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Ever wondered how businesses handle their shopping and payments? This is where procure-to-pay steps in. Imagine it as a streamlined shopping journey, but for businesses. It's a step-by-step roadmap that companies follow when they want to purchase things–from getting the green light, to buying something, to paying vendors for it.

In this article, we'll explore how procure-to-pay works and why it's crucial for businesses. We'll break down its stages and show how it keeps businesses efficient, saves money, and helps to make smart buying decisions. Let’s dive in and make sense of this essential behind-the-scenes process.

Overview of procure-to-pay

Procure-to-pay is a process that covers all the steps involved in purchasing goods and services and making payments for them.

The complete workflow involves the process of ordering, receipts, payment, and accounting of goods and services. It's a process, not a technology, though there is software designed to handle the entire procure-to-pay process.

Procure-to-pay is also known as purchase-to-pay and is often abbreviated as P2P. It shouldn't be confused with peer-to-peer, however, which is also called P2P and refers to a networking technology that allows two or more computer systems to connect and share files without separate servers. For the purposes of this article, P2P refers to procure-to-pay.

Stages of procure-to-pay process

P2P has 2 stages:

  • Source-to-pay process, known as S2P
  • Procurement process

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Source-to-pay process

Generally, this gets confused with P2P and S2P. Sourcing is a key function within procurement, as it makes sure the procurement team finds quality suppliers and S2P manages contracts with suppliers. These steps include the following:

  • Identifying the need: The process starts by identifying the business need. This is typically done with the help of multiple stakeholders. Once the requirements are identified, the procurement team outlines broad specifications for goods and creates a set of Terms of Reference (TOR) for services.
  • Create a requisition and select a supplier: After finalizing the specifications/TOR, a purchase requisition (PR) form is created that identifies a product, service, and vendor. This marks the beginning of the finance team's evaluation process, wherein they select the most suitable vendor, and explore potential cost discounts.
  • Requisition approval: Submitted purchase requisitions (PRs) are then reviewed by the department head. The approver holds the authority to either give approval or reject a PR after checking the budget availability and validating the details provided in the purchase requisition form.

Procurement process

  • Create purchase order/spot buy: Once the PR is reviewed and the contract with the vendor is finalized, the finance team issues a Purchase order (PO) for goods and services. If the requested goods and services have characteristics such as one-time unique purchases and low-value commodities, then a spot buy can be performed.
  • Purchase order approval: Purchase orders are now sent through an approval chain. Once approved, purchase orders are sent to vendors. Upon the vendor's confirmation of the purchase order, a legally binding contract is activated. 
  • Good receipt: At the following stage, the vendor delivers the specified goods and services, which are then inspected by the buyer to guarantee compliance with the contract terms. The acceptance or rejection of the receipt of the goods adheres to the criteria specified in the purchasing contract. Then, a ‌receipt is sent to the accounts payable team.
  • Invoice submission and approval: Accounts payable team approved the invoices by different ways of invoice matching, such as two-way matching, which checks the vendor's invoice against the details of the purchase order, or three-way matching, which compares the details of the purchase order, the invoice, and the good receipt to make sure they all match before the vendor payment is made.
  • Vendor payment: Upon receiving an approved invoice, the finance team will process the payments according to the contract terms. A payment made to a vendor will fall into one of the following five types: advance, partial, installment, final, and holdback/retention payments.

Example of procure-to-pay

Imagine needing a new set of kitchen essentials from Amazon. You’d go from identifying the need, making a budget, making a list of essentials to order from Amazon, to finally making the payment after receiving the goods from an agent. In the same way, companies have their way of getting the tools they need for their businesses.

  • Suppose a battery manufacturing supervisor wants more lithium for the manufacturing unit due to an unexpected growth in demand.
  • First, the manufacturing supervisor submits a request for additional lithium to the purchasing department and awaits the delivery of the products.
  • The procurement team approves the request and proceeds to assess the prevailing prices of lithium offered by various suppliers.
  • Identifying the best value, they generate a purchase order, sending it to the finance team for processing.
  • Upon approval from the finance team, the purchase order is transmitted to the supplier.
  • The assigned team at the plant receives and inspects the goods, signing off on the receipt.
  • The supplier sends the invoice to the accounts payable team for validation, providing alignment with the receipt and purchase order.
  • Following invoice approval, payment is disbursed to the supplier.

Procure-to-pay vs. accounts payable: unraveling the variances

Procure-to-pay

P2P covers the entire procurement process, from the initial requisitioning of goods and services to the final payment to suppliers.

Key functions:

  • Requisitioning and approval of goods or services.
  • Creating and managing purchase orders.
  • Receiving and inspecting goods and services.
  • Matching purchase orders, goods receipts, and supplier invoices.
  • Approving invoices for payment.
  • Authorizing and making payments.

Accounts payable (AP)

AP specifically pertains to the payment side of the financial process. It involves managing and recording financial obligations to suppliers. In other words, AP primarily deals with the post-procurement phase, focusing on the processing and payment of invoices.


Key functions:

  • Receiving and validating supplier invoices.
  • Obtaining necessary approvals for payment.
  • Recording the liabilities in the financial system.
  • Making bills to suppliers.

