No matter the nature of a business- raw materials, basic office supplies, professional services and other such miscellaneous requirements are a critical part of every business around the world. To cater to these needs, every company has a clear process of how they not only buy these products but also pay for them. This process is called Procure-to-Pay (P2P) process. While this may sound a bit technical, it is nothing but a business’s journey from identifying a business requirement, i.e. goods or services, to paying a supplier to deliver that requirement.
With this blog, let us understand the basic aspects of this process and steps involved along the way. We will also learn about how modern businesses can streamline their P2P process for cost-effectiveness and efficiency with automation and other best practices. Alongside, we shall also look at how certain businesses approach the concept at present.
Understanding the Procure-to-Pay Process
To grasp the P2P process better, let’s break it down into six key steps:
- Identifying the Need (Purchase Requisition)
- Vendor Selection (Sending RFQs)
- Purchase Order Creation
- Goods Receipt and Inspection
- Invoice Approval and Matching
- Payment Processing
Each step plays a vital role in ensuring seamless procurement and payment operations. Let’s dive deeper into what happens at each stage.
Step 1: Identifying the Need (Creating Purchase Requisition)
Every time someone in an organization identifies a need for something, the P2P process will flow again from beginning to end. This need can be simply anything from a chair for office, stationery items, or raw material for manufacturing.
To document this need, the person concerned will create a Purchase Requisition (PR) and share it internally within the team with the manager or the procurement department (if it exists). This document acts like a permission slip for a person to get his requests approved by the relevant authorities. In this document, key details of this need like quantity, budget, or type are specified.
Step 2: Vendor Selection (Sending RFQs)
Once the authorities approve the request, it is upon the procurement team to choose a vendor. Choosing a vendor is a critical step as it ensures the company gets the right price and quality for the supply along with its timely delivery. For certain supplies, companies may have pre-approved vendors. For others, they will send Request for Quotations (RFQs) to multiple vendors to receive a competitive bidding. Once the procurement team has evaluated all RFQs, they will make an informed decision by comparing the quotes for prices and quality offered by the vendors.
Step 3: Purchase Order Creation
Upon successful selection of the vendor, relevant team creates a Purchase Order (PO). This document here entails the details of the order including the item details, the cost for the same, date of delivery, and terms of payment. The PO is particularly a legal document between a company and a supplier to ensure both parties are clear with the terms of the transaction. It is hence crucial for ensuring accountability and transparency.
Step 4: Goods Receipt and Inspection
Once the vendor delivers goods or services, the receiving company verifies that everything is in order. It is important to inspect the items received for quality and verify that all aspects of delivery match the agreed-upon terms in the PO. If something is missing or incorrect, the company issues a notification for rectification to the supplier.
Step 5: Invoice Approval and Matching
After receiving the goods or services, the supplier sends an invoice for payment. This invoice goes through a two-way or three-way matching process, where it’s cross-checked against the purchase order and the goods receipt to ensure accuracy. If everything matches, the concerned party approves the invoice for payment. If there are discrepancies, the team should address them before proceeding.
Step 6: Processing the Payment
Finally, once the invoice is approved, the finance team processes the payment according to the agreed-upon payment terms—whether it’s immediate payment, 30-day terms, or any other arrangement. Timely payments are important not just for fulfilling obligations but also for maintaining good supplier relationships, which can lead to better deals or discounts in the future.
P2P Process in Action: A Practical Example
Imagine a medium-sized manufacturing firm, XYZ, that needs 500 tons of steel for production. Here’s how the P2P process unfolds:
1. Purchase Requisition: An employee creates a PR for 500 tons of steel, specifying grade, quantity, and delivery date.
2. Vendor Selection: The procurement team sends RFQs to two verified steel suppliers, compares bids, and selects the best option.
3. Purchase Order Creation: Team issues the PO, confirming the order details.
4. Goods Receipt and Inspection: The steel arrives, and the warehouse team verifies the shipment against the PO for quality and quantity.
