The purchase cycle is the process your company undergoes when buying supplies from another vendor. It can be a fairly complicated process, but is incredibly important. Startups and SMEs can’t afford to overspend on wasted purchases, pay above market rate or lack in urgency to stock product. Once you understand the purchase cycle, you can plug holes and begin to optimise the company’s working capital funds. Let’s get into it.
Purchase order: how to purchase goods and services
Most companies follow a similar step-by-step process for the purchasing cycle:
- Analyse needs
- Clarify needs
- Purchase Requisition
- Purchase Order
- Authorisation
- Supplier Review
- Goods Received
- Invoice Approval and Payment
- Records Management
Needs
Need analysis begins by making a decision about what your business requires in terms of goods or services. Plus, this identification process highlights whether you’re ordering raw material for production, office supplies, or re-ordering a previous purchase, for example.
Needs clarification refers to decisions around the variety, quantity and delivery date schedule for the purchase.
Purchase
Purchase requisition is directed towards the internal approval process for the order.
At this stage, you’ll create a purchase order to send off to the accounts, finance or purchasing departments. The teams may review your contract, check the price or oversee the inventory to double check the selection meets current material requirements.
After your request is authorised, it can be sent over to your approved supplier.
Supply
The next few stages within the system rely on your supplier. They’ll review your documents and either meet your needs or get in contact to manage your expectations. Of course, the better your buyer and supplier relationship, the more smoothly these steps are likely to go.
Receive
Your startup will then receive the goods or services, ready for inspection. It’s important to have a consistent qualification and review process for any product received. This way, you avoid the potential to accept defect materials, and can return any breakages back to the supplier without losing money.
Payment
Finally, your supplier should send over an invoice, which is usually send over to the finance team to pay. Existing invoices are typically payable within a set number of days, such as 30, 60 or 90. As a vendor, it’s important to remember that they also run a business and require your payment within this time frame in order to complete their own buying cycles.
Records
An important final note is making sure you’ve got systems for record keeping and management. These documents become resources for future financial and business decisions, so they need to be stored securely and easy to find. Plus, you’ll be expensing purchases under G&A reports, so they should be easy to find.
Purchasing cycle challenges
No matter your business or industry, many of us struggle with the same problems when it comes to the purchasing cycle.
Lack of Software
Many companies are now 100% remote and based online, relying on cloud technology to securely store important digital information. Yet only 14% of businesses that generate between $0-$100mil report having a dedicated e-procurement solution.
It means that these companies, which are often startups or scaleups in the SaaS industry, rely on emails, telephone calls and paper records. But manual records are much harder to consolidate, and often get lost among other communications – leading to mistakes that affect the bottom line.
Lack of Visibility
Without easy access to clear data on costings, buyers are lumped with inaccurate information. You could be paying over the nose for goods or services that have previously cost less, impacting the company’s unit economics. Companies that lack a dedicated purchasing department or software might also struggle to compare between suppliers on factors such as:
- typical lead time
- delivery accuracy
- accounts payable
By leaking cash on these inefficiencies, your working capital will be reduced. Without a plug to these leaks, company growth will become harder and your competitors are likely to surge past your performance.
Broken Supplier Relationships
When your purchase process is disorganised or messy, suppliers can become easily frustrated with your inconsistencies. This can lead to a knock-on effect where they are less likely to engage with, or support your business (no matter how large your purchase order!) Avoid being left high and dry when business is thriving by taking care of suppliers year-round.
Optimise the procurement process
Without the right technology and systems, the procurement process can be clunky, inefficient and slow. Leaks in this area can affect the entire company revenue, slowing growth and scaling. The benefits of having a defined, high quality procurement practice are undeniable.
Procurement Software
Installing a specialised procurement software can transform the state of your purchase cycle. These softwares, which are often based in the cloud, increase the security around your company funds. Plus, a digital storage system makes your records much more transparent and accessible. It’s easy to re-order by using the search function, or compare different suppliers without the hassle of sifting through paperwork.
Engage with Suppliers
When you engage properly with suppliers, the benefits are two-fold. Firstly, suppliers feel valued and respected among your business operations. They know that you prioritise their business and will work equally harder to provide good service to you as a vendor.
Secondly, and potentially more importantly, come the tangible business benefits. Engaging with suppliers helps you to both qualify and quantify details around your orders, and establish a good routine for paying on time. Setting these habits allows both your buying team and the supplier to be in agreement about your orders so that mistakes are few and far between.
Optimise Inventory
The key part of the purchase cycle is, of course, your product. Optimising your inventory is key to balancing product output with cash reserves. One of the most popular optimisation methods is to automate re-orders or trigger notifications upon low product reserves. Working within e-commerce, there are multiple programs that will help you do this.
Another great way to optimise your inventory is to compare industry shopping trends against your own KPIs. No matter your core focus, you’ll be able to find out what is selling or not selling and order within proportion to your current sales and marketing output.
We hope this article helps you better understand the ins and outs of the purchase cycle. If you’re an SME finding it hard to maintain working capital between purchase orders, it might be time to think about outside funding sources like tax credit loans, revenue-based financing, or even government grants. Chat with our team if you’d like to explore your funding options to better optimise your purchase cycle.
