What is a Purchase Requisition and Why It Is Important for Your Business?

We have written many articles on purchase orders, but one key term that continues to cause confusion and mixup is purchase requisitions.

In this blog post, we highlight the differences between purchase requisitions and purchase orders, and why purchase requisitions are imperative in your organization.

What is purchase requisition?

A purchase requisition is a formal request initiated within an organization to procure specific goods or services. It typically outlines the description, quantity, and price of the items or services requested and serves as an internal authorization before a purchase order is issued to suppliers.

The importance of a purchase requisition in for an organization

In any organization, there is always the need for supplies or materials and equipment. These may be office supplies, consumables, machines, and other equipment. A purchase requisition not only offers a structured approach to procurement but also aids in financial management, planning, and risk mitigation, making it an indispensable tool for modern businesses.

A purchase requisition holds significant importance for a company for several reasons:

1. Financial Control: A purchase requisition system ensures that purchases align with a company’s budgetary constraints. By necessitating approval before any purchase, companies can monitor and control spending, ensuring resources are used judiciously.
2. Streamlined Procurement Process: A standardized purchase requisition process helps in consolidating requests, which can lead to bulk purchasing and potential volume discounts. It also ensures that the procurement team follows a structured approach, reducing ad hoc or unplanned purchases.
3. Enhanced Accountability: Purchase requisitions provide an audit trail. Every request, approval, or denial is documented, ensuring transparency in procurement activities. This level of documentation can be vital during internal audits or external regulatory checks.
4. Avoidance of Unauthorized Purchases: The purchase requisition process acts as a gatekeeping mechanism, ensuring only approved and necessary purchases are made. This prevents unauthorized or redundant purchases that can strain a company’s finances.
5. Forecasting & Planning: By analyzing purchase requisitions, companies can predict future spending trends, helping the finance and procurement departments in budgeting and forecasting exercises.
6. Ensuring Need Fulfillment: purchase requisitions ensure that departments get what they genuinely need to function effectively. They help prioritize and communicate demands between departments and the procurement team, ensuring timely acquisition of essential items or services.
7. Vendor Management: With a clear purchase requisition system in place, procurement teams can better plan their interactions with vendors, negotiate more effectively, and manage lead times, contributing to a more efficient supply chain.
8. Risk Management: By maintaining a standardized requisition process, companies can more easily adhere to compliance standards, reducing risks related to non-compliance with internal policies or external regulations.

So, why are purchase requisitions important in the procurement process?

1. They Initiate the purchasing process

Purchase requisitions play a foundational role in initiating the purchasing process within an organization. Here’s a step-by-step breakdown of how they set the process in motion:

1. Identification of Need: The process begins when a department or individual within an organization identifies a need for goods or services. This might be a result of depleted inventory, an upcoming project, equipment breakdown, or any other scenario requiring an external purchase.
2. Creation of the Purchase Requisition: The individual or department requiring the item/service fills out a purchase requisition form. This form typically includes:
   • Description of the item or service required.
   • Quantity needed.
   • Estimated cost or price range.
   • Desired delivery date.
   • Any other specific details or justifications for the request.
3. Review and Approval: Before the requisition can move forward, it undergoes an internal review and approval process. Depending on the organization’s hierarchy and rules:
   • The immediate supervisor or department head might first review the purchase requisition.
   • It could then move to higher levels of management or a dedicated procurement department for further validation.
   • Some organizations may have a financial review to ensure budgetary compliance.
4. Sourcing (if a supplier isn’t predetermined): Once approved, the procurement department begins sourcing suppliers if there isn’t a preferred or pre-approved one. This might involve:
   • Requesting quotations (RFQs) from potential suppliers.
   • Evaluating supplier credentials and past performance.
   • Comparing price, quality, delivery times, and other relevant factors.
5. Creation of Purchase Order (PO): After a supplier is chosen, the purchase requisition is often converted into a purchase order . The PO is a formal document that is sent to the supplier to officially place the order. It contains detailed information about the item/service, price, delivery date, and terms and conditions of the purchase.
6. Order Fulfillment: Once the supplier receives the PO, they will acknowledge it and subsequently deliver the goods or services as per the agreed terms.
7. Receipt and Inspection: Upon delivery, the company will inspect and verify the received goods/services against the PO to ensure accuracy and quality.
8. Payment: After verifying the received items, the accounts payable department processes the invoice and arranges payment to the supplier as per the agreed terms.
9. Documentation and Record Keeping: Throughout the process, all documentation, from the initial purchase requisition to the final invoice, is kept for future reference, accounting purposes, and potential audits.

2. They’re an effective control tool

Purchase requisitions act as an effective control tool in organizations by introducing structure, oversight, and transparency to the procurement process. Here’s how PRs function as a control mechanism:

1. Standardized Process: Purchase requisitions establish a uniform procedure for initiating purchases, ensuring that all procurement requests undergo a consistent and controlled process, reducing the chance of ad hoc or unsanctioned purchases.
2. Separation of Duties: Purchase requisition systems typically separate the roles of those who request, approve, and make the purchase. This separation minimizes the risk of any single individual or department having unchecked authority over procurement, thereby reducing opportunities for fraud or misuse.
3. Approval Mechanism: Before a purchase can proceed, PRs necessitate validation and approval, often at multiple levels. This ensures that the requested items align with company needs, budgetary constraints, and strategic objectives.
4. Budgetary Control: Purchase requisitions can be integrated with budget tracking tools, ensuring that departments or projects don’t exceed their allocated funds. They allow for real-time monitoring of expenses against budget allocations.
5. Audit Trail: Purchase requisitions provide a clear record of who requested a purchase, who approved it, and the reasons behind the request. This documented trail aids in transparency and can be invaluable during internal and external audits.
6. Forecasting and Planning: Purchase requisitions give insight into an organization’s spending trends and needs, assisting financial and procurement departments in forecasting and strategic planning exercises.
7. Vendor Verification: Purchase requisition systems can require validation of suppliers, ensuring that the organization doesn’t engage with unauthorized or potentially fraudulent vendors.
8. Minimizing Redundancy: By documenting and reviewing all purchase requests, organizations can identify and avoid redundant or overlapping purchases, optimizing resource utilization.
9. Risk Management: Purchase requisitions help in adhering to compliance standards and internal policies. They can be tailored to meet industry-specific regulations, reducing the risks related to non-compliance.
10. Enhanced Accountability: By demanding justifications for each purchase and necessitating approvals, PRs instill a sense of responsibility among employees, ensuring that company resources are used judiciously.
11. Feedback Loop: An effective purchase requisition system allows for feedback, letting the procurement process evolve based on past experiences, challenges, and changing business needs.

3. They protect the organization from fraud

A purchase requisition system is a pivotal tool in combating fraud within an organization’s procurement processes. Here’s how it can be instrumental:

1. Established Approval Process: Purchase requisition systems require multiple levels of approval before a purchase can proceed. This multi-tiered approach makes it challenging for a single individual to push through unauthorized or fraudulent purchases.
2. Audit Trail: Purchase requisitions create a documented trail of every purchase request, approval, and denial. This transparency makes it easier to review and audit procurement activities, thereby detecting anomalies or suspicious patterns.
3. Separation of Duties: With a purchase requisition system, the responsibility of requesting, approving, and executing a purchase is typically divided among different individuals or departments. This separation minimizes the chance of any one person having unchecked control over the procurement process, a key factor in preventing insider fraud.
4. Verification of Need: The requirement for a detailed justification of the goods or services requested in a purchase requisition ensures that every purchase has a valid business rationale. This helps combat “phantom purchases” or the acquisition of items for personal use or resale.
5. Budgetary Controls: Purchase requisition systems can be integrated with budgetary controls to ensure that requested purchases align with available funds. This can prevent attempts to inflate prices or make unnecessary purchases as a way to divert funds.
6. Vendor Validation: Purchase requisition systems often involve a thorough vetting of suppliers. This can help ensure that the company isn’t doing business with non-existent (“ghost”) vendors or those with conflicts of interest.
7. Standardized Process: A consistent, organization-wide purchase requisition process reduces the likelihood of ad hoc or off-the-books purchases. Such standardization ensures that all purchases undergo the same scrutiny.
8. Data Analysis: Modern purchase requisition systems, integrated with digital tools, can use data analytics to identify unusual patterns or trends in purchasing, flagging potential areas of concern for further investigation.
9. Employee Awareness: A transparent and structured purchase requisition process signals to employees that procurement activities are monitored and audited, acting as a deterrent for potential fraudsters.
10. Continuous Improvement: As fraudsters evolve their tactics, purchase requisition systems can be continually updated and refined to address new threats. Regular reviews and updates to the purchase requisition process can ensure it remains an effective line of defense.

