What is Purchase Requisition and its Importance

Where the demand for goods and services began to surge, a critical challenge emerged: controlling and streamlining purchases. As organizations expanded, the complexity of managing spending without compromising efficiency and accountability became apparent. The purchase requisition system was created to streamline and improve the way companies buy goods and services.

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Originally a simple form to request items, the purchase requisition evolved into a sophisticated system designed to ensure compliance with company policies, prevent unauthorized spending, and maintain a clear audit trail. The purchase requisition system wasn't just for ordering things. It was about creating a clear process to help companies stay financially stable and run smoothly.

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In this article, we delve deeper into purchase requisitions, why they are indispensable to any organization, and how they differ from purchase orders. We also explore the benefits of implementing a robust requisition management system, arguably one of the most critical components of the procure-to-pay process!

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What is a purchase requisition?

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A purchase requisition is an internal document that your employee creates to request the purchase of goods or services for their department. It is the first step in the purchasing process, but it does not involve buying anything yet. Instead, it serves as a formal request for approval before making any financial commitments to suppliers.

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The process starts when your employee identifies a need for certain items for their department's work. They fill out a purchase requisition form, which includes details about the needed items, quantities, and expected costs. They may also include supporting documents like quotes or agreements.

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The requisition is then sent to the manager and the purchasing department for review. They ensure the request aligns with your business's needs, budget, and purchasing policies. This helps prevent overspending and fraud.

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If the purchase requisition is approved, the next step is to issue a purchase order to the vendor. This is the official order to buy the goods or services under agreed terms and prices.

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The purchase requisition is important because it acts as a control mechanism. It streamlines the purchasing process and ensures that all purchases are justified, authorized, and aligned with the company's budget. It also helps departments, like finance and accounting, keep accurate records of the organization's spending.

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Step by step purchase requisition process

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1. Identification of Need

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The process starts when you or one of your employees recognizes a requirement for goods or services essential to your department's operations. This need could arise from various factors such as depletion of supplies, requirements for new projects, or replacement of outdated equipment.

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2. Filling Out the Purchase Requisition Form

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Once you or your employee identifies the need, the next step is to fill out a purchase requisition form. This form is crucial as it collects all necessary information in a structured format. Make sure your team is well-versed in completing the requisition form accurately and comprehensively to avoid delays in the approval process.

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3. Review and Approval

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After completing the requisition form, it is submitted to the designated approvers. This generally involves multiple levels of review, depending on the organization's structure and the value of the purchase.

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Approvers may include the requester's direct supervisor, the finance department, and the procurement team. Each reviewer evaluates the request based on its necessity, budget alignment, and adherence to organizational policies.

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4. Final Approval and Creation of Purchase Order

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Once the purchase requisition is approved at all required levels, your procurement department creates a purchase order. This order is a formal contract issued to the vendor to supply the specified goods or services at agreed prices and terms.

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The creation of the PO marks the end of the purchase requisition process and the beginning of the purchasing phase.

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How do purchase requisitions differ from purchase orders?

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What is included in a purchase requisition form?

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Requestor: The name of the employee initiating the requisition. This individual is responsible for filling out and submitting the form.

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Department/Delivery Location: Indicates the department that will utilize the ordered items and specifies where they should be delivered, ensuring they reach the correct location.

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Requisition Date and Requested Delivery Date: The date when the requisition form is completed and the date by which the items are needed. This helps in planning and prioritizing the procurement process.

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Description of Products or Services: Detailed information about each requested item, including stock/part/model numbers, manufacturers, and product names. This description assists the purchasing department in accurately identifying and sourcing the required items.

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Quantity Requested: Specifies the number of units of each item required, which is essential for inventory and budget planning.

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Unit Price and Total Price: The estimated cost per unit and the overall estimated cost of the requested items. These figures are crucial for budget approval and financial planning.

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Business Justification: Explains the rationale behind the request, such as the need for additional resources for a new hire, replacement of outdated equipment, or response to an equipment failure. This justification is vital for assessing the necessity and urgency of the purchase.

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Suggested Vendor/Supplier: Provides details of the recommended supplier, including the legal name, mailing address, and contact information. This helps in expediting the purchasing process if the vendor is already vetted and approved by the organization.

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Importance of purchase requisition

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Efficient procurement operations and planning

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A purchase requisition system standardizes procurement steps, consolidating requests and potentially facilitating bulk purchases. This standardization reduces ad-hoc and unplanned purchases, streamlines operations, and often leads to volume discounts. 

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Analyzing past and current purchase requisitions enables organizations to forecast future needs and spending trends, facilitating effective budgeting and resource allocation.

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Financial management and control

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By requiring approvals for every purchase, a purchase requisition acts as a gatekeeper, ensuring that only necessary and authorized purchases are made. This reduces financial waste, protects against unauthorized expenditures, and ensures that all purchases align with the organization's budget constraints. 

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This control mechanism helps manage financial resources efficiently, avoiding overspending and facilitating better financial planning.

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Compliance and risk management

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Purchase requisitions create a detailed audit trail for every request, approval, and denial. This documentation is crucial for internal audits and external regulatory checks, enhancing organizational transparency and accountability. 

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Standardized requisition processes help organizations adhere to compliance standards and internal policies, minimizing legal and financial risks and enhancing overall corporate governance.

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Supplier relationship optimization

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Effective management of vendor relationships begins with transparent and planned procurement. Purchase requisitions allow for better scheduling and negotiation with suppliers, ensuring that interactions are based on well-defined needs and timelines.

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Ensuring need fulfillment

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Purchase requisitions ensure that all departments receive what they need to operate effectively. This system helps prioritize and fulfill internal demands on time, preventing operational delays.

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Steps in the purchase requisition workflow

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Step 1: Submission of purchase requisition form

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The purchase requisition workflow begins when an employee identifies a requirement for goods or services essential for their department's operations. This need prompts the employee to initiate a purchase requisition to formally request these items.

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To proceed, the employee completes a purchase requisition form, detailing the specific items or services needed. This form includes crucial information such as the type and quantity of goods, estimated costs, and the reason for the purchase. The accuracy and completeness of this information are vital as it helps streamline the approval process by providing clear and justifiable data.

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Depending on the organization's technology and processes, the submission of this form can vary:
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Step 2: Approval from the line manager

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Once the purchase requisition form is submitted, it enters the internal approval phase, starting with the line manager of the requesting employee's department. The line manager plays a crucial role by thoroughly reviewing the requisition to ensure its legitimacy and necessity.

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The line manager's responsibilities include:

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• Validate the request by checking the details of the requested items or services to confirm that they are essential for the department's operations.

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• Verify the budget by ensuring that the cost of the requested items does not exceed the department's allocated budget, which is crucial to maintain financial control and prevent overspending.

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• Check compliance by verifying that the request adheres to the organization's procurement policies and guidelines.

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If the line manager approves the request, it proceeds to the next stage of the approval process. If not, the requisition may be sent back to the requester for revision or clarification.

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Step 3: Inventory verification

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The purchase requisition form is forwarded to the inventory department following managerial approval. This step is vital to ensure optimal use of your resources and to prevent unnecessary purchases. The inventory department thoroughly checks the current stock levels against the requisitioned items.

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If the items requested in the purchase requisition are already available in stock, the inventory department may either issue them directly to the requesting department or advise on the availability, potentially negating the need for an external purchase.

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If the inventory check reveals that the items are not available, or the stock levels are insufficient to meet the requisition, the form is then passed along to the purchasing department.

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Step 4: Review by Purchasing Department

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Once the inventory check is completed and if the requested items are not available in stock, the purchase requisition form is sent to the purchasing department for further review. Here, a purchasing officer, typically the purchasing manager, processes the request.

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The purchasing manager's role involves several key tasks. First, they validate the business need for the requested goods or services, ensuring that the requisition aligns with your business's operational requirements. They also verify the legitimacy of the purchase, confirming that it has been duly authorized and signed by the appropriate personnel.

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If the requisition form is incomplete or lacks essential details, the purchasing manager may either fill in the missing information themselves or return the form to the requester for completion. This step ensures that all necessary information is accurately captured before proceeding.

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In cases where the request appears inappropriate or exceeds the department's purchasing limits, the requisition form is rejected. The purchasing manager then provides feedback, explaining the reasons for the rejection and offering guidance on how to amend the request if possible.

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Step 5: Issuance of purchase order

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After successfully navigating through the approval process, the next step in the purchase requisition workflow involves generating a purchase order. This document formalizes the procurement process by specifying the purchase terms, including quantities, agreed-upon prices, and delivery schedules.

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The purchase order is meticulously drafted based on the approved purchase requisition form and is then sent to the selected vendor. Upon acceptance by the vendor, the purchase order transitions from a mere formal request to a legally binding contract. This contract binds the vendor and the purchasing organization to the terms laid out, including the supply of goods or services as specified within the stipulated time frame.

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Step 6: Order Delivery and Assessment

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The final stage in the purchase requisition workflow occurs when the ordered products or services are delivered. At this point, the receiving department takes a pivotal role, meticulously inspecting the delivered items. They assess both the quality and quantity of the goods or services to ensure they meet the specifications outlined in the purchase order.

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Processes like three-way matching are employed in this step to ensure the accuracy and legitimacy of the purchase. This process is crucial as it confirms that the organization only pays for the correctly ordered and received items, safeguarding against overcharges or erroneous billing.

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Step 7: Payment Processing

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Once the delivery is verified and all documentation aligns the purchase order, delivery receipt, and invoice the finance team proceeds with the closure of the purchase order. This step marks the completion of the procurement cycle for the requested items or services.

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The finance team then checks and approves the vendor's invoice, ensuring that all charges are correct and reflect the terms agreed upon in the purchase order. This approval is crucial as it confirms that the invoice is valid and ready for payment.

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Following approval, the invoice is entered into the accounts payable system. Payment is then processed according to the predetermined terms and conditions negotiated with the vendor.

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This also includes specific payment schedules or early payment discounts. Ensuring timely payment is vital for maintaining good vendor relations and upholding the organization's creditworthiness.

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How to tell if you need a purchase requisition process?

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If you're experiencing any of the following issues, it may be time to consider implementing or refining a purchase requisition system:

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• Assess whether your company struggles with planning and monitoring budgets across different departments. If so, implement or refine a purchase requisition system to provide a clearer view of impending expenditures and help maintain budgetary control.

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• Evaluate if purchase requests and approvals are overwhelming employee inboxes and causing delays. Streamline the requisition process to reduce bottlenecks, speed up approvals, and clear the clutter from inboxes by centralizing and automating the approval workflow.

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• Determine if the increasing number of stakeholders involved in the purchasing and approval process makes coordination more complex. Define clear roles and responsibilities through a requisition process to ensure that all necessary approvals are efficiently managed.

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• Address employee frustration stemming from lengthy durations it takes to get purchases approved. Resolve these inefficiencies with a more streamlined and transparent requisition process.

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• Provide sufficient context to approvers about why a purchase is necessary to facilitate informed decision-making. Ensure all relevant information is presented upfront through a detailed requisition form.

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• Integrate legal and security teams earlier in the purchase requisition process to enhance compliance and speed up the process, preventing delays and last-minute scrambling.

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• Empower your procurement team with the necessary time and information to negotiate effectively by implementing a proper requisition process, capitalizing on opportunities for cost savings.

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• Implement a purchase requisition process to provide the finance department with visibility into upcoming expenditures and financial commitments, facilitating financial forecasting and reporting.

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Streamlining purchase requisition and procurement process with Ramp

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Ramp revolutionizes the purchase requisition process by introducing a streamlined, automated system that enhances your organization's efficiency, control, and compliance. This solution simplifies the creation and management of procurement workflows, ensuring every step from initiation to payment is handled with precision and ease.

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Here’s how Ramp makes the purchase requisition process easier and more efficient:

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Creating a Procurement Program: Admin users can easily set up a procurement workflow by navigating to "Spend Programs" in Ramp and selecting "new spend program." The process is intuitive, allowing you to choose "Procurement" and customize the workflow according to your business needs.

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Customizable Intake Forms: Ramp allows you to build detailed intake forms tailored to your company’s requirements. You can add various questions— from vendor selection to file uploads and more—to gather all necessary information upfront. This ensures completeness and adapts to the dynamic needs of different procurement requests.

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Conditional Questioning: To streamline the intake process further, Ramp enables conditional questioning, which allows you to set precedents for when certain questions should be asked. This makes the form smarter and more responsive, helping to avoid unnecessary clutter and confusion during the requisition process.

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Mapping Form Responses to Purchase Order Fields: Ramp provides functionality to directly map responses from your intake forms to specific fields in the purchase order. This automatic mapping facilitates a seamless transition from requisition to order, ensuring accuracy and reducing manual input errors.

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Automated Approval Workflows: Ramp's system automates the approval process, using conditionally routed approvals based on the specifics of the request. This includes integrating with contract lifecycle management tools like Ironclad for reviews that require legal scrutiny, ensuring all approvals are secured efficiently.

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Customizable Visibility and Payment Methods: You can set which departments or roles have the authority to make requests and define who is involved in the approval process. Additionally, Ramp allows for the customization of payment methods, including virtual cards, enhancing both security and convenience.

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Monitoring and Reporting: Once a procurement program is live, you can monitor all requests, approvals, and statuses directly from Ramp’s dashboard. This provides a comprehensive view of your procurement activities, including the ability to sync with accounting systems like NetSuite or QuickBooks for financial reconciliation.

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Ramp automates and transforms the purchase requisition process, making it incredibly efficient and robust. With Ramp, your business can control spending from the outset, capture every request accurately, and significantly accelerate the procure-to-pay cycles.

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