Advantages of the procure-to-pay process

The P2P process offers numerous benefits to organizations, contributing to efficiency, cost savings, and improved control over procurement activities. The flexibility of this process ensures that it can be applied in a wide range of business settings. Here are some key benefits of implementing a P2P system: 

Strengthen supplier relationships: By using the supplier portal, suppliers can access information regarding their payment timelines, which offers visibility of the invoice's status, enabling better decision-making on their end.

Fraud prevention: While having great relationships is helpful, it may also create opportunities for fraudulent activities. Implementing a P2P system that includes strict invoice matching and multiple review checkpoints acts as a safeguard against potential fraud.

Improved visibility: Internal control and visibility over the end-to-end P2P cycle gives organizations full insight into cash flow and financial commitments. When all transactions are captured, it becomes easier to track. Additionally, the data can reveal optimization opportunities.

Cost efficiency: Transitioning to a paperless not only decreases time and cost to 80% but also empowers companies to allocate their employees toward strategic initiatives instead of repetitive tasks that are more efficiently handled through automation.

Streamlining procurement operations: Using procurement software establishes seamless connectivity across an organization, speeding up requisition requests and approvals, enabling data-driven supplier selection, and electronically generating and dispatching purchase orders to suppliers. The electronic traceability and simple monitoring make this process more efficient.

Procure-to-pay process challenges

Procurement leaders manage an array of responsibilities, overseeing needs assessment, vendor management, and payments. Their role is dynamic and fast-paced, presenting constant challenges and complexities.

Maverick buyers: Poor contract management and unauthorized purchases make goods and services more expensive. Prices are generally high when made at low volumes or purchased during peak demand.

Effective budget management and expenditure control: Lacking proper tools for procurement expenditure visibility, departments can overspend without adequate tracking. This absence of comprehensive spending records leads to limited data transparency, impacting decision-making and causing expenditure inefficiencies.

Interdepartmental conflicts: Efficient P2P operations require close collaboration between procurement and accounts payable teams. Yet, when one team lacks visibility into the other's actions, internal conflicts can arise. These conflicts may further strain supplier relationships.

Slow approvals: Manual and repetitive tasks within the P2P process are always prone to errors and slow down a workflow. This leads to delays in payments.

Cash discount losses: Early payment programs offer to negotiate discounts with suppliers that also support the organization's supply chain. However, delays in bills can harm the relationships with suppliers.

Failure to adopt technology: Managing the procurement process manually may appear simple at first, but it becomes more complex gradually. Many companies might not realize the potential for increased efficiency and cost savings when using partially manual P2P systems that lack automation capabilities.

Role of automation in procure-to-pay in solving the challenges

Many companies are harnessing technology to automate various aspects of the P2P process, particularly invoicing. P2P solutions are crafted to streamline the entire end-to-end process.

Cloud-based P2P software solutions such as SAP Ariba, Coupa, and Precoro, with their analytics and process mining capabilities, can improve compliance and control. They also help provide deeper insights into global spending. The following are a few ways that software can improve the process:

Cost-saving and streamlined process: Automate the transmission of purchase orders, validate payments swiftly, and make timely payments to speed up invoice processing. Moreover, combining all data onto a unified platform enables effortless expense management and leads to increased savings.

Track KPIs: The following KPIs are used to evaluate the P2P process:

  • Average cost and time taken to complete a purchase order
  • The average cost to process an invoice
  • Time it takes to approve an invoice, on average
  • Outstanding days payable
  • Saving realized
  • Management of spending 

Speed up invoicing: P2P automation gives us the power to auto-create and deliver purchase orders for approved requisition requests. With 3-way matching functionality, an automation tool verifies and processes invoices faster with less scope of error. 

Unlock valuable insights: P2P automation empowers us to automatically generate and dispatch purchase orders for approved requisition requests. Leveraging the 3-way matching feature, this automation tool accelerates invoice verification and processing, minimizing the potential for errors.

Wrapping up the procure-to-pay journey

The P2P process plays a pivotal role in managing business purchases and payments. While it offers significant benefits like efficiency and cost savings, challenges such as budget control and slow approvals exist. 

Implementing automation technologies can overcome these obstacles, simplifying processes and revealing valuable information for more intelligent decision-making. In the end, utilizing P2P automation offers more efficient operations for companies.

Get more spend under control with Ramp

With Ramp’s procurement software, you can effortlessly track expenses, enforce compliance terms by uploading your expense policy, streamline vendor management, and take control of spending. 

Plus, you can establish employee expense permissions and barriers to guarantee your financial parameters are always met. Don't miss out on optimizing your procure-to-pay process with Ramp.

Try Ramp for free.
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P2P Analyst
An experienced P2P Analyst with over six years of experience, my expertise lies in the nuanced field of accounting and financial operations, particularly in managing and optimizing accounts payable processes. My journey has been marked by a deep dive into the intricacies of P2P operations, where I have honed my skills in data analysis, problem-solving, and process enhancement. My writing encapsulates the lessons and insights gained from streamlining financial procedures, enhancing revenue growth, reducing costs, and ensuring compliance across diverse regions. My narrative style weaves together practical experiences with theoretical knowledge, offering readers a comprehensive view of modern financial operations in a global context.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

FAQs

How Ramp helped Viking Well Service institute a more efficient expense management process

“Having the purchase order and bills all in one place just makes a whole lot more sense for the type of business that Viking’s doing, because you can simplify it down to a one-line-item type deal. That’s really important for control purposes, for visibility."
Chris Lowdermilk, Senior Controller, Viking Well Service

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