The procure-to-pay (P2P) cycle—alternatively, the purchase-to-pay cycle—encompasses all of the various actions between the initial identification of a business need and the final reconciliation of the invoice payment for any goods or services purchased to meet it.
In some instances, the phrase “procure-to-pay” refers to the specific processes involved in corporate procurement and purchasing. In others, however, its usage also includes the technologies used to digitize these processes (compared with traditional, paper-based accounting practices).
The digitization of the procure-to-pay cycle is an increasingly important priority for many businesses. To see why, it’s helpful to understand each stage of the procure-to-pay workflow, from requisition to settlement.
Core Steps in the Procure-to-Pay Cycle
Although the individual steps involved in the procure-to-pay process are highly variable across organizations, some of the common stages that may be involved in executing a purchase request include:
- The identification of a need. Before a requisition can be executed, the organization must become aware of an unmet need. Once a business stakeholder identifies such a need, cross-functional finance team members come together to define how it should be fulfilled. Depending on whether a product or service is needed, this may involve aligning on specifications or developing a statement of work (SOW).
- Purchase request management. With this information, the stakeholder or business unit requesting the purchase completes a formal purchase requisition form, according to the company’s standard process. The procurement team reviews the requisition form for compliance before approving it (or requesting modifications if needed). Depending on the type of purchase being made, a purchase order may be generated. In other cases, purchasers may be approved to make a “spot buy” for lower-value commodities or items that fall into unmanaged categories.
- Vendor identification and selection. Once a purchase is approved, a vendor is identified who can fulfill the need while complying with the company’s requirements (such as prioritizing purchases from local suppliers, those with volume-based discounts, or those with ESG programs).
- Purchase order management. If a purchase order is required, it will be submitted to the supplier along with any necessary purchase details. The supplier can then approve and execute the purchase order, or they can negotiate the terms of the order with the purchaser or their purchasing team before fulfilling it.
- Order fulfillment. Once the order is placed, the vendor should confirm that it has been received and advise on its likely fulfillment date. Once the goods or services have been received, it’s up to the purchaser to confirm that everything was fulfilled correctly, per the contract’s terms. If discrepancies or exceptions are identified, the purchaser will work with the procurement department to resolve the issue before the invoice is processed.
- Invoice processing. Once the purchaser confirms that the order has been successfully completed, the purchasing department will receive the vendor’s invoice and confirm that the invoice, the purchase order (if used), and the goods or services that were delivered all match. If everything lines up, the purchasing department approves the invoice for payment.
- Payment processing. Finally, once the invoice is approved, the purchasing department issues the vendor payment based on the terms and channels specified in the contract (e.g., net-30 terms, payable by check). Sometimes, partial payments may be processed as an advance on an upcoming order, as an installment or retainer payment on an ongoing contract, or as part of a holdback arrangement with the vendor.
Ongoing Procure-to-Pay Process Responsibilities
Complimenting this process are several key activities that may not represent individual stages in their own right, but are nonetheless important in ensuring a smooth procure-to-pay process:
- Ongoing vendor approvals. In some organizations, vendor approvals occur outside of the procure-to-pay cycle on a rolling basis. In these instances, confirmed suppliers are sought out regularly, regardless of whether or not specific needs have been identified. Depending on the company’s tech stack, these vendors may be added to a centralized marketplace once their contracts are negotiated and approved so that purchasers can access them as needs arise.
- Vendor performance monitoring. As orders are received, stakeholders may offer insights on how well individual vendors are performing relative to their contracted standards. If ongoing issues occur within supplier relationships, this may lead purchasing departments to change vendors’ approval status or re-negotiate terms with them. Vendor performance may also offer key supply chain insights, leading to more proactive supply chain management within the company.
- Financial record-keeping. Throughout the procure-to-pay cycle, the accounts payable department (AP) must record purchases, add entries, and reconcile financial records to ensure that the company’s books accurately reflect its current financial state.
