Improving Cash Flow and Expense Control Using Purchase Orders

In the business environment where “CASH IS KING”, the “Purchase Order”, is one of the best tools for managing the outflow of cash and controlling expenses. I know what you are thinking right about now, this is another procedure that will just be a waste of time. The truth be told having a well-functioning Purchase Order System (POS) will not only save the company money but also prevent fraud, eliminate waste, and provide a company with tools that can better forecast future cash out-flows.

There are several ways to efficiently forecast issues, control business expenses, and monitor cash flow:

  • Create and allocate a budget to the financial system that your company is using,
  • Use a Purchasing Order Systems (POS) that links to the budget,
  • Monitor changes in cash flow and forecast future cash requirements,
  • Do all of the above <- Correct Choice!

Why is it that management and employees often fight or just ignore POS altogether? The excuses that are generally given for not having a POS reflect a business culture that too often lacks various fundamental controls and business structure.

  • The management team probably hates the idea of purchase orders,
  • POS will slow down progress and creativity of the organization,
  • There are too many setup details required in the POS to make it function correctly,
  • Rarely does the company have all the information needed to complete PO,
  • Accounting expects the supplier invoice to actually match what was ordered on the PO.

Implementing and using POS is not just about satisfying the obsessive-compulsive disorder (OCD) tendencies of accountants and stock managers. The single most important reasons for implementing and managing a POS are to improve cash flow, increase profitability, and maximize communication across the whole business unit. Numerous case studies over the years have clearly revealed that once you have more than four employees, working with POS will result in a much more effective and profitable business as compared to working without a POS.

During the span of my career I worked with companies ranging in size from startups to fortune 100 companies, and organizations that incorporated best practices included POS controls were usually cash positive and profitable. It was role of the Finance Department to investigate significant cash flow problem and monitor corrective actions. When variances were generated it was often the result of individuals that had circumvented policies and controls associated with purchasing that resulted in a budget discrepancy.

Cash Flow challenges are usually a combination of low profit, inadequate collections, unfavorable payment terms, mismanaged inventory, and unforeseen expenses. A quick check of the business Actual YTD Profit & Loss Statement compared to YTD Budget will expose variances that are normally a result of lack of expense control because there isn’t a fully functional POS system that compares proposed spending to the budget.

What Are Three Main Benefits Of Using Purchase Orders?

  • At-a-glance, you can see if you’ve received what was ordered (Excel spreadsheets and piles of papers are inefficient and time-consuming, not to mention stressful),
  • POs can reduce the risk of errors, discrepancies, overpayments, inaccurate deliveries, and internal fraud,
  • POs can help small and medium-sized businesses plan better, control cash flow, and stay within budget.

Full Transparency:

Having the ability to see what is happening in real time or how it related to billable projects is a critical aspect of managing a business in the current environment. A fully functional POS will allow management to determine the prices of past purchases, avoid duplication of orders, and select suppliers that offer better terms and product pricings. Department Managers that have visibility to POS can communicate with project leaders about the status of their materials or services in order to keep projects on track and below budget.

The POS approval process allows companies to manage their budget and prevent fraud. Too often costs can balloon seemingly out of nowhere, paperwork and other important documents piles up on individuals’ desks and stress levels increase when productions and projects are late. It’s no surprise that you can’t keep the train running on time without the right controls in place.

When the POS is interfaced with other operational or financial systems (ERP or MRP) it provides the added controls that make processes easier for employees and gives management the ability to eliminate any unauthorized spending. Linking POS system to the Operational Budget will force the business to make smart procurement decisions in the short and long run because they will need to adhere to budget limitations that can only be overridden by management.

Driving Profitability:

If an organization has the time and resources to dig deeper and compare suppliers, past expenses, pricing and payment terms to current day situation they will find where they could have made better business decisions. Employing a POS system that compares old pricing, terms, delivery, and other policy criteria will drive savings to the bottom line of company very quickly.

Shopping the market, negotiating with suppliers for favorable pricing and terms, and holding individuals accountable for carefully reviewing purchase orders based on economic conditions are fundamental elements that drive organization toward positive cash flow and profitability. However, when no one is reviewing purchasing decisions to determine how they will impact the overall profits then you will quickly see a negative effect on cash. Why is this the case? Because there isn’t a POS in place to make it simple to review those decisions.

Cash Flow:

Good data is the backbone to smart business decisions. The right POS can deliver mission-critical information in real-time to improve decision making and avoid costly mistakes. Recording purchase orders in your system allows you to have cost and order information at your fingertips. Viewing specific costs without waiting for an invoice and looking through your database to see the effect on the budget is a much more realistic way of managing business goals.

When the POS is interfaced with other components such as Accounts Payable, Accounts Receivable, Sales Orders, Payroll, and Inventory then you can generate a Cash Flow Statements / Cash Flow Forecast.

Having the right Cash Flow Reporting / Forecasting tools in place that links with POS, will enable management to make sure there’s enough money in the bank account prior to committing to any substantial purchase order. This is especially important for startups and growth businesses since cash is always a resource that is scarce.

There is a saying that goes something like this, measure three times and cut only once” and in very simple terms it means that businesses should check their budgets, production schedule and other cash balance before committing to spending on any products or services.

Business with a healthy cashflow, will be in a better position to grow, launch new products or services, pay wages, and take advantage of supplier discounts. Positive cash flow shows that your organization is self-sufficient and has an ongoing ability to both generate and spend cash.

If you are interested in learning more about the POS and Cash Flow Forecasting tools, or if you need help on how to better utilize these tools please contact Rocket Office. Rocket Office is specialized in the finance and accounting challenges of startups and growth companies. We are here to help you and we are looking forward to helping with any issues that your business is facing now.