It seems that we often live in two worlds, at home and at work. There is the world of ‘what should be’ and then there is the world of ‘what is’.
Purchase Orders are a very good case in point. So, I will tell you a story of one of my first encounters with this issue. When I took the position of Controller at a very large, successful privately owned company they were using a very strict P.O. policy. There had to be a Purchase Order for everything. It wasn’t long before I observed accounts payable bills like Utility bills (from the power company and the phone company) with P.O.’s attached. What sense does that make? When you see this, you can be sure that no common sense logic is being applied. This is a terrible waste of an employee’s time. Then there are the a/p expenses incurred where someone who should have gotten a P.O. did not. The invoice does not reference a P.O. The processing employee then writes up a P.O. and attaches it. What have we accomplished here?
The whole purpose of Purchase Orders can be summed up in the need to be sure there is appropriate authorization for certain types of expenses and secondly, it helps prevent duplicate payments. Purchase Orders are an integral part of Internal Control.
All of us, the controllers of the world, probably have some differing ideas about the best approach. I agree that there is not a ‘one size fits all’ solution. But here are some of my recommendations:
- All purchases for Inventory must have a P.O. number on the supplier invoice.
- All purchases for Capital Expenditures must have a P.O. number on the vendor invoice.
- All purchases for expenses over ($XXX.XX) must have a P.O. number. You could devise a number for office supplies as a limit that is different from plant supplies as a limit.
- Recurring expenses such as lease payments, utilities, salaries, contract labor, should not require a P.O.
- Contracts that cover accounting fees, legal fees, consulting fees should not have a P.O.
It’s a simple policy and one that might cover a high percentage of spending in your organization. In the case of No. 1, the P.O. should disclose the terms, quantity, price, shipping costs, etc. Then that P.O. must be referred back to when the invoice is received to be sure you are being billed on the correct basis.
In the case of No. 2 – there should be no exception to this rule (or almost none). These are purchases that are almost always planned and pre-approved.
I firmly believe that Controllers should not value form over substance. Just writing a p.o. because the policy says you should no matter what ……………… that is ‘form over substance’. Maybe this is a great time to ‘audit’ your Purchase Order policy. See how that policy is being complied with. You might be surprised.