Procure to Pay Cycle

Procure to Pay Cycle

As I mentioned earlier, the first step to learn the application is to understand the business, thoroughly, in line with that direction let us see the Procure to Pay Cycle.

In general, for any business the major operation at high level would be purchasing and selling in case of trading organization and in manufacturing organization it would be Purchasing, Manufacturing and Selling. Thus, in any business Purchasing (in business language – ‘Procurement’) is one of the major business process / activity.

Procurement process starts with the demand for the material / goods / Services and ends with the payment for the said purchases.

Let us see the overview of the process steps:

Based on the demand requisition would be sent to Purchasing / Sourcing dept.

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Sourcing team would Request For Quotation (RFQ)

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Quotation Received from the Suppliers (Vendors)

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Analyze the Quote and place the Purchase Order (PO)

[Process may differ if the Organization has the system

Of Approved Supplier List (ASL), Contract Purchase Agreement (CPA)

and Blanket Purchase Agreement (BPA)]

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Material received against the PO and delivered in Inventory

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Invoice is created for the Supplier for the above Purchase

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The above invoice is matched with PO / material receipt / material acceptance

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Schedule the payment as per the payment term agreed upon

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Pay the invoice as per due date

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Accounting entries for Invoice & Payment are transferred to

General Ledger

Let us see the meaning of some important components frequently used in Procure to Pay Cycle:

Standard Purchase Order (PO):

A document used to buy and request delivery of goods / services from a supplier.

The order on which the purchasing department approve a purchase.

Blanket Purchase Agreement (BPA):

Blanket Purchase Agreement is created when you know the details of the goods or services you plan to buy from the specific supplier in a period, but you do not know the details of your delivery schedule.

Planned Purchase Order (PPO):

Planned Purchase Order is a long-term agreement committing to buy the item or service from the single source. Must specify the tentative delivery schedule and details of goods.

Contract Purchase Agreement (CPA):

Contract Purchase Agreements created to enter into an agreement with your suppliers to agree on specific terms and conditions without indicating the goods and services that you will be purchasing. You can later issue standard purchase orders referencing your contracts, and you can encumber these purchase orders if you use encumbrance accounting.

Invoice:

A document received from suppliers that list amount owed to them, for purchased goods / services. In Oracle Payables, you create an invoice online using the information provided by suppliers on the document. It is a list of charges, including payment terms, item and other information. Activities like payment, inquiries discounts and adjustments are based on the information entered upon the Invoice.

2-way matching:

The process of verifying that purchase order and invoice information matches within accepted tolerance levels.

Payables uses the following criteria to verify two-way matching:
Invoice price <= Order price Quantity billed <= Quantity ordered

3-way matching:

The process of verifying that purchase order, invoice, and receiving information matches within accepted tolerance levels.

Payables uses the following criteria to verify three-way matching:
Invoice price <= Purchase Order price Quantity billed <= Quantity ordered Quantity billed <= Quantity received

4-way matching:

The process of verifying that purchase order, invoice, and receiving information matches within accepted tolerance levels. Payable uses the following criteria to verify four-way matching:
Invoice price <= Order price Quantity billed <= Quantity ordered Quantity billed <= Quantity received Quantity billed <= Quantity accepted

Approval:

A feature that prevents you from paying an invoice when your supplier overcharges you or bills you for items you have not received / ordered / accepted. Approval also validates tax, period, currency, budgetary, and other information. If you use budgetary control and encumbrance accounting, Approval also creates encumbrances for unmatched invoices or for invoice variances. Approval prevents payment or posting of invoices that do not meet defined approval criteria by placing holds on the invoice. Approval also releases holds when you resolve invoice exceptions. You must submit Approval for each invoice to pay and post the invoice.

Distribution set:

A Payables feature you use to assign a name to a predefined expense distribution or combination of distributions (by percentage). Payables displays on a list of values the list of Distributions sets you define. With Distribution Sets, you can enter routine invoices into Payables without having to enter accounting information.

There are lot of phrases and terms used in Procure to Payables, let me give the link of Oracle Glossary of terms in order to go through, whenever you need it.