To get a true picture of the total cost of a project and its proposed profitability, you need to take into account the costs booked to the project and include any outstanding committed costs. Outstanding committed costs are commitments to pay for something you have ordered or received but have not yet paid for. Not understanding and tracking committed costs is a frequent cause of going over budget.
Most businesses measure budgets against actual spending using the costs that have been entered into their accounting system. However, there is often a time lag between a financial commitment being made and when it is actually paid. In some cases, this lag can be a period of months, which could mean a business may not take into account unpaid costs when analyzing their budgets. This can cause a business to overstate budget balances and can lead to overspending.
By issuing purchase orders for all your materials, you will have the numbers needed to produce a more accurate and up to date report of your costs and projected profits.
With greater cash flow, your business could finance growth without borrowing. Purchase orders allow small business owners to control cash flow and eliminate inefficiencies within their accounts payable.
Purchase orders allow you to begin the accounting process from the moment they are issued to the supplier. This helps businesses avoid the accounting lag and keep financial details up to date.
When you create a purchase order, your accounts payable team has all the information to verify the invoice. This saves your team time from tracking down approvals and confirming receipt of orders and keep your project teams out completing billable tasks rather than tracking down information.
Using purchase orders allow you to implement internal controls and mitigate financial and operational risks. Internal controls of a purchase order policy include separating purchasing tasks, obtaining appropriate authorizations and approvals, and verifying charges.
Purchase orders give you immediate visibility into upcoming payment obligations, so you can better understand your current cash flow situation in real-time.
The bottom line is that the better you manage your cash flow, the more likely you are to have cash on-hand when you need it.
Purchase orders are often overlooked when managing cash flow and in dealing with suppliers. Maximizing the amount of time it takes you to pay for your outstanding purchases is good business, leaving more money in your account longer.
You maintain accountability when you have a purchase order policy that includes obtaining authorization and approval. Periodic review and limits on purchase order totals ensure your team is compiling with your defined purchasing policies.
Potential consequences if accountability does not exist:
It is very important to review a supplier’s invoice, packing slips, and purchase orders. Purchase orders allow you to check each invoice prior to payment to verify the item orders, quantities and prices charged.
Potential consequences if review and reconciliation is not performed: