users to quickly adjust stock levels when orders are received.
  • Promote Visibility - The procure-to-pay cycle enhances visibility into the supply chain by allowing purchasing teams and suppliers to examine which stage their requisition is in.
  • Improve Supplier Relationships - The process can improve a company's relationship with suppliers by ensuring that orders are made accurately and payments to suppliers are sent promptly. It also promotes collaboration and communication between the two groups; therefore, any inquiries or disputes can be resolved quickly.
  • Leverage Negotiations - Due to the strong supplier relationship, companies will have a better chance of negotiating for more opportune contract terms, as long as it also helps the supplier's bottom line.
  • Simplify Data Reporting - When using cloud-based inventory management systems, businesses can access reports related to costs, waste, and profitability in real time. Having data on hand will help managers have more control over their cash flow and allow them to make informed purchasing decisions.

Following the best practices in the procure-to-pay cycle will ensure efficiency in a business's procurement process and enhance supply chain management procedures.

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