- Financial reporting. Purchasing and accounts payable team members may be called on at any point to pull reporting on spend by category, total spend under management, spend by vendor, non-compliant spend, and any number of additional KPIs. These and other data points are commonly used by company leadership to make business decisions—and they’re all derived from information generated throughout the P2P cycle.
Optimizing the Procure-to-Pay Process
Looking at each procure-to-pay process stage individually, the importance of optimizing the overarching process becomes clear. For instance, imagine the difference between carrying out each of these activities using manual, paper-based processes and using procure-to-pay software to automate as many of them as possible.
In a traditional accounting environment, it’s not uncommon for purchasing and accounts payable functions to operate separately. If both departments utilize paper-based processes, matching up purchase orders and requisition forms with their corresponding invoices and receipts can be time-consuming and prone to errors.
On the other end of the optimization spectrum lies procure-to-pay transformation, which involves bringing both purchasing and accounts payable activities into a single technology like Vroozi. Not only does this reduce labor costs and minimize errors, but also has the potential to:
- Reduce rogue spending
- Improve purchaser compliance with approved processes
- Limit invoice fraud
- Improve the total spend directed toward approved or preferred suppliers
- Streamline reporting by consolidating purchasing data within a central platform
Some of the other strategies companies use to solve for P2P transformation include leaning heavily on email tracking, leveraging procure-to-pay solutions for some—but not all—of the steps within the P2P cycle, or adapting existing ERP solutions to perform some procure-to-pay functions. However, these alternatives come with their own challenges as well.
Common Challenges in the Procure-to-Pay Cycle
Regardless of the specific approach taken to purchase-to-pay cycle optimization, common issues can arise. Familiarizing yourself with these potential pitfalls enables your organization to take corrective action before they’re able to derail your department.
- Budget overruns. A tightly managed P2P cycle facilitates better cost controls by increasing compliance with predetermined purchasing policies. For example, if you’ve negotiated a preferred rate with a specific vendor, but don’t have the process rigor to ensure purchasers utilize that vendor, you may inadvertently wind up spending more through either intentional or unintentional rogue spending.
- Limited visibility across cross-functional teams. For the procure-to-pay cycle to function optimally, all participants need to have a degree of visibility that’s appropriate to their role. For example, purchasers may only need access to approved vendors and order-placement workflows. On the other hand, members of the purchasing and accounting departments may need full visibility into the other’s actions to limit unnecessary duplication of efforts and prevent individual actions from falling through the cracks.
- Redundant, manual tasks. The P2P cycle—whether executed manually or through the use of technology—can be prone to redundancy. Optimizing it requires procurement teams and AP to closely examine their specific tasks to identify areas of overlap or activities that could be handled through technology or process automation.
- Failure to fully leverage P2P data. Corporate purchasing activities generate a wealth of data that can be used in forecasting, vendor negotiations, and employee performance monitoring, amongst other areas. However, manually interpreting these large data sets can be cumbersome, and miscalculations can lead to misguided assumptions. Utilizing a procure-to-pay system is especially important at this stage in the procure-to-pay process to prevent misinformation from being used in company decision-making.
Automation in the P2P Cycle
Given the potential impact these and other challenges can have, a growing number of organizations are turning to procure-to-pay software and process automation to reduce redundancy and minimize human error in the P2P cycle.
Some of the specific procure-to-pay activities that can be automated include:
- Extracting information from incoming invoices
- Dynamically populating financial system fields with extracted data
- Automating the invoice approval process when specific matching criteria are met
- Coding and routing incoming invoices for review, when needed
- Detecting potentially fraudulent invoices
Despite common fears, automated invoice processing doesn’t eliminate human action—and, more importantly, human oversight. Instead, this type of automation is controlled through a series of customizable rules that determine how and when specific activities should be handled, facilitating time-savings over manual processing and freeing up human resources to be allocated to more impactful activities.
To see this type of procure-to-pay automation in action, request a demo of Vroozi SpendTech, a modernized, software-as-a-service (SaaS) solution that streamlines the P2P cycle, driving both savings and efficiencies. Or, take a look at our recent guide to digital procurement and AP automation for five specific changes you can make today!
