Ask the Accounting Community

Hello,

I am the Controller for a product design firm and we are implementing NetSuite and updating our processes to be more effective and efficient.  Are there Best Practices regarding the PO process and materiality threshold.  Currently, a PO is used for each purchase (the majority are pass thru expenses to the client) and they are being used more for information purposes (project no, etc.) and less for control.

Any insight is appreciated.

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Helen (Holly) Marie Heenan CMA
Director/Manager
Philadelphia PA
United States
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Hi Helen,

In my organization, the PO is raised by the Purchasing  dept after approval of quotes. Ideally the PO needs to have a two tier approval process. With automation, the PO fill first pop up for approval with the Head of the Purchasing Dept. Once done the second and final tier is the Finance Head . Only then  can the PO be released/sent.
The Finance Head performs the due diligence of verifying the quotes etc
There is a system posting of the PO done to stocks and WIP

With regard to Materiality-  The ERP should have codes like for stationery items etc. for which the PO can be released at first approval itself ie by the Purchasing Manager.

For the PO to further be a control tool..   There needs to be a proper process of 'Receiving" the items and matching against the PO. If in error the supplier invoice cannot be posted. This is even in the case of non stock items like stationery etc.

However, this does make it tedious if there is an error .  First the PO will need to be corrected which will again follow the approval process.This will reverse the preivous automated postings.  And then can the 'item' be received.

I hope this helps.


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Gloria Menezes CMA
Dubai
United Arab Emirates
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Dear Helen,
Purchase orders are a key control of the procure-to-pay process. A purchase order is very important from a legal standpoint since it is one of the elements that form the purchase agreement with the supplier. It is important to specify appropriate terms and conditions in the document, particularly, with non-recurring suppliers. You should also make sure that key elements like item specification/reference, quantities and delivery terms are clearly specified.
You should also have a proper approval hierarchy that takes into account the risk and financial impact associated with each type of transaction (depending on the type of order and amount and the specific ERP setup this may go from a single level of approval for low-risk low-value transacions to multiple levels of approval which include the key functions and appropriate level of seniority for accountability purposes).
Finally, you should also have a proper 3-way matching control in your ERP with reasonable tolerances to ensure that you pay only for items that have been actually ordered and received.
Hope this helps.

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Javier Carrasco Pena
Other
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Hello,

I would consider the PO in the purchasing cycle and value/risk associated based on below matrix adapted from P. Kraljic.  Some of the purchasing cycle maybe outside of NetSuite but the total process should include the following processes:

• Pr-Solicitation Phase- Purchase Request - automated or manual signed off with appropriate approvals.  If single or source source that should also be approved. 
• Solicitation Phase - Prepare the Request for Proposal (RFP) to include criteria bid will be evaluated on, Statement of Work and pro-forma contract.  Try to obtain at least 3 proposals to ensure competitive acquisition
• Evaluation/Recommendation Phase - Bid analysis of received bids based on criteria included in RFP Solicitation.  If only one bid received then price analysis of bid received for price reasonableness
• Award Phase - Create Vendor Master record, create a PO number for PO/Subcontract and conform PO/Subcontract based on final negotiations.  Your company representative should review the proposed PO/Subcontract and initial each page then Purchasing Dept should send to Supplier for initialling each page and signature. 

Also consider having Purchasing Dept set up Master Service Agreements (MSA) with suppliers/vendors that your company procures from regularly.  The MSA acts as a general agreement and then Purchasing can issue task orders unique to each procurement but the common commercial terms are included in MSA and do not need to be negotiated with each task order.

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Kevin Miller
Director/Manager
San Antonio TX
United States
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