It's easy to neglect the area of purchasing in your business. Of course you buy goods and services, but you don't always plan the purchases as well as you could. As a result, you may spend more money than they need to, buy goods that aren't of the proper quality for your needs, or choose suppliers that don't offer the level of customer service you deserve.
If you fail to devote enough attention to your purchasing, your cost of doing business could rise to an unnecessarily high level. As operating expenses increase, profit margins shrink, you would either have to live with lower profits or raise your prices, and neither of these choices is appealing. By keeping your costs under control, you'll be able to keep your prices at competitive levels and maintain a desirable profit.
To purchase wisely, you need to buy the right quality and quantity of materials or products at the best possible price and at the appropriate time from the best vendor.
The purchasing process is much more streamlined in small companies than in larger businesses, especially when the businesses are still fairly new. The owner usually decides what to buy, when to buy, where to buy, and how much to buy. As the business grows, however, the owner may no longer be able to handle this task and will have to delegate it to others. While a small business probably won't need to create an entire purchasing department, it will need to have a purchasing manager. By selecting one person to manage all of the business's purchasing activities, you will decrease the risk of duplicating orders for the same materials.
Purchasing need not be the purchasing manager's sole duty; in fact, your business may not do enough purchasing to require a full-time purchasing manager. You should select an employee who can handle purchasing, as well as the other duties he or she my already have. This individual should be able to communicate clearly with your business's suppliers. Although purchasing duties probably won't occupy all of this individual's time, there is more to purchasing than placing orders. The purchasing manager will have to gather orders, make sure they are complete, and stay within any limits the company may have set on spending, select an appropriate vendor, order the goods, check their condition upon receipt, make sure the invoice is correct, and speed payment of the invoice by forwarding it to the accounting department.
Before you delegate the purchasing function to another employee, you should write out a purchasing policy for your business. You may even want to create such a policy while you are still responsible for purchasing, as a guide for yourself.
The purchasing policy, according to the SBA, should answer the following questions:
- Who has the authority to purchase items for the company? What items can that person purchase? Are there any spending limitations?
- What are the business's requirements for adequate supplier competition and what criteria will be used to select possible vendors?
- What is the company's position on the acceptance of gifts?
- Which types of contracts can the business enter into with successful bidders or vendors?
- What is the company's position on conflict of interest and personal loans from suppliers?
- What kinds of information does the company consider confidential?
- What is the procedure for dealing with legal questions?
The Ordering System
The steps your employees and purchasing manager will follow to request, order, receive and pay for goods and materials make up your ordering system. A good ordering system will help maintain satisfactory supplier relations, improve cash management, aid in inventory control, and increase the overall profitability of your company.
The Purchase Order
Once the purchasing manager has received a requisition, her or she will need to select a supplier and check the price of the items ordered. After agreeing on a price, the purchasing manager will send a purchase order to the supplier. This order is a formal request to the supplier to deliver materials or supplies according to the terms and prices agreed upon. Purchase orders, like requisition forms, can help small businesses keep track of their purchasing activities. Firms can refer to their purchase orders to see if suppliers have shipped the correct goods in the correct quantity. They can also see if suppliers are delivering goods on time. Purchase orders can also serve as support in any legal disputes if they arise between you and the supplier.
Although you can write out purchase orders by hand, you would give a better impression if you used standard multi-part forms that you can purchase at any stationery store. They should include information such as the type of product or service you are ordering, the quantity desired, price and delivery terms. The orders should also have an area for any additional information. Purchase orders should also include your company name, address, telephone and fax numbers, and logo. You can simply write in this information, stamp this information on your purchase orders with a rubber stamp, or design and print your own purchase order forms. Purchase orders should have at least three parts: a vendor copy, an internal file copy, and an accounting copy.
In addition to the standard purchase order, you might choose to use two other types: blanket purchase orders and annual contracts. If you routinely order fairly inexpensive items from a single vendor, you might want to place a blanket order for those items with the vendor. The blanket order covers specific items to be delivered over a specific period of time, such as six months or one year. This type of purchase order lets you take advantage of quantity discounts and saves you the time and trouble of reordering small items you need often. You will also receive a monthly invoice covering your purchases for a given month, instead of several small invoices covering each individual purchase.
Annual contracts cover the purchase of a specific product from a vendor over a period of 12 months. An annual contract will usually let you fix the price for buying a specific quantity of a given item over a year. You can also arrange to have goods delivered as needed, either monthly, weekly, or on another specific schedule.
A packing list will accompany orders you receive. Make sure that the items shipped match the items indicated on the packing list. Inspect all of the items shipped carefully, paying special attention to items that appear damaged. Initial the packing list to verify receipt and file it in a folder until you receive the invoice for the shipment. In many cases, you won't have to send payment with your order; your suppliers will either include an invoice with the shipment or send the invoice to you separately soon after sending your order. When the invoice arrives, check it against the packing list and the purchase order. Write a check for the appropriate amount, note the check number on a copy of the invoice, and file the invoice and packing list.
If you receive any damaged items, or if a vendor sends you items you did not order, let the vendor know as soon as possible. The vendor will tell you the best way to return the items and to receive the ones you actually ordered.
Fill out an internal receiving report and distribute it to those who need to know when shipments come in, such as the person in charge of inventory control, the buyer, the employee requisitioning the items, and the person in charge of accounts payable in accounting.