Most organizations globally have come to appreciate the importance of proper record keeping, which also ensures compliance with the International Reporting Standards (IRS). The supply chain department in an organization is critical as it helps managers understand their expenditure and accounts payable, thus impacting the financial planning and management.
Before an employee makes any purchase, there is usually a process that is followed from the realization that the item is required to the purchasing and eventual receipts of goods or services.
However, the processes and the activities to be undertaken at every stage depend on policies an organization has put in place regarding purchase requisitions. In this article, you'll learn everything you need to know about requisition orders, including their importance to an organization and how they are prepared.
What Is a Requisition Order?
A requisition order is a formal request made by staff to a departmental head in charge of finances, requesting to purchase goods and services outside an organization. Simply put, it's a document an employee within your company creates to request a purchase of goods or services.
A requisition order is critical as it helps the finance department track its accounts payable, thereby enforcing accountability and forecasting cash flow needs in an organization. This document specifies the department requesting the goods, the individual who raised the request, the details of the goods, the potential supplier, and their location.
The purchasing department never sends the requisition order to the supplier, but it assists in moving to the next level of the procurement process, which is the actual purchase of the goods.
Purchase Order vs. Requisition Order? What's the Difference?
The terms "purchase order" and "requisition order" are often used interchangeably and assumed to be the same. But they are not the same thing.
A purchase order is a legal document written by a company to a supplier requesting the supply of goods and services for the stipulated quality, quantity, place, and time. On the other hand, a requisition order is an internal document that seeks permission to buy specified goods and services of set quantity and quality within a specified time frame.
A requisition order always precedes a purchase order and must align with your company's financial goals. In most cases, a supply chain officer uses a requisition order to obtain a Pro-forma invoice which indicates the prices for the desired goods and services.
The pro-forma invoice number is always indicated on the purchase order and ensures the cost of the goods to be procured matches the amount indicated on the pro-forma invoice.
A supplier can use the purchase order to demand the payment and even set the payment terms. However, a supplier cannot use a requisition order to make demands to the company regarding goods and services yet to be supplied.
Similarly, if a company fails to pay the supplier for the goods supplied, the supplier can file a suit in a court of law using the purchase order.
Canceling the purchase order may attract some fines from the supplier's end due to the inconvenience caused. On the other hand, a purchase requisition is not binding to either party and hence cannot attract any fine from the officers involved. The purchase order terms must be well stipulated and followed before, during, and after the supply of goods and services.
How to Write a Purchase Requisition?
There are a number of processes you're required to follow before creating a purchase requisition;
- Outline the exact goods and services to be bought and their quantities.
- Follow the procurement process and choose the best supplier for the job.
- Determine the price at which you seek to purchase the goods.
- Determine the name, location, and delivery terms of the potential supplier.
- Ensure that the figure on the pro-forma invoice matches the one on the purchase order.
After following the steps above, take your purchase requisition form, indicate the department and the person requesting the goods, write the quantity, quality, and units required, and then indicate the specified prices per the pro-forma invoice.
Lastly, ensure that the authorized signatories have reviewed and approved by signing the purchase requisition form. Once approved, send the form to the finance department for the team to check if there are available funds to make that requisition.
Why Is the Purchase Requisition Order Needed?
A purchase requisition order is needed to help an organization ensure compliance with its procurement policies. This document helps reveal the resource gaps existing in an organization, and if honored, it can help improve the efficiency of an organization.
Most importantly, the purchase requisition order is a source document that can help auditors determine how effective an organization is at managing its finances.
To wrap it up, it's worth noting that a purchase requisition always precedes a purchase order. Without a purchase order, a vendor cannot supply goods or services or claim any payment.
Organizations may reject a purchase requisition based on the availability of funds, needs assessment results, or timing. However, once a purchase order has been sent to the supplier, it becomes legally binding to both parties and may attract fines if withdrawn.
Both documents are good source documents for audit trails, and they can help minimize the risk of fraud and help organizations plan their finances better.
Want to learn more? Check out our guide on purchase orders for hardware-intensive startups.