What Is Purchase-to-Pay (P2P)?
Purchase-to-pay is an integrated system that fully automates the goods and services purchasing process for a business.
The system earned its name because it handles all aspects of acquisition from the purchase of goods to the payment of the vendor. The key benefits to purchase-to-pay are efficiency, cost savings, and increased financial and procurement visibility.
Key Takeaways
- Purchase-to-pay is a complete purchase system for businesses from the purchase of goods to vendor payment.
- Purchase-to-pay is also called P2P, procure-to-pay, eProcurement, or req-to-cheque.
- The purchase-to-pay process is automated, saves costs, and reduces risk.
- Purchase-to-pay is not designed to speed up vendor payment because this is not in the interests of companies that want to hold on to their cash for as long as possible.
- Purchase-to-pay systems are designed to improve efficiency and financial controls.
Understanding Purchase-to-Pay (P2P)
The purchase-to-pay system begins with requisitioning, proceeds to procurement, and ends with payment. Requisitioning is the process of formally requesting a service, item, or product with a purchase request form. Procurement happens when the goods or services are received. The system ends when payment is made.
Purchase-to-pay seeks to optimize the purchasing process, thereby benefiting the organization through better financial controls and efficiency. This streamlined, integrated system saves costs and reduces risk.
A typical purchase-to-pay system includes five steps and requirements for completion:
- Catalogs: Catalogs from preferred suppliers are the first requirement in a purchase-to-pay system.
- Purchase requisitions: Once a product has been selected from a catalog, the buyer sends a purchase requisition to the appropriate manager.
- Purchase order workflow: A purchase order is generated once the purchase requisition is approved by the manager.
- Invoicing: This is a critical component of a purchase-to-pay system since manual processing of invoices is a hugely laborious and time-consuming process. Automated invoice processing saves time and money and includes a reconciliation feature that matches purchase orders to invoices.
- Payment: Once an invoice is approved for payment, a file is generated in the company’s accounts payable system. The approved invoice results in payment to the supplier by the end of the period for which the supplier has extended credit.
Purchase-to-pay systems are not intended to speed up the payment process. While this would be a laudable objective, the reality is that it would not be a priority for most companies because paying bills faster would affect the timing of their own cash flows. Rather, the goal of a purchase-to-pay system is to improve efficiency and financial controls since finance departments have timely purchasing data at their fingertips.
Purchase-to-pay systems are automated processes that reduce labor costs and increase accuracy.
Best practices for purchase-to-pay systems include solid technology that uses a single point of contact, such as a supplier portal, reduced complexity in catalogs and buying channels, and support from top management. It can provide key data on how much is being spent, what products or services are being received, and delivery times.
Advantages and Disadvantages of Purchase-to-Pay
Advantages
Advantages of the purchase-to-pay system include improved efficiency, as the automated process can trim the time and effort of managing procurement, which can reduce administrative costs.
Other advantages include:
- Better financial controls, as finance departments have access to timely purchasing data
- Transparency and control, as purchase-to-pay can help ensure compliance with internal policies and external regulations
- Cost savings, as catalogs can provide better spending visibility, thus helping procurement teams identify cost-saving areas
Disadvantages
One disadvantage of purchase-to-pay is its limited scope. This is because the system is designed mostly to facilitate transactions; thus, it may not be able to address strategic sourcing needs such as long-term vendor evaluation or risk mitigation.
Other disadvantages or challenges include if there is a lack of data and transparency; redundant tasks; inefficient or uninformed communications and decisions; and risk of fraud and noncompliance. Any of these can affect extraneous costs and, ultimately, the company’s bottom line.
What Are the 3 Steps of the Purchase-to-Pay System?
The three steps of the purchase-to-pay system, in order, are:
- Requisitioning, or the process of formally requesting a service, item, or product with a purchase request form
- Procurement, which happens when the goods or services are received
- Payment, which concludes the process
What Does a Purchase-to-Pay System Require for Completion?
For completion, a typical purchase-to-pay system requires:
- Catalogs from preferred suppliers
- A purchase requisition from the buyer to the appropriate manager
- A purchase order, after the purchase requisition is approved by the manager
- Automated invoicing, which saves time and money over manual invoicing and includes a reconciliation feature that matches purchase orders to invoices
- Payment, which appears as an approved invoice in the business’s accounts payable system
Does Purchase-to-Pay Speed Up the Payment Process?
No. Purchase-to-pay aims only to improve efficiency and financial controls.
The Bottom Line
The purchase-to-pay system fully automates a business’s goods and services purchasing process. The integrated process saves costs and reduces risk.
