Business-to-business transactions require series of document exchanges to ensure commercial and regulatory compliance. These documents reflect the strength of the process, internal controls, and terms of the transactions that take place between the companies. Business purchases are not like a swipe of credit cards as more nitty-gritty correspondence and documentation are of vital importance in the process.
One of the widely used documents in the process of purchase is the purchase order. It’s prepared by the buyer and sent to the supplier with the requested quantity and terms of the transaction. Once, a purchase order is accepted by the supplier it’s a legally binding agreement.
However, the problem is that businesses have to make purchases regularly with some specific suppliers. So, it’s energy-consuming and laborious to send purchase orders every time (especially in case of recurring purchases).
Hence, buyers and suppliers agree to carry out the transactions on certain terms for some specific period without a need to send purchase orders on every delivery. So, a blanket purchase order is agreed between buyer and supplier that can be used for multiple deliveries and invoices.
In other words, a blanket purchase order is placed by the customer to get multiple deliveries from a supplier on the same terms and conditions for some specified time in the future.
How does BPO work?
The BPO works based on pre-negotiation. The pre-negotiation of the terms makes BPO different from simple PO. The negotiation may include the dollar amount of the purchase and the quantity to be purchased in some specific period. Once the timeline is reached, the companies may enter into another BPO. However, once BPO is done it acts as a legally binding document for a specified period. So, a great precaution needs to be taken to ensure purchase efficiency by a way of BPO.
It greatly reduces the laborious work and creates mutual understanding between the buyers and suppliers. It saves time and energy as prices and terms do not have to be negotiated again and again.
Hence, a single PO works for multiple transactions between buyers and suppliers. As a single Purchase order covers multiple deliveries and invoices that’s why it’s called a blanket purchase order.
BPO can also be formed for the supply of services. It’s formed when the business of the buyer needs to have some continuous service from the supplier. For instance, the buyer may need maintenance services of the machine throughout the year.
If the buyers enter in BPO with the service provider, the service provider can perform services on pre-agreed terms and the price does not have to be negotiated every time of the purchase. Let’s discuss some aspects of the blanket purchase order,
Benefits of blanket purchase order- BPO
The blanket purchase order offers several advantages that include but not limited to followings,
Blanket purchase order decreases the workload of the managers in the purchasing department as they don’t have to negotiate with the supplier for every time purchases. Further, the purchasing department does not have to get approvals for every purchase, the reduction of bureaucracy increases the efficiency of the purchasing department.
This helps to improve the efficiency of the purchasing department, this improved efficiency can be realized in decreasing inventory ordering cost and holding cost, etc.
The personnel in the purchasing department can focus on technical and research-related stuff rather than doing clerical works like the generation of the purchasing order.
The blanket PO is an excellent approach of doing purchase when the price of the supplies is expected to increase.
BPP adds reliability to the budgeting process as the price of the material to be used in the production process is already known to the company.
It helps to improve working relations with the suppliers as blanket orders are expected to be larger. Even, economies of scale can be achieved with a blanket approach.
BPO is beneficial for suppliers as well because they can manage the supplies to be delivered on a timely basis.
The BPO can be an excellent choice for the buyer in the following situations.
The business operates in an environment where prices of the material are increasing.
The details of the purchases can be specified easily.
The vendor is capable to deliver supplies on a timely basis. In other words, the vendor is credible and got the ability to ensure sustained supplies.
The bulk orders produce economies of scale that lead to a lower price per unit and increase profit for the company.
However, there is a certain situation where BPO should be avoided to bring consistency and efficiency to the business. These situations include,
There is a greater fluctuation in the prices of the product and the market does not remain stable. Sometimes, there is an increase and sometimes, there is a decrease in the prices.
The business has greater fluctuations in the demand for the product and it cannot be estimated reliably.
The company does not use the same level of inventory all the time. Sometimes, it uses good quality material, and sometimes, it has to use low quality material (depending on the sales order).
It suggests that if there is uncertainty regarding purchase in the business model of the company, the BPO does not seem to be a suitable option of purchase. Due care needs to be exercised before entering the BPO as it may be actually a cause of loss for the company if due care is not exercised.
So, certain precautions are required to issue BPO as it becomes legally binding once both parties have approved the same. The BPO is a commercial document that acts as a contract between the parties like a simple PO. However, the difference is that simple PO is used only for a single purchase and BPO can be used for a number of the purchases and deliveries.
The companies can enter the BPO for material and supply order and supply of the services. The material and supply orders are when the buyer needs to purchase the standard quality of products from the same supplier. For instance, a business may need packing material during the entire year and can enter BPO with suppliers.
Purchase order VS blanket purchase order
All the purchases in the modern business environment are backed by purchase orders. The normal purchase order is used for a single delivery and a single invoice can be expected from it. The acceptance of a single purchase order brings liability on a supplier to deliver for one order.
On the contrary, a blanket purchase order is used for multiple deliveries and multiple invoices can be expected from the supplier. It acts as a contract to deliver a specified quantity of goods/services over a specific period.
Similarly, a purchase order does not contain the concept of long terms pre-negotiation as it’s a negotiation for one time only. On the other hand, Blanket purchase order contains the concept of pre-negotiation as it’s a contract that covers some specific time of the future.
The modern-day business dynamic has considerably evolved over the course of time. As a matter of fact, companies today are striving to be more agile in order to survive in a fast-paced environment. In this regard, it is imperative for businesses to ensure that they are able to make decisions on grounds of business strategy.
This in return helps them retain their competitive edge. With shrinking profit margins, companies are always looking for options that are in line with the cost-cutting objective.
This has been a fairly important consideration for companies since it gives them much-needed flexibility that is well suited to the current business outlook.
Rapidly transforming business practices have also been coupled with new innovations, not only in product lines that the company offers but also in terms of innovative processes that can help the company save up considerable costs.
Outsourced Accounting has been a new trend in this regard and over the course of years, it has seen an exponential increase that is mirrored by a larger number of companies shifting towards outsourced accounting.
Financial planning and accounting are considered to be highly critical elements in business reporting and analysis. It is an integral ancillary function for the business that helps the business to learn and grow, and ensure that they can make