Understanding Purchase to pay cycle

Understanding Purchase to pay cycle (P2P CYCLE)

Procurement meaning evolves depending on the context one looks at, meaning, eprocurement takes a different shape from the typical procurement procedure involved in calling your suppliers or even using call-off and blanket ordering systems. Global procurement on the other hand will entail other aspects that may not be taken care of by simply clicking a button in eprocurement. Despite all these, procurement process can be looked at as:

All activities required in order to get the product from the supplier to its final destination. It encompasses the purchasing function, incoming inspection, and quality control and assurance, allowing companies to make decisions based on total cost of ownership (TCO), rather than price. (Van Weel, 2009)

In procurement process what often happens the moment you have decided on contract award is the emergence of purchase to pay cycle also known as P2P Cycle. This cycle in procurement procedure occurs in series of steps as follows.

Purchase order and its acknowledgement

As a buyer, assuming you don’t have to negotiate a contract, you simply send a purchase order which can be as standard printed from or electronic in case of eprocurement. Purchase order intends to create a legally binding agreement since it entails the terms and conditions relating to the purchase. You should note that not all purchase orders are written, at times a phone call will just do. A copy of this order remains with the supplier and often a second is signed and returned as acknowledgement to the buyer.

Follow up or expediting the order

The buyer may do some follow up on the supplier to track the progress of the delivery. This can be through “track and trace system” which will depend on the organization’s procurement system and to the degree that the system is automated. Most organizations have some computerized systems that raise flags when follow up is needed.

Receiving goods / Goods inwards

There are a number of routines or logistics that get triggered when order of goods is ready for delivery;

1. The supplier informs the buyer as to the contents to be delivered and when they will be delivered through an advice note.
2. When goods are delivered, the department responsible in the buyer’s organization inspects them for conformity to the specifications given in the purchase order or even as per the advice note. Remember battle of forms determines which form to use here.
3. A goods received note (GRN)is sent to the supplier to indicate that goods have been received and in the event of any defect or discrepancy the supplier is equally notified, as well as actions to be taken before payment is approved.

Invoice and Payment

The supplier will send an invoice or request for payment. The buyer will ensure that the invoice corresponds to the purchase order or procurement contract in terms of the agreed price and also ensure that all the discrepancy in the goods received note, if any, have been solved.

Remember when it comes to the payment part of the purchase to pay cycle, it is a good idea to observe the terms stipulated in the agreement. In as much as the buyer may want to pay late so as to retain money or even earn interest on banked funds, the supplier wants to be paid early especially since they have already incurred the cost of supplying the product or service.