Why purchase orders are important: 5 key benefits of using POs

Why are purchase orders (POs) so critical to the health of your business?

It seems like a simple question, but in an age of digital transactions, it’s easy to overlook the impact these often-overlooked documents can have. The answer lies in their ability to bring control, clarity, and accountability to how your organization spends money. But that’s just scratching the surface. Here are five reasons POs are essential for maintaining financial discipline, optimizing spending, and ultimately driving profitability.

Let’s start by explaining what POs are all about.

What’s a purchase order and why is it important?

Purchase orders list all the relevant details about a purchase, like who is requesting the purchase, what goods and services they want to buy, and which supplier they’re using. Organizations use them to: 

• Authorize expenditures by providing approvers with the information they need to review and approve the purchase.
• Confirm order details with vendors so everyone agrees on the goods & services, quantities, costs, and payment terms.
• Establish an audit trail by recording purchases to track spending and ensure accountability.
• Track order status by following the purchase from requisition to delivery for visibility and control.
• Facilitate invoice verification by providing the information to match invoices to POs and receiving reports, ensuring correct payments.

While these functions may seem straightforward, POs have a big impact on your company’s financial health. Here’s why you shouldn’t underestimate the importance of their benefits.

The benefits of using purchase orders

Purchase orders provide the necessary information to help your company buy the goods or services it needs. They also facilitate communication and collaboration between buyers and sellers and establish the terms and conditions of doing business. Purchase orders are important because they:

• Keep employees from going over budget.
• Track and manage what your company spends.
• Tell suppliers exactly what you want to buy.
• Help detect (and prevent) fraud.
• Ensure accurate three-way invoice matching.

Let’s break these out.

Keep employees from going over budget

You trust your employees to spend the company’s money like it was their own. Unfortunately, the reality can be different — they can blow through a budget in less time than it takes to say “fiduciary duty.” For finance leaders, this can lead to headaches like emergency budget reallocations or missed financial targets.

Let’s look at how POs can help.

Employee spending without POs is a mess

A sales and marketing team (why is it always Sales and Marketing?) is given a budget of $100,000 for their annual offsite. It’s been a good year, so Emily, the event planner, verbally books a week at a 5-star resort in St. Bart’s to reward the team — to the tune of $200,000. By the time the invoice arrives, the team has already booked their travel. This led to an uncomfortable meeting between Mason, the VP of Sales, and Kenneth, the CFO, who had to scramble to reallocate funds from a critical software update to cover the cost of the trip, potentially impacting the company’s growth.

Employee spending with POs is nice and tidy

Emily finds the same resort and submits a purchase order for $200,000 to her VP, Mason. The PO system automatically notifies the VP that the request is over budget. Mason proactively asks Kenneth (the CFO) to approve a budget increase. Because it has been a good year, Kenneth determines there’s room in the budget for the trip and improves the increase.

Requiring a PO before any spending commitment is made sets and enforces clear spending limits. This prevents nasty surprises and empowers leaders to make proactive and informed spending decisions.

Track and manage what your company spends

It’s a no-brainer that you need to watch your company’s expenditures. It helps you maintain financial control, manage liquidity, and make informed decisions. But without a reliable way to accurately record and track expenses, you’re flying blind — and that’s not exactly a recipe for success when managing your company’s finances.

Let’s see how POs can bring clarity to spend management.

It’s hard to manage spending without POs

Ashley, the CFO of a growing mid-sized tech company, faces a major hurdle during the company’s first audit. When Sam, the auditor, requests more details on a major server purchase, the company’s lack of a purchase order system makes it a struggle to locate the information. 

Despite managing to provide most of the data after a frantic search through emails and paper files, Ashley’s team overlooks an expensive recurring maintenance contract tied to the server purchase. The auditor catches the mistake and requires a complete review of the company’s expense policy and approval processes, creating a significant disruption to their operations — and a big headache for Ashley.

POs make it easy to track and manage spending

Learning from this experience, Ashley decides to make a change. She implements a policy requiring POs for all major purchases. During the next audit, Sam again requests information about a cloud computing subscription. This time, Ashley’s team quickly pulls up the corresponding PO. It clearly outlines the vendor, service description, price, and approval record, showing the purchase was legitimate and within budget. With a complete audit trail readily available, Sam says they are satisfied with the company’s improved financial controls — giving Ashley and her team well-deserved peace of mind.

POs record every transaction, providing a clear and concise audit trail. By using POs for all major purchases, Ashley’s company transformed its audit experience, improved its financial management, and reduced its risk.

Tell suppliers exactly what you want to buy

It’s easy for details to get lost in translation during purchases, especially when communicating with vendors. Misunderstandings about product specs, delivery dates, pricing, or payment terms can lead to expensive mistakes and delayed shipments. 

Here’s how POs ensure clear communication with suppliers.

Without POs, how do you know what you’re buying?

Bob, the operations manager for a general contractor, calls a supplier to order 100 gallons of Aegean Blue paint for Camille’s, a new clothing boutique. They discuss the details verbally, and the supplier ships the paint to the job site. 

Unfortunately, when the delivery arrives, there is a problem. To Bob’s dismay, the supplier delivers 100 gallons of Bubble Gum Pink paint instead of Aegean Blue. It is an expensive mistake. Bob has to pay the painting crew to stay on the job site while he works with the supplier to get the right paint. Fortunately, he can source the paint and finish the project without jeopardizing the store’s opening date, barely.

