If you work in a business, you know that purchasing goods and services is a big part of daily operations. The Procure-to-Pay (P2P) process is essential for managing these purchases and payments in an efficient and organised way. Whether you're working in accounts, procurement, or just curious about how it all works, this guide will help explain it in simple, easy-to-understand terms.
What is Procure-to-Pay (P2P)?
Let's say you're running a business and need to buy things like raw materials,
office supplies, or services. The P2P process covers everything that
happens from the moment you realise you need something to the final step of
making the payment to your supplier. It's a cycle that ensures every purchase
is tracked, transparent, and in line with company policies.
To give you an idea, imagine you need to buy some raw materials for production.
The P2P process would track every step: raising a request, getting
approvals, placing the order, receiving the goods, and finally, paying the
supplier.
Steps in the P2P Process
Here’s how the P2P process typically works:
- Raise
a Purchase Requisition:
This is the first step. A department or team identifies a need and submits a request, explaining what goods or services are required. - Find
and Evaluate Suppliers:
Next, the procurement team looks for suppliers and compares them based on price, quality, and delivery timelines. - Create
the Purchase Order (PO):
Once the supplier is chosen, a formal Purchase Order (PO) is created. This acts as an official document that agrees on the price, delivery date, and other details. - Receive
Goods or Services:
When the goods or services are delivered, they are checked to make sure they match what was ordered. This includes inspecting the quality and quantity. - Match
the Invoice:
After receiving the goods, the supplier sends an invoice. This invoice is checked against the Purchase Order (PO) and the goods receipt to make sure everything matches. - Approve
and Pay:
Once everything is confirmed and in order, payment is made to the supplier. This is done as per the payment terms agreed earlier.
Why Are Journal Entries Important?
Every transaction in the P2P process needs to be recorded for accurate financial tracking. Here’s how the journal entries work:
When Goods Are Received:
- Debit: Inventory or Expense Account
- Credit:
Accounts Payable
This means that when the goods arrive, they are added to your inventory or recorded as an expense, and your company now owes the supplier money.
When Payment Is Made:
- Debit: Accounts Payable
- Credit:
Cash or Bank
Once you pay the supplier, the amount owed is removed from accounts payable, and your cash or bank balance decreases.
These journal entries ensure that every financial movement is properly recorded in your books.
12 Steps of the P2P Cycle
Here’s the P2P process in 12 simple steps:
|
Step |
Description |
|
1 |
Identify the need for goods or services. |
|
2 |
Raise a purchase requisition. |
|
3 |
Check budget availability. |
|
4 |
Find and evaluate suppliers. |
|
5 |
Send a Request for Quotation (RFQ). |
|
6 |
Compare supplier quotations. |
|
7 |
Choose the best supplier. |
|
8 |
Create and send the purchase order (PO). |
|
9 |
Receive and inspect the goods or services. |
|
10 |
Record the supplier’s invoice. |
|
11 |
Match the invoice with the PO and goods receipt. |
|
12 |
Approve the payment and process it. |
Each of these steps helps ensure everything is in place before a payment is made, and it helps you avoid mistakes along the way.
Why is P2P Important for Businesses?
P2P is crucial for several reasons:
• Makes Sure Purchases Are Justified:
The process ensures that every purchase is necessary and has been approved,
which helps prevent unnecessary spending.
• Strengthens Supplier Relationships:
Timely payments and clear communication help build good relationships with suppliers,
which can lead to better deals and smoother operations.
• Ensures Accurate Financial Records:
By following the P2P process, businesses keep their financial records
clear and correct, which is important for audits and reports.
• Saves Time and Reduces Errors:
Automating the P2P process can help speed up operations, reduce
mistakes, and free up time for employees to focus on other tasks.
In short, P2P helps businesses run smoothly and efficiently by making sure all purchases are managed in an organised way.
Why Use P2P Tools?
Many businesses use P2P software to make the process even more efficient. These tools help automate tasks, manage suppliers, and track orders and payments. Here are some popular P2P tools:
• SAP Ariba:
SAP Ariba is great for managing procurement and supplier relationships. It
gives you a clear view of your entire procurement process.
• Coupa:
Coupa helps simplify procurement tasks and gives businesses better control over
spending. It can also help improve decision-making.
• Oracle Procurement Cloud:
This tool integrates procurement and finance, making it easier to manage
everything from ordering to payments.
Using these tools helps businesses save time, reduce errors, and keep
everything in one place.
A Practical Example of P2P in Action
Let’s go through a simple example to show how P2P works:
- Your office needs new computers.
- A purchase requisition is raised and approved by the necessary team.
- The procurement department selects a vendor and issues a Purchase Order (PO).
- The supplier delivers the computers.
- The invoice from the supplier is checked against the PO and delivery receipt.
- Payment
is made to the supplier.
This example shows how P2P helps keep everything organised from start to finish.
Explaining P2P in Interviews
If you're asked to explain the P2P process during an interview, here’s how you can do it:
- Define
it clearly:
“The Procure-to-Pay cycle manages everything, from generating a purchase requisition to processing the final payment to the supplier. It ensures that the entire process is transparent and organised.” - Summarise
the steps:
“In the Procure-to-Pay process, the main stages include raising requisitions, selecting suppliers, issuing purchase orders, receiving goods, matching invoices, and completing payment processing.” - Highlight
its benefits:
“The P2P process helps improve financial accuracy, builds better supplier relationships, and saves time by automating tasks.”
Final Thoughts on P2P
The Procure-to-Pay process is a key part of business operations. Whether
you're in accounting, procurement, or managing a business, understanding how P2P
works is crucial for smooth and efficient operations. It helps ensure that
everything is tracked, purchases are approved, and payments are made on time.
Looking for ways to optimise your P2P processes? Reach out to Fininformatory
for help. We can help streamline your procurement and payment systems, making
your business more efficient and organised.
Also Read this Main processes in finance and accounting within BPO and KPO
Public FAQ on P2P
Q1: What is the main purpose of the Procure-to-Pay (P2P) process?
A: The main purpose of the P2P process is to ensure that all purchases are tracked, approved, and paid for in an organised and transparent manner. This helps businesses avoid unnecessary spending and maintain accurate financial records.
Q2: How does P2P help in reducing errors in the payment process?
A: P2P helps reduce errors by automating tasks such as matching purchase orders, invoices, and goods receipts. Automation helps ensure that payments are made only when everything matches and is correct.
Q3: What are the benefits of using P2P software tools like SAP Ariba, Coupa, and Oracle Procurement Cloud?
A: Using P2P software tools helps businesses save time, reduce errors, and improve decision-making. These tools provide better control over procurement and payment processes, and they streamline operations by automating key tasks.
Q4: Can the P2P process be applied to small businesses?
A: Yes, the The Procure-to-Pay process can be used by businesses of all scales, from large corporations to small businesses. It ensures that purchases are justified, payments are accurate, and financial records are kept in order.
