Procure-to-Pay (P2P): Process, Cycle, Benefits, and Best Practices

Every company has business needs that require them to procure goods and services. But procuring goods for a company is quite different than an individual making purchases. The procurement team of the company generally takes care of all company purchases. This includes selecting vendors, negotiating prices, etc. The accounts payable team of the company is responsible for paying the subsequent bills. They, along with the concerned business heads, are the stakeholders of the procure-to-pay process. 

What is the Procure to Pay process?

The procure-to-pay process is the entire set of steps involved when purchasing goods or services for the company. The procurement process involves steps such as selecting the vendor and setting the price for the purchase, whereas the payment process involves verifying the bill received from the vendor and paying it back.

Let’s say a company needs to buy office chairs and desks for the purpose of increasing their headcount. The procurement team contacts their nearby office furniture suppliers to get a quote for 50 chairs and desks. The team then selects a vendor based on the quality of furniture and price involved and drafts a contract with them for future purchases as well. After this, the procurement team purchases the furniture from the vendor, which is billed after delivery is completed. The accounts payable department then verifies the details of the invoice received and processes the payment after gaining the necessary approvals. 

Steps in a procure to pay process

Filling a purchase requisition

The procure-to-pay process begins with the employee filling out a purchase requisition requesting the procurement of goods. A purchase requisition needs to be reviewed by the employee’s manager and the inventory or procurement team before going ahead with the purchase. The employee needs to provide their name, department, reason for purchase, and details of the purchase.

Generating a purchase order

Once the purchase requisition is approved, a purchase order is generated. This is done after the vendor and price for the goods have been decided by the procurement department. The purchase order is a request for goods or services stating the type of purchase, quantity required, line item price, and estimated delivery date. It is then sent to the vendor for confirmation. The vendor informs whether they will be able to supply the goods within the time frame. A purchase order is also later used by the accounts payable team for invoice matching. 

Delivery of goods or services

The vendor then delivers the goods or services to the company. The company then needs to verify the quantity and quality of goods received and revert back to the vendor with a receiving report or inspection slip. This is to ensure they only pay for the goods and services that they have received. Receiving reports and inspection slips are also used to perform three-way matching and four-way matching, respectively. 

Receiving the invoice

The vendor sends over the invoice for the goods and services procured by the company to its accounts payable team. The invoice contains details such as the total amount payable, payment terms, line item details, invoice date, and any PO number associated with the purchase. 

Invoice matching

The accounts payable team might then match the invoice with its relevant purchase order, receiving report, inspection slip, and/or contract. This process is known as invoice matching. In case of any discrepancies observed in invoice matching that are higher than the defined company threshold, the accounts payable team raises the issue to the vendor and requests a corrected invoice with updated due dates. 

Requesting approvals

The next step for the accounts payable team will be to request approval from the concerned business approver for processing the invoice. This might be the head of the department that has made the purchase or the procurement team. 

Paying the invoice

After all approvals have been received, the invoice is processed for payment after verifying the vendor’s payment details. 

Challenges in procure to pay process

The procure-to-pay process can be really challenging to optimize and perform. 

Siloed processes

The accounts payable department and the procurement department generally function separately from each other. This can prove challenging for the process as a lack of communication between the two can end up hampering the company’s financials. For example, the accounts payable department might end up paying an invoice from a vendor which has been flagged by the procurement department. Or the procurement department might end up settling for a price that might be out of budget for the company. 

Lack of visibility

Lack of visibility into a company’s purchases can also prove to be a challenge in the procure-to-pay process. One might not always have visibility into which goods have already been purchased or how the company’s recent purchases add up against their monthly budgets. Utilizing multiple vendors for the same service might also occur due to a lack of visibility. 

Maverick spending

When someone makes a transaction that doesn’t adhere to the company’s set rules, it is known as maverick spending. Maverick spend generally occurs in the tail spend portion of a company’s expenditure and can prove harmful as it might lead to overpayment for goods or missing discounts. 

Invoice frauds

Invoice fraud is also a huge problem when optimizing the procure-to-pay process. Fraudsters might intercept payment threads between the company and the vendor to replace vendor payment details with their own. They might also issue duplicate invoices replicating those of the actual vendors to launder money from the company. 

Manual and time-consuming processes

Procurement and accounts payable functions such as processing invoices, creating purchase orders, and verifying inventory are generally performed manually. This takes up a lot of the departments’ time and bandwidth, which could be focused on more strategic tasks instead. 

Best practices to follow in procure to pay process

Despite multiple challenges emerging in the procure-to-pay process, following some best practices can be beneficial for the financial wellness of the company. 

Implement invoice matching

Implementing invoice matching can help reduce susceptibility to invoice fraud. It can also help avoid overpayments by ensuring only goods mentioned in the receiving report and inspection slips are paid for. 

Have strict approval policies

Implementing strict approval policies for payment of vendor invoices can help keep maverick spending and frauds in check. It would also increase accountability among the employees making the purchase in the first place. 

Carefully segregate duties

Preventing conflicts of interest among your employees and segregating roles specifically to ensure no one has the power to misuse company funds can also help prevent internal fraud. 

Constant data reporting and monitoring

Real-time spend analysis is of the utmost importance for a company’s financial growth. Viewing spends in real-time and checking how your spends aligns with your monthly budgets can also help in ensuring you don’t end up losing money, as well as identify the culprits behind overspending. 

Automate manual tasks

Automating manual tasks will not only free up your employee’s time and bandwidth to focus on more important tasks, but it will also save you money by avoiding manual errors, helping you capture early payment discounts, and avoiding late fees. 

How AP automation helps the procure to pay process

AP automation can help optimize the entire procure-to-pay process without having to increase headcount. With AP automation software, invoice processing and matching can be done in a matter of minutes while avoiding manual errors in the process. Solutions like ClearTech also allow approvals via email and Slack, with each request containing complete invoice context. With real-time AP and spend dashboards, keeping track of monthly and quarterly spends also becomes easy and efficient. ClearTech also flags duplicate invoices and provides spend insights for the vendor on the processing screen itself, avoiding invoice frauds before they occur. It also allows the implementation of all vendor, invoice and payment approvals, nipping fraud in the bud. 

In conclusion

The procure to pay process refers to the steps involved when making a company purchase, from selecting vendors, checking inventory, setting up contracts, negotiating deals and receiving goods to processing the invoice, gathering necessary approvals and paying the invoice on time. Both the procurement and the AP department are important stakeholders in this process. Having siloed processes, lacking shared visibility into spend, maverick spending, invoice frauds and manual and time-consuming processes are some challenges the procure to pay process entails. Automating your accounts payable functions, implementing strict approval policies, segregating duties of your employees and real-time spend analysis can help optimize this process and overcome these challenges. 

FAQs

• What is the P2P payment process?

The P2P or procure to pay process is the process of procuring goods or services required by the company, from purchase request, purchase order generation, goods or services delivery to invoice processing, approvals and payments. 

• What is the P2P process in simple words?

In simple words, the P2P process is the entire set of steps involved from purchasing supplies for a company to paying the suppliers. 

• What is the difference between P2P and O2C?

The P2P or procure to pay process is when your company needs to buy supplies from their vendors. The O2C or order to cash process is when customers order supplies from your company. 

• What is an example of a P2P process?

If a company needs to purchase raw materials from their suppliers, the procurement team first chooses a supplier and issues a purchase order for the material after negotiating the price and payment terms. After delivery and inspection, the supplier sends an invoice to the company to its AP team. The AP team processes the invoice and matches it to the purchase order, before gathering approval from the relevant business approvers and paying the vendor.