Why is it important to have a formal purchasing process? Is it important to have a predefined purchasing process? What can go wrong if the purchasing process is not followed?
There are many reasons why a formal process must be followed including the prevention of fraud, cost saving, compliance with regulations, management of risk and control. To understand or to explain why a formal process should be followed it can be useful to think in terms of the 5 As.
- Approved Suppliers
- Approval Process and Segregation of Responsibilities
- Audit Trail
Purchasing Process Flowchart
There is sometimes a significant amount of effort required to ensure that a supplier is appropriate for a particular category of goods or services. They should be able to supply goods and services that meet requirements of quality and fit for purpose. They should be reliable financially sound and not present a commercial or reputation risk and their prices should be competitive. It makes no sense to perform the relevant research on a supplier each time goods or services are required. By developing preferred suppliers, longer term sustainable relationships can be developed that deliver a better value for money.
Approval Process and Segregation of Responsibilities
The principles of approval and segregation of responsibilities provides an organization with a control to reduce the risk of fraud. The requirement for the approval of a purchase requisition prevents inappropriate purchases being made and the separation of responsibilities to unconnected parts of the buying organization helps to reduce the risk of collusion.
A formal purchasing process that records a predefined set of processes allows the path of events to be examined retrospectively to identify errors or deliberate breaches of policy.
All commercial organizations have a legal responsibility to account for their finances including for the goods and services that they procure. It is important therefore that proper records are maintained e.g. to record dates, prices and department details as well as to categorize goods and services appropriately to distinguish between capital goods and expenses for example. This can have a crucial bearing on how the finances of the organisation are described which in turn can have a tax and profitability impact.
A standard process allows for automation and the use of technology which reduces the cost of the process.