Procure to Pay Process Flow

Welcome back. In the last video, we took a look at the order to cash process flow. In this video, we're going to be taking a look at procure to pay. Now, that's the side of things where we as a company are procuring either raw material, inventory or supplies from another organization so that we can operate.

So let's take a look at an illustration that shows this process flow. All right. So as we can see here, we start with the fact that our company wants to buy something. So let's continue using the example of us being Dunder Mifflin, a fictional paper company. So we want to buy something and you'll see as we go through this process flow, you'll notice that it's basically a mirror image of the order to cash process flow. There's differences in some of the terms and some of the concepts, but very similar flows and patterns.

So the first thing that we have, the most common pattern you'll see for procure to pay is the aspect of a purchase order, then resulting in a receipt which generates a bill, and then there is a payment. So what are all these terms mean? Well, first off, a purchase order is a record of our commitment. Our is a company commitment to buy goods or services from a vendor. Then we have a receipt. Now, I don't mean a receipt, like a little paper receipt. We're using kind of the past tense of receiving goods or services. So it's that record that the goods have been received or services delivered to us. Then a bill is generated, meaning a record that money is owed for the value of those goods or services.

So keep in mind, on the order to cash side, right, they are now sending us on their order to cash flow. They're sending us an invoice from their standpoint. And we receive an invoice. And on our side, a bill is generated in our Netsuite instance. So we have that bill record. And then once we have that bill, we are then able to have the payment against that bill. And a payment is that record, that money was paid, closing out the bill.

So this is the most common pattern for procure to pay. So let's take a look, an example that would fit this pattern. For example, again, if we are Dunder Mifflin, and in this case, instead of saying the ABC customer or ABC company is our customer, let's have them as our vendor. Maybe even the company sells computers and we're trying to buy ten new computers for some new staff that we're employing. So we're going to ABC Company to buy these ten computers. First off, we would generate a purchase order. So we start off with generating a purchase order that goes to ABC Company. They ship us the ten computers. Once we receive the ten computers, we record that we have received them. So the receipt record is made and then we would also receive the invoice from ABC Company to pay for these ten computers. That would be the bill. Now once we have the bill, we can go straight to payment for that bill.

And again, this is not necessarily the only pattern for procure to pay, but it tends to be the most common one is the full cycle. So let's take a look another example. Let's say we start off with a purchase order. In this case for services. Let's say we need some consulting, so a purchase order is drawn up to get some consulting. We get a consultancy firm, they deliver the services to us. But in this case, we're not receiving physical goods, right? It's just a service delivered. So we actually don't have to do the receipt step. We can skip straight from purchase order to bill, in which case we receive the invoice from the consultants firm. We receive the services, we generate the bill, and then we pay that firm.

So in this case, we've skipped that receipt step and simply gone purchase order bill payment. So that's another common one. An additional flow that you can have or I should say additional pattern is, let's say for things like utilities or services that are recurring payments and again, not necessarily something we're receiving something physically, but let's say, you know, we're paying for the electricity and the lights in that case. We our company wants electricity and power. So that's something we need. And we don't draw up a purchase order every month, or at least you don't have to. You simply know that that expense is coming. And when it does right, we get the invoice from the electrical company or the utility company every month. And that goes straight to a bill being generated to match that invoice. And we pay that bill. So no purchase order, no fulfillment, or in this case, from our end, a receipt and a straight to we receive the invoice, we generate a bill on our side, we pay that bill, that transaction is completed.

So that's another common one that organizations will have. So these are, again, not exhaustive of all the different patterns that can be, but these are some of the common ones. And that's it for the overview on the procure to pay process flow. In the next video, I'm going to be doing an example in Netsuite to show you how that would work. So I’ll see you there.

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