In procurement, there are terms that are similar yet different enough to cause confusion. A common source of confusion is the difference between a purchase requisition and a purchase order. Understanding the difference between these two important documents is essential to a smooth workflow within your business.
What is a Purchase Requisition?
A purchase requisition is a formal document that is used when an employee needs to purchase or order something on behalf of their organization. This document informs the department managers or purchasing staff of the decision so the purchasing department can start the process of purchasing the requested products or services. The finance department will also use the purchase requisition to coordinate reporting with the accounting department.
How a Purchase Requisition is Different from a Purchase Order
Purchase orders (POs), on the other hand, are issued once a purchase requisition has been approved. The PO serves as the legally binding document that’s sent to the supplier with a request for goods or services.
When a purchasing need arises, the person or department who needs it will create a purchase requisition and send it to the appropriate team for approval. Once approved, that requisition can be converted to a PO.
Why Your Organization Must Use Purchase Requisitions in Your Procurement Process
In any company, there’s always a business need for something, be it basic office supplies or consumables, equipment, raw materials, or services.
If department managers are allowed to place orders directly with suppliers, there’s an increased chance of fraud. To prevent this issue, many companies operate with a procurement department that is in charge of finding and vetting suppliers and overseeing the entire ordering process, from purchase requisition to order, to receipt of goods, then handing everything off to accounts payable for invoice payment. The procurement department creates a workflow to ensure fraud prevention, which saves the company money in the long run and keeps procurement adding value to the company.
The purchase requisition form is an internal document. With this document, procurement doesn’t order goods directly from vendors but instead initiates a formal process. The requisition comes from the department where the goods or services will be used, then goes through an approval process – based on need, available budget, and so on. That process is what provides the company internal control over the purchasing process. If the approval process is followed correctly and the purchase requisition is approved, the process continues by converting the requisition to an official purchase order that’s sent to the vendor. If it’s denied for any reason, the requisition doesn’t become an official order, and no money changes hands.
For instance, the IT department may be interested in buying new server equipment to improve security and make their jobs a bit easier. Either the head of the IT department or the designated purchasing staff member will use the purchase requisition form to make a formal request for the servers. Then, it will be sent to the necessary staff for approval. When approved, procurement will place an order with the server vendor.
The same applies when basic materials are running low. A department manager will fill out a purchase requisition to indicate which materials are needed and in what quantity. They may even suggest the vendor where the materials should be purchased. It will be sent to the purchasing department, who will then go through the request and approve it, alter it, or deny it. If the request is altered or denied, they must supply reasoning as to why this decision was reached. If approved, the department is given the go ahead to create a purchase order and formally request the items from the vendor.
Purchase Requisitions Start the Purchasing Process
Departments throughout an organization will need things from time to time, and this document will start the process. The purchasing team will act on the strength of the document to make their decisions. If any issues arise, the document serves as evidence of communication.
Paper Trails Keep Everyone Accountable
Without a proper checks and balances system in place, any staff member has the potential to engage in fraud – ordering things on the company dime for personal use. The formal purchasing process stops this from happening and ensures both accuracy and need. Department managers will look at it before sending it to the procurement department to formalize the order with the vendor.
This is important for auditing purposes because you can see who requests what, who approves what, and when, to make sure there are no issues with overstock or unnecessary items. Documents can always be referenced to determine the facts if an issue ever arises.
The Business is Protected
By using purchase requisitions, there is less potential from fraud. There is not likely to be a situation where staff members work with vendors to steal from the business. Company assets are also protected because the requisition is proof that assets were ordered. The document can be followed up on to ensure the delivery was made. Using a purchase requisition makes it easier to trace assets if a problem ever occurs.
By taking the time to centralize your procurement system and requiring all employees to use formal requisition documents to request the things they need, the workflow becomes more efficient and is easier to manage effectively. Buyers also benefit because they can bundle purchases together and leverage more favorable terms with vendors.
PLANERGY makes it easier for anyone on your team to create a requisition and send it through approval. Once approved, the requisition converts to a PO and given a purchase order number that’s linked to the original purchase request, which is then easily transferred to an invoice for payment. All the documents are linked so you can see an item’s progression through the workflow, and the audit trail shows who took what actions and when.
Though a purchase requisition may seem like “just a document” it has an important place in an organization’s procurement process. It serves as a control tool, helps with fraud prevention, and ensures all purchases are authorized.