What is Procure to Pay (P2P) Cycle and Its Business Impact
Procure to Pay, also known as P2P, is the process of obtaining the raw materials needed for manufacturing a product or providing a service, and making payment for these. Every manufacturing concern or service provider needs to run this cycle efficiently if they are to continuously manage their cash flow, build goodwill with suppliers, and make profits.
Procure to Pay (P2P) Process Flow
The process begins with planning what materials are required, when they are required, and the price that the company can afford to pay for them.
Then the company prepares a list of vendors that they think can provide the materials for them.
The company asks each of the vendors to submit a quotation, which includes the price, terms of delivery, quality of materials, and any other information that they need for making their decision. This stage could also involve negotiating with the vendors for the best deal.
Once a vendor has been chosen, the buyers create a purchase requisition form that includes information such as the description of goods and services, department account number, signatures of the authorized managers, delivery instructions, and quotations from the authorized vendor.
A formal purchase order is sent to the vendor to supply the goods along with instructions as to the conditions under which they have to be supplied.
Once the company receives the goods from the supplier, the purchasing department prepares a Goods Receipt. This is an important document that can later be used for reconciling if what the seller delivered was indeed what they asked for.
The Goods Receipt is compared with the Purchase Order to validate if the two match. If there are any discrepancies, the buyer can contact the seller and post a complaint. Checks are made if the goods are suitable for use or not if the correct quantity has been delivered if all the goods meet the ordered specifications and if they are priced according to the terms of the purchase order. If any goods are damaged then the buyers will have to contact the sellers and ask either for a replacement or a refund.
Once the verification of the goods is done, the payment invoice is created and the necessary approvals from the project managers are obtained.
When the company makes the final payments to the vendor, the cycle comes to a close.
Procure to Pay (P2P) Challenges and Their Business Impact
Procure to Pay has a considerable impact on the business since the process is spread across so many departments that encompass purchase, production, and accounting.
There are many checks and balances put in place, and the authorization of numerous managers is required.
There are companies that conduct these operations manually and use extensive paperwork thus facing the risk of documentation errors and delays in processing.
In some firms, there is a lack of communication and cohesiveness between the various divisions, and even among the personnel working in the same unit. The purchase department might place orders at a price beyond the budget of the finance department. Invoices might inadvertently get written for goods that were rejected.
Orders might be placed for raw materials that the production unit does not need.
There could be delays in the documentation traveling across the various departments causing late payments, which might harm the buyer-vendor relationship.
With the Procure to Pay process being fraught with the possibility of risk and inefficiency, which would have an adverse impact on the business in a competitive market, many companies are now finding ways of streamlining the procure-to-pay process.
Outsourcing key tasks in the Procure to Pay process allows managers to maintain tighter control over the system, and save cost by reducing manpower and closing down redundant and wasteful roles. Selection of the right Finance and Accounting Outsourcing Services provider which has the experience, talent, and technology for optimized invoice and purchase order data processing will enable the outsourcer organization to derive positive business results and the desired advantage in the market.