5. Invoice Approval and Matching: The vendor’s invoice is cross-checked with the PO and goods receipt, then approved.
6. Payment Processing: The finance team processes payment within the agreed terms, completing the transaction.
Best Practices in P2P Cycle
The following practices allow for better efficiency and effectiveness in the P2P cycle also ensuring successful achievement of the above-mentioned KPIs:
- Adapting an automated procure-to-pay software
- Always ensuring a transparent and traceable throughout the process
- Promoting more collaboration between procurement and accounts payable departments
- Optimizing and prioritizing vendor management
- Developing quantifiable goals for the P2P team
How Automation Transforms the Procure-to-Pay Process
Managing the procure-to-pay process manually can be overwhelming, especially for large organizations dealing with multiple departments, vendors, and transactions. Automated procure-to-pay software streamlines these workflows, enhancing efficiency, accuracy, and compliance. Let’s explore how automation transforms the P2P process:
Accurate 3-Way and 5-Way Matching
Traditional 3-way and 5-way matching (matching the purchase order, goods receipt, and supplier invoice) is time-consuming and prone to human errors. Automated procure-to-pay solutions enhance this process by instantly cross verifying these documents, flagging mismatches in real time. Some advanced automation solutions extend this to include e-invoices and e-way bills, ensuring compliance with GST regulations. This not only eliminates manual errors but also ensures a higher degree of accuracy in the P2P cycle.
Faster Invoice Approval and Payment Processing
With automation, invoice approval workflows are streamlined. Automated systems ensure invoices are routed to the right personnel for approval, with notifications and escalations to avoid delays. Payment terms, early payment discounts, and approvals are handled seamlessly, reducing the cycle time from requisition to payment. This improves cash flow management and builds stronger supplier relationships.
Better Visibility into Expenses
Automation provides real-time visibility into expense patterns and generates detailed reports on spending, invoice statuses, and supplier performance. These insights help businesses track expenses against budgets, identify cost-saving opportunities, and avoid overspending. Real-time spend visibility allows organizations to optimize procurement decisions and ensure financial compliance.
Ensuring Statutory Compliance
Manual P2P processes often overlook critical statutory requirements, leading to non-compliance risks. P2P automation addresses this by automatically generating and validating e-invoices as per GST regulations ensuring compliance with tax laws. Automated procure-to-pay solutions also match GST details across invoices, returns, and payments to prevent mismatches. Calculations for TDS, GST, and other taxes when automated, reduce errors and penalties.
Enhanced Audit Readiness
Audit readiness is a critical aspect of financial management, and automation plays a pivotal role in storing all purchase orders, invoices, and approvals securely in a single platform, making data retrieval for audits quick and effortless. Every action in the P2P cycle—approvals, modifications, or rejections—is logged automatically, ensuring a transparent and traceable workflow. Automated systems also generate accurate and up-to-date compliance reports, helping businesses prepare for statutory audits without last-minute scrambling.
Cost Savings and Supplier Discounts
P2P automation identifies opportunities for cost optimization by sending reminders for due payments, ensuring timely transactions and preventing late fees. Many suppliers offer discounts for prompt payments; automation ensures these opportunities are not missed. By reducing processing costs and maximizing savings, automation boosts profitability over time.
Read more about Accounts Payable automation here.
Conclusion
The procure-to-pay process is a fundamental part of how organizations manage their purchases, but it can become highly inefficient when handled manually. It is only about understanding the basics of the P2P cycle and implementing certain important automations into it for the companies to achieve increased accuracy, efficiency, and significant cost savings. GSTrobo® is one such tool that streamlines your P2P process by automating the 5-way matching of purchase orders, goods receipts, invoice receipts, e-invoices, and e-way bills. The solution aims to eliminate manual errors and add more efficiency to your P2P cycle by flagging all inaccuracies during the matching process itself.
So, don’t wait for inefficiencies to affect your company’s growth, navigate your P2P challenges with GSTrobo®̥ today and watch your operations transform.
