A Complete Beginner’s Guide to Procure to Pay / P2P Process

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 or P2P process. The procure to pay cycle is nothing but a business’s journey from identifying a business requirement, i.e. any good or service, to paying a supplier to deliver that requirement.

With this blog, let us understand the basic aspects of P2P 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 Business Process

To grasp the procure to pay process better, let’s break it down into six key steps:

1. Identifying the Need (Purchase Requisition)
2. Vendor Selection (Sending RFQs)
3. Purchase Order Creation
4. Goods Receipt and Inspection
5. Invoice Approval and Matching
6. Payment Processing

Each step of the procure to pay process plays a vital role in ensuring seamless procurement and payment operations. Let’s understand in detail what happens at each step of P2P process.

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 a PR, following details are mentioned:

1. Product/service requested
2. Item quantity, price, and description
3. Name and department of the requester
4. Date of request
5. Reason for purchase.

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 (PO) Creation

Upon successful selection of the vendor, relevant team creates a Purchase Order (PO). PO details include;

1. PO number
2. Date of PO and delivery
3. Name of vendor and customer with contact information
4. Item details (description, price, quantity)
5. Billing address
6. Shipping address
7. Legal terms / terms of payment
8. Sales tax (if due for non-resale items)
9. Subtotal and invoice total.

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 Note (GRN) 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. But, if everything is in order, a Goods Receipt Note or GRN is created.

Details in GRN are as follows:

1. Supplier’s Name
2. Delivery Date and Time
3. Products Details like name, type, quantity, and more
4. Delivery Manager’s Signature
5. Supplier’s Signature

Step 5: Invoice Approval and Matching

After receiving the goods or services, the supplier issues an invoice for payment. This vendor invoice goes through a two-way, three-way, or five-way matching process on recipient’s end, where it’s cross-checked against the purchase order, goods receipt note, e-invoice, and e-way bill to ensure accuracy of details. If everything matches, the recipient approves the invoice for payment. If there are discrepancies, the team addresses them before proceeding. To do this, they contact the vendor for discrepancies and ask for rectification. Once the vendor shares an updated invoice, it is processed for 2-way, 3-way, or 5-way matching again.

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 steps work:

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 through 2-way, 3-way, or 5-way invoice matching as per suited requirements.

6. Payment Processing: The finance team processes payment within the agreed terms, completing the transaction.

Best Practices in Procure to Pay or P2P Cycle

It is evident that procure to pay process is an essential part of operations for businesses around the world. However, this process has long lacked efficiency, absolute accuracy, and maximized productivity due to heavy manual dependence on different teams. Here is where procurement teams can improve significantly ensure to address such procure to payment challenges and realize their maximum potential:

Standardized PR Process: A structured and documented processes for employees to submit their PR requests, including all relevant details like budget, items required, and viable reason for the same.

Vendor Sourcing: Sourcing and selecting right vendors can have a significant impact on a business’s overall budget. Hence, setting up a strategic vendor sourcing process can help with cost optimization.

Increased Visibility: Improving visibility into the entire procure to pay process flow is also essential as it helps both suppliers and vendors track the status of various purchases and make informed decisions at various steps.

Maintaining Vendor Relationships: When a company sources a vendor that is ideal as per all their requirements, they should do everything to maintain a strong relationship with this vendor. This includes streamlining the payment cycle to facilitate early payments, or at least on-time payments along with other things.

Access to Information: Access to crucial information at all times is quite necessary these days. The entire procure to pay process involves important documents like PO and invoices. This makes it essential for companies to consider developing a portal that integrates their P2P cycle with their ERP systems so all concerned stakeholders have access to P2P information at all times.

Leveraging Automated Systems: As mentioned earlier, procure to pay cycle has long been ridden with manual dependency. Businesses should now start adapting automation at various stages of procure to pay process to lower dependency on teams, eliminate manual errors, and streamline the entire procure to pay process flow.

How Does Automation Transform the Procure to Pay Flow?

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 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 P2P automation solutions extend this to include e-invoices and e-way bills, ensuring compliance with GST regulations as well. 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 P2P 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 flow—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 capturing of such opportunities at the right time. By reducing processing costs and maximizing savings, automation boosts profitability over time.

Read more about Accounts Payable automation here.

Conclusion

The procure to pay cycle 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, supplier invoices, 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.