4. Purchase requisitions centralize the procurement process

Purchase requisitions play a pivotal role in centralizing the procurement process, ensuring that the buying activities of an organization are streamlined, consistent, and controlled. Here’s how purchase requisitions contribute to this centralization:

1. Standardized Procedure: By using purchase requisitions, organizations establish a uniform method for initiating purchases, ensuring that all departments and individuals follow the same process. This standardization reduces variability and establishes a clear path for procurement.
2. Central Repository: All purchase requisitions typically funnel into a central procurement or purchasing department. This consolidation allows for easier management, tracking, and reporting of all purchasing activities, regardless of which department initiated the request.
3. Unified Vendor Management: Centralization via purchase requisitions ensures that interactions with suppliers are consistent and managed through a single channel, even if multiple departments are sourcing from the same vendor. This can lead to better negotiation capabilities and relationship management.
4. Efficiency in Bulk Purchasing: By centralizing requests, procurement teams can identify opportunities for bulk purchasing, which might lead to volume discounts and cost savings. Without centralization, departments might make individual purchases, missing out on potential savings.
5. Controlled Budget Monitoring: A centralized process allows the finance department to monitor and control expenses more effectively. They can easily compare departmental requests against allocated budgets, ensuring fiscal discipline.
6. Enhanced Oversight: Centralization brings all procurement requests under the purview of a specialized team or individual, ensuring each requisition undergoes rigorous review, validation, and approval.
7. Risk Reduction: By centralizing procurement through purchase requisitions, organizations can better enforce compliance with internal policies and external regulations. This reduces the risk of non-compliance, fraud, and unauthorized purchases.
8. Data Analytics and Insights: A centralized system often comes with integrated tools that can analyze procurement data, providing insights into spending patterns, vendor performance, and potential areas of optimization.
9. Consistency in Documentation: Centralizing the process ensures that all documentation, from the initiation of a purchase requisition to the final payment, follows a consistent format and is stored in a unified manner. This is invaluable for audits and record-keeping.
10. Feedback Loop and Continuous Improvement: A centralized procurement process offers a consolidated view of all purchasing activities. This holistic perspective is crucial for reviewing the effectiveness of the process, making necessary adjustments, and ensuring continuous improvement.

Purchase requisition vs purchase order: what is the difference?

Both purchase requisitions and purchase orders are integral components of the procurement process, but they serve different purposes and are used at different stages. Here’s a breakdown of the differences between the two:

Definition:

Purchase Requisition (PR): A purchase requisition is an internal document used by a department or individual within an organization to request the acquisition of goods or services. It is essentially a formal request that signifies a need but is not a confirmed order.
Purchase Order: A PO is an official document sent from the buyer (organization) to the seller (supplier) indicating types, quantities, and agreed prices for products or services. It’s a binding contract that commits the organization to buy the specified goods or services.

Usage:

PR: Used internally to seek approval for a purchase.
PO: Used externally to place an official order with a supplier.

Purpose:

PR: To communicate the need for goods or services and obtain necessary approvals.
PO: To officially order goods or services once the need is approved.

Audience:

PR: Typically reviewed by internal parties like managers, department heads, or the procurement team.
PO: Sent to external parties, namely the vendors or suppliers.

Binding Nature:

PR: It is not a legally binding document. It’s more of a communication tool within the organization.
PO: It is a contractual agreement between the buyer and seller. Once accepted by the supplier, it becomes a legally binding contract.

Sequence in Procurement:

PR: Comes first in the procurement process. It’s the initial step where a need is identified and approval is sought.
PO: Follows the purchase requisition. Once the requisition is approved, a PO is generated to formalize the purchase with the supplier.

Details Included:

PR: May include item descriptions, quantities, desired delivery dates, and justifications for the purchase.
PO: Contains more detailed specifications, agreed-upon prices, payment terms, delivery schedules, and other contractual terms.

Outcome:

PR: Results in either approval or denial of the requested purchase.
PO: Triggers the supplier’s fulfillment process, leading to the delivery of goods or services, followed by invoicing and payment.

What exactly is a purchase order?
We do a great deep dive where we answer the question what is a purchase order.

A purchase order is an official document issued by a buyer to a seller, indicating the types, quantities, and agreed prices for products or services. It serves as a contractual agreement between both parties, detailing the specifics of a purchase, including delivery terms and payment conditions. Once accepted by the seller, a PO becomes a legally binding contract, committing the buyer to the acquisition and the seller to the delivery of the specified goods or services.

Purchase requisitions: critical documents for successful spend management

Purchase requisitions are critical to successful spend management because they introduce a structured and controlled approach to procurement. They ensure that every purchase aligns with organizational needs, budgets, and strategies, thus preventing unnecessary or unauthorized expenditures. By centralizing and streamlining the buying process, purchase requisitions promote transparency, enable efficient budget tracking, and enhance accountability, making them indispensable for optimal financial oversight and resource allocation.