Dr. Sharon Gotteiner, CPA
Take a short break from the intensive routine and allow yourself some time for a refreshing executive exercise: Check out the percentage of payments made to suppliers, that are not supported by a purchase order. Did that percentage surprise you? Too many managements are surprised when that figure is presented in their conference room. That’s not the way they meant to run their business. Their instant requirement to regulate that subject comes right after and is absolutely justified: Significant amounts are paid to various suppliers, for various purposes, without sufficient control over the need in such expenses, or the price being paid, or the identity of such suppliers.
A “decent” purchasing process helps to decrease exposure to cases of faulty spending. That includes cases of unnecessary purchases, or payment of non-competitive prices, or engagement with suppliers that are not optimal for the company, or… I am almost embarrassed to say… expenses that are of a non-business nature. Yes, you can see that happen from time to time. Such a “decent” process instructs, among other, how many proposals should be obtained, who should obtain them, who are the employees whose approval is required, how various financial thresholds affect the approvals required, how such rules are enforced by “the system”, and even what cost-reduction targets are set, and to whom.
When a given department carries out its own orders without keeping Purchasing personnel in the loop – the price paid by a company may be expensive. The kinds of exposures indicated above may become a reality. In addition, contractual conditions may be unacceptable to the Legal Department; payment terms may be unacceptable to Finance; budgets may get out of control and more. Altogether, I do not see why a well-managed enterprise would compromise a systematic, consistent inclusion of the Purchasing Department in most cases, besides a lack of awareness, or other, non-business-related considerations. There may be some room for special cases, but it has to be examined and justified on a case-by-case basis.
How can such processes get inline with best practices? Well, it takes a tough decision and some tolerance for managers shouting in the corridors about how stupid that is. That’s right, top-managements should decide that it’s time for getting in line with best practices, and fully support that decision by pushing back its objectors. The first, loud conflict is just around the corner when Finance will tell a supplier that they are truly sorry, but they can’t process a payment without a purchase order. They will direct that supplier to the manager who made the order, and that manager will get back to Finance with “fire and fury”. That incident will quickly make its way to the highest corner-room, and a magical, one-time solution will be found… until next time (any guesses what that solution would be?).
It’s a major, important change, that must be designed and coached with care and experience. But once it is completed, everybody will know, that we have improved for the best of our future organizational health.
The opinions expressed on this website are not suitable for all business circumstances.
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