Research & Insights
“No PO, No Pay” is a Best Practice – Procurement Myth No. 17

We continue our series of 25 (at least) procurement myths here on Chief Procurement Officer. 

No. 17: No Payment Without a PO

How could this be a myth, you ask? We all know invoices that come in without POs are the bane of procurement’s existence. And the only way to truly eradicate it is to set up “no PO means no payment” rule, right? Well, the only problem with this supposed best practice is that you won't find a single company out there that has 100% use of pre-invoice POs (after-the-fact POs created merely to feed the ERP 3-way-match beast do NOT count).

Why? There’s lots of cash disbursed that just doesn’t need a PO:

  • First, you have utilities payments. This is a scenario for recurring invoices. You can approve the invoice, but if you need budget approval to keep the lights on and water flowing, you have bigger issues.
  • Next, consider purchasing cards/travel cards that use central bill/pay. Many companies have remote workforces that need untethered access to this purchasing method. Additionally, T&E systems are similarly standard fare for traveling employees, and you’ll get a nice big efficient consolidated invoice to settle with your issuing bank – no PO needed. Yes, it’s a potential source of maverick spend, but good spend visibility will find a lot of this, and you’ve got bigger fish to fry anyway.
  • If you are a manufacturer, you may even want to do away with the invoice as well via an Evaluated Receipts Settlement (ERS) process where you have tight physical controls (here's a scenario: when you complete production, you back-flush the components, and generate an automatic approved payment to the vendor who owned consigned inventory of those components in a JIT warehouse).

OK, you get the point. The “No PO, No Pay” rule will never be 100%, but it is absolutely valid for PO-appropriate spend, and it should also make sure that POs are not issued after the invoice is received. There are many points of failure and root causes for such situations, and they must be uncovered and eradicated through not just a policy, but also education as to why POs (and associated and/or implicit contracts) are necessary to protect the firm from risk… and that the firm may be saving a little money in the process, too! Best practices, like benchmarks, need to be implemented thoughtfully.

Voices (10)

  1. Christiane says:

    This is a very interesting topic, thank you for discussing it.

    May I add the issue of “no PO, no Purchase”? I provide internet services, which customers can book online, at which moment they are required to provide data for me to create the invoice. More often than not I do NOT receive PO numbers from my clients, who require me to then use the PO number they have not provided, while already using our services. I end up chasing the necessary information, which is an enormous drain on time resources, and sometimes even futie. What is your view on this?

    Best regards, Christiane

    1. Hi Christiane,
      There’s no easy solution. Not all buyers will even use POs (which is bad). Some will only use POs for certain spend (e.g., above a certain amount like $500 or $2500).
      You can consider the possible solutions, but I’m not sure what’s possible at your organization…
      1. Allow for card settlement (or ACH even better) under a certain amount. You’ll pay 1-3% to the card networks, but get immediate funds.
      2. Make sure that the buyer accepts your terms and conditions that includes clause for late payment penalties. This will help expedite buyers attention!
      3. Flag to the buyer that a PO number is needed, and also maybe offer a choice like “I don’t have a PO yet” and “we don’t use POs” which you can use to review the order and decide next steps with that customer.
      4. Encourage your customers to use e-Procurement systems! 🙂

      Thanks for writing in.

  2. Javier Cazares says:

    This is a very interesting topic and although it might seem simple, it must be a continuous concern for the Procurement area. Any of you have a more general definition of the type of expense that is “advisable” to be manage without a purchase order; Public Services and Credit Cards are the cases that always come to mind, but will there be any criteria to include or discard the concept of this scheme?

    1. Corporate cards are fine if set up properly with reasonable limits, access, and monitoring. You also don’t need a PO with ‘evaluated receipts settlement’ where a buyer-initiated trigger is sent to the supplier that serves as a receipt (and implicit PO) and ‘pre-invoice approval’ – e.g., a raw material issuance to the factory floor. You can also have a blanket PO or MSA and do 2-way matches on the line items/release as long as there is an invoice approval in the workflow by the budget owner at a minimum.

  3. Benjamin Wee says:

    Glad that this is raised for discussion. Post-facto PO (i.e. PO after invoice) should be kept to the minimum and limit the usage for emergency situations or when purchasing agreement is already in place. Failure to have PO first will increase contractual risks as the company will probably unconsciously accepted the supplier’s terms stated in the quotation or invoice.

    Beside improving governance (approval process), the other purpose of having No PO No Pay is to allow all spend data to be captured in the orderly manner for tracking and analysis. I agree that PO are not the best approach to manage all kinds of expenditure. And forcing the use of PO for every transactions, that can be better managed by other means (e.g P-Cards and fixed sum contracts), will result to higher administrative costs and inefficiency. Therefore, procurement management must find alternate ways to capture all maverick spend with pre-defined dataset.

  4. Jay, great to hear your voice! I forgot you left industry and went to the ‘dark side’ (consulting). It’s great to have you here. You’re absolutely correct – unless it’s a complete bypass and there’s not even an agreement in place, and if there’s no policy, that is an, ahem, ‘opportunity’! Please chime in anytime. If I stray too much off the ranch, please don’t hesitate to lasso me virtually.

  5. Jay Merenda says:

    It should also be considered that in services heavy industries a large % of PO spend is typically on blanket orders (approved lump sums of money) with no details as to what is being bought and at what unit price. It’s simply a way to get the bills paid but does not provide visibility to or enforce compliance to contractual agreements.

  6. Pierre says:

    Bill, agreed! And that compliance might not be the requisitioners fault if the procurement policy wasn’t terribly ‘front of mind’ and the process not failsafed to help guide that requisitioner to preferred item/service and supplier. This topic was myth #3…

  7. Bill Kohnen says:

    Good observation that after-the-fact POs created merely to feed the ERP 3-way-match beast do NOT really count towards 100% PO policy.

    Also would suggest that even when something comes in that should be covered by a PO that is not, rather than taking a tyrannical gotcha attitude, Purchasing leaders should use it as an opportunity to identify issues with current systems and it often is a sign of a change that happened that needs to be addressed.

    1. EtChane Towers says:

      Great comments. I wonder if anyone has performed any benchmarks on what ‘good’ looks like. Should there be a target of how much is an acceptable amount of after the fact POs?

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