With POs, you know what you’re buying

After a few more near-disasters, Bob’s company implements POs for project work. For the next project, another painting job, the customer wants Kerry Pasture Green paint. Bob discusses the customer’s needs with the paint supplier and then sends a PO specifying 50 gallons of Kerry Green Paint — the exact shade and quantity required. The supplier delivers the correct paint, and the project goes off without a hitch.

POs are like a detailed instruction manual for vendors. They provide clarity and ensure you receive exactly what you ordered when you need it.

Help detect (and prevent) fraud 

According to the Association of Certified Fraud Examiners, occupational fraud (like employees creating fake invoices) costs businesses 5% of their revenue yearly. More than half of all occupational fraud is due to a lack of internal controls or an override of existing controls. In other words, if you aren’t tracking and controlling expenditures, you’re leaving the door open to getting robbed.

How can POs act as a control to prevent fraud and errors? Let’s have a look.

Fraud happens without POs

Zach is a procurement manager at a midsized food services company. He has also been stealing from his employer for over a year. Zach’s company doesn’t use purchase orders to track and record expenditures, a vulnerability he exploits by creating and sending invoices from fake companies like “Sketchy Strategies LLC.”. Working with an accomplice in the AP department, Zach has scammed over $20,000 from his unwitting employer.

How POs prevent fraud

Zach eventually leaves his old employer and moves on to a new company, where he tries to continue his schemes. Unfortunately for him, his new employer uses POs to track purchases. Zach attempts to create a PO for “Fake Plants Inc,” a false company, but the PO system detects the unknown company name and flags the PO for investigation. The company’s controller investigates, discovers the fraud, and tracks it back to Zach. Zach is dismissed from the company, and, after his old employer gets wind of his action, faces criminal charges.

POs are powerful weapons against fraud. By requiring authorization, they prevent duplicate or fake vendors or invoices, false purchases, and rogue spending. And as we’ll see in the next section, they also add a second layer of security through invoice verification.

Ensure accurate 3-way invoice matching

Three-way matching is the most effective way to verify invoices against POs and shipping receipts. It helps reduce errors and detect fraud, ensuring you pay for what you ordered and received. Verifying invoices without POs is a laborious process of searching emails and files for relevant information.

Let’s look at how the matching works with and without POs.

Invoice matching is really hard without POs

Jacqueline is the AP manager at Maker Market, a craft supplies manufacturer. Traditionally, the company has operated without POs, trusting in established relationships with their long-time suppliers to ensure order accuracy. However, as Maker Market has grown, they’ve added new suppliers, which has caused some issues. A few suppliers have sent invoices with incorrect quantity and pricing information. Not noticing the errors, the company has paid these suppliers.

Jacqueline sets up a three-way matching process, but it’s ineffective. Without POs, she has to manually search for the order and shipment information to confirm the invoice details. It’s a slow process, and she doesn’t have time to verify every invoice. As a result, Maker Market is losing money and doesn’t know how much.

POs make invoice matching easier

After missing an invoice error that costs the company $25,000, Maker Market implements a PO policy for purchases. Now, when Jacqueline wants to verify an invoice, she simply pulls the PO and shipping information and compares the details. When she finds a discrepancy, she addresses it with the supplier. Also, the more efficient matching process reduces the time to verify an invoice by 50%, meaning Jacqueline can verify more invoices. As a result, Maker Market has significantly reduced overpayments to suppliers.

With purchase orders in place, companies can accurately match invoice and shipping details, reducing errors and preventing fraud. 

Case study: Superior Masonry builds a solid foundation with Stampli Cognitive AI™ PO Matching

Construction is notorious for its reliance on paper-based processes — and the nightmares those cause for contractors. Superior Masonry was no exception. Buried under heaps of paper invoices and POs, they were struggling to stay ahead of job costs, a task vital to survival in the tough construction industry. They needed a solution to eliminate their dependency on paper and improve their invoice processing and matching workflows.

Superior chose Stampli to automate their accounts payable functions. They implemented Stampli’s core platform to automate invoice processing, along with Stampli’s evolutionary Cognitive AI PO Matching solution to automate three-way matching. Cognitive AI goes beyond automated PO matching. It understands nuance and context and can interpret PO and invoice details to make accurate, human-level matching decisions.

The improvement was dramatic — a 93% reduction in invoice processing time. But the real story was how Cognitive AI transformed their AP processes. Billy the Bot, Stampli’s AI, learned Superior’s processes and, within a week, recognized vendor names and invoice details. With a 90-100% accuracy rate for matching POs to invoices, Cognitive AI helped Superior detect and eliminate $10,000 per month in previously undetected vendor overcharges.

The transformation meant Superior could get on top of their spending and ahead of their job costing. Superior’s CFO, Matt Andersen, explains:

“I just did a recap/touch base conversation with the team at Stampli after about a month into the new Cognitive AI pilot program (the Pilot Program). 

The results……incredible! There is not enough room on LinkedIn for me to explain how impactful Stampli has been to the Finance team at Superior Masonry.

The most notable impact…..Stampli has saved us 30-35 hours a week in productivity gain which has allowed our team to focus on strategy, growth, and moving our Company forward. This is worth 10X the investment we have made in this software!!!

Also, it has opened our eyes to what is possible with AI.”

See what’s possible with Stampli. Contact one of our experts to discuss how Cognitive AI can transform your P2P processes.