Setting up a procure to pay (P2P) process can be challenging for even the most seasoned small business owners. For startups and young entrepreneurs, it can be an absolute nightmare. Doing it wrong at the outset can lead to wasted spending and lower profit margins at a time when you need them the most. In this article, we’ll try to help you avoid that.
What is procure-to-pay?
Procure to pay is a procurement planning process with multiple steps to take you from the starting point, which is the procurement of goods and services, to the ending point of paying for them. Along the way, the business needs to source and select, enforce compliance, and set up receiving and reconciliation. Here are the steps in order:
1. Select goods and services
2. Enforce compliance and order
3. Receiving and reconciliation
4. Invoicing and payment
Ideally, each of these pieces should be connected and managed by an automated system. There are several P2P software platforms out there that can do this for you. Unfortunately, startups often choose to forego the cost of that software and handle the procure to pay process manually. That can cause a disconnect between procurement and accounts payable.
Without finance automation, procure to pay could conceivably be managed with good interdepartmental communication, but it’s not scalable as your business grows. That’s why setting this up properly in the early stages is so important. In the next section, we’ll go through how it’s supposed to work and provide some tips on early-stage procure to pay setup.
How does the procure to pay process work?
Let’s begin at the material procurement stage, for example. Your company needs manufactured goods and/or raw materials to function. This is true of all businesses, regardless of industry. Those items need to be sourced and selected based on price, minimum order quantity, and payment terms. The person or people in charge of that are typically skilled at vendor negotiation.
The next step, enforcing compliance and order, is where the first break in the chain is generally seen. Negotiators specialize in getting the best prices and terms. They are not compliance officers, yet procurement compliance is in place to ensure spending flows according to company policies. Failure to adhere to that can lead to overspending.
Receiving and reconciliation comes with a new set of headaches. Procurement officers set the prices. Compliance determines if they’re within company policy. What happens if the goods received and the invoices for them don’t match up to the terms negotiated? How are those errors uncovered without a vendor management system? That’s a procure to pay issue.
The last stage is the payment stage. In a manual system, invoices are simply paid when they come in, according to the terms negotiated. An automated procure to pay system matches those outflows with cash inflows to ensure the company remains solvent. For small businesses, particularly startups, liquidity is critical. Manual systems put that at risk.
Pros and cons of procure to pay
You may already be able to see some of this based on what we just explained about what procure to pay is and how it works. There are some clear benefits to putting this process in place, but there are also some drawbacks.
Pro: More control
A proper procure to pay system puts the company in full control of procurement management, compliance, inventory, and accounts payable. When fully automated, these systems work in concert with one another, eliminating the possibility of human error at any stage of the pipeline. This is by far the most important benefit of procure to pay.
Pro: Transparent relationships
Procurement managers and sourcing specialists tend to keep their contacts and the details of their vendor management close to the vest. They do this to make themselves more essential to the company and as insurance against a potential change of employment. None of that is possible with procure to pay because everything is recorded in the system.
Con: Reduced accuracy
From an accounting perspective, the cashflow controls inherent in a procure to pay system could lead to inaccuracies in financial reporting. Companies can adjust to this by using estimated budgets and an accrual accounting system that doesn’t rely on cash inflows. With these few small changes, accuracy will no longer be a problem.
Con: Can be costly
There’s no avoiding this. Procure to pay can be costly to implement. On the other hand, the cost savings your company will enjoy once it’s put in place should more than make up for that. Weigh the cost carefully and shop around. Start with Precoro, SAP Ariba, and Tradeshift. They are all cost-effective procure to pay software solutions for small businesses and startups.
Best practices when implementing a procure to pay process
Here are three best practices that you can employ when putting together a procure to pay process for your small business. You may develop some more on your own, but start with these:
Focus on budget management
Don’t let the flow of events dictate your budget. Create sensible budgets that all departments can stick to. Make vendor risk management a priority to avoid getting into deals that can hurt your company. If their minimum order quantity (MOQ) doesn’t fit in the budget, find another vendor. If shipping costs are too high, renegotiate or order less often.
Streamline workflows
Quality procure to pay software will do a lot of this for you. Workflows should be constructed with fewer steps and less complexity that could confuse your employees. See if you can combine steps when evaluating your current workflows. Most companies will find redundancies when they do this that can be eliminated to cut costs and reduce hours spent.
Automation is one of the best tools for streamlining workflows. The implementation of it will immediately cut down on the hours currently required for manual tasks. Keep this in mind when shopping for procure to pay software. You may pay a little more for full automation, but it’s well worth it if you can cut down on costs elsewhere.
Get company buy-in
Adopting a procure to pay system requires a buy-in from the entire company if it’s going to work. Schedule meetings with each of your department heads and have them help you roll it out to all employees. If you’re a startup, gather the team together and discuss it. You can use this article as a guideline to put together some talking points.
Areas of concentration in these conversations should include getting everyone up to speed on universal compliance issues, the software stack that’s going to be used, and how payments and reimbursements will be handled. This last point can be a source of contention if not addressed in the beginning of the process. It’s the “money” questions that can cause disruptions.
How Ramp can help with procurement
Ramp has a place in the procure to pay process also. With our platform, you can monitor expenses, use our policy generator to set compliance terms, manage vendors, and control spending. You can even create employee expense permissions and barriers to make sure your financial parameters are met.
Another service we offer is contract negotiations through our Buyer team to review prices, terms, and licenses while you’re working out vendor relationships and contracts. These experts can work with your vendors to help you save money, without ruffling any feathers or putting those relationships in jeopardy.
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