Purchase requisitions and purchase orders (“POs”) are both key documents in an efficient procurement process for any business. They allow teams to plan purchases adequately, plan budgets, and provide proof of spending in case of financial audits.
Yet many business owners are unfamiliar with each document and their specific roles within the purchasing process. As a result, people either misuse these documents or don’t use them at all.
Let’s break down the basics of the procurement process by exploring the difference between purchase requisitions and purchase orders.
What is a purchase requisition?
A purchase requisition is a document that an employee within your organization creates to request a purchase of goods or services.
When you fill out a purchase requisition, you are not yet purchasing anything. You are merely beginning the process of a purchase by asking for internal permission.
This document is used when an employee in your organization makes an order request if a need arises for certain goods or services.
The employee’s manager – or anyone in charge of purchases at your company – is notified that the employee has made an order request once they receive the requisition.
Purchase requisitions outline the details required before completing a purchase, should it be approved, such as:
- Product description and quantity
- Name of vendor
- Name and department of purchaser
Purchase requisitions rarely (if ever) leave your organization. Employees use these internal documents to obtain permission. As such, they are not a legally binding document.
Not all companies use purchase requisitions in their procurement process. In other cases, some companies require a purchase requisition for purchases going over a set dollar amount.
Additionally, the accounting department uses this document to plan for future spending. It’s much easier to avoid costly mistakes if you check the budget prior to approving a purchase.
Why do you need purchase requisitions?
Purchase requisitions detail out all the details of an order that your organization needs to make. So why not just skip the purchase requisition and go straight to the purchase order?
- They help establish a clear procurement process. By rerouting permission to purchase to a common manager using purchase requisition forms, you can streamline your organization’s pipeline. The process is much easier to manage and formalize when there are clear rules for who can purchase what, and when.
- They help detect and prevent fraud in your organization. The more steps involved in the procurement process, the more likely someone will sniff out a fraudulent purchase if it does happen.
- They give Finance more direct control over purchasing. If someone from outside of the department needs to purchase something, they can fill out a purchase requisition and submit it to the head of purchases. This way, the same department oversees every purchase your organization makes.
How does a purchase requisition work?
Purchase requisitions are first filled out by an employee who sees the need for a product or a service. The employee fills in all the details, including the price, suggested vendor, and the specifics of the goods or services. The document is then sent to the purchasing department for approval.
Let’s say you are running a manufacturing company. You have a team of mechanics who do routine inspects and fixes on your drills, saws, and other machinery. If one of your mechanics finds out about a new type of equipment that would make their lives easier for routine checkups – equipment that your company has never purchased before – they could fill out a purchase requisition without needing to ask for permission first.
The mechanic files the completed form to the purchasing department. They take care of approving or denying the request for new equipment. Because the equipment is high-end, the head of purchases would check in with the finance department first to make sure this is a feasible demand.
What is a purchase order?
Also known as a PO, the purchase order is a document outlining the details of an actual purchase.
The purchasing department creates the purchase order once a purchase requisition has been approved. If an organization does not use purchase requisitions, other employees may fill in purchase orders for approval as well.
Unlike a purchase requisition, the purchase order is an external document. Purchasing sends it to the vendor as a set of instructions for how to fulfill your order and process your payment.
Note that POs are not the same as invoices — they are not a prompt for payment.
And once a purchase order form has been finalized and approved by the buyer and vendor, it becomes a legally binding document.
POs include everything the vendor needs to know to fulfill the order and everything your company needs to document the purchase:
- Name of your company
- Name of the employee making the order
- Date of PO creation
- Quantity and price of goods
- Payment terms
- Signature of all involved parties
How do purchase orders work?
Your organization creates purchase orders only when it wants to go ahead and officially purchase goods or services. When it has an approved purchase requisition, the purchasing department can create a PO from the information in the requisition. If the PO exceeds a set dollar amount, most companies demand approval of the VP before finalizing the document to send over to the vendor.
Let’s go back to our manufacturing company. Management decides to approve the mechanic’s purchase requisition for new high-end equipment.
From there, an employee from the purchasing department would fill in a PO. However, because the equipment will cost over $10,000, a VP must approve the PO before the purchase can be made.
The VP takes a look at the PO, approves it, and sends it back to the purchasing department, who takes care of sending the PO to the vendor and to their own accounting department.
Once the vendor receives and signs the document, the PO becomes legally binding. Now everyone – the mechanic, the purchasing department, the VP, the accounting department, the vendor – is in the loop and has read the same terms and conditions for a purchase.
So once the company receives their new equipment on a specific date, they’ll be expecting it.
What is the difference between a purchase requisition and purchase order?
Let’s quickly go over how each document differs:
|What is it?
|Request for a purchase
|Confirmation of an order
|Who creates it?
|Purchasing department or head of a department
|When is it sent?
|When an employee sees a demand for goods or services
|When an order needs to be placed for goods and/or services
|Who receives it?
|Head of department and/or purchasing department
|What info does it contain?
|– Date requisition is created
– Requisition number
– Name of employee making requisition
– Description of items needed
– Number of items and price– Suggested vendor information
|– Date PO is created
– PO number
– Name of buyer
– Description of items or service being purchased
– Number of items and price
– Payment terms
– Billing and shipping addresses
– Delivery date
The role of purchase requisitions and purchase orders in an efficient process
Whether you are a vendor or purchaser, your company can benefit from making your procurement process more efficient for all parties involved.
Without set rules and processes in place, employees waste lots of time running after lost information or fixing mistakes caused by misplaced paperwork.
Think of it this way – you need to spend your resources in the right place if you want to stand out and grow your business. Today, business process automation tools are readily available to give employees a head start even when they aren’t programmers.
By staying behind and constantly running around like a headless chicken to stay on top of who purchased what and when, you’re wasting a ton of resources. In the meantime, others will catch up to you.
Let’s bring back the manufacturing company as an example. If you’re using old school procurement processes, all of the resources you waste on procurement are resources you’re taking away from creating a positive client experience. Nowadays, there are plenty of modern manufacturing companies that your client can go to if you can’t give them the quality of service they know they can get elsewhere.
Here’s how this relates to another type of process – Netflix is changing the way people consume media content. Now, more and more networks are offering similar streaming services to remain relevant.
The same goes for automation.
Streamline your procurement process
It’s hard to run a business. Challenges will crop up everyday from an unsatisfied customer to an unexpected expense. Instead of chasing paperwork, you want employees to focus on customers and strategic matters.
Wrapping it Up
From mid-sized companies to giant enterprises, so many businesses need to use purchase requisition forms and PO forms to their advantage to save resources, plan their finances more efficiently, and even protect themselves in cases of financial audits.
Without purchase requisitions and their accompanying POs, it can become a free-for-all in your procurement process – the costs of such mistakes can range from annoyances to major catastrophes.
Does your company have efficient forms in place for its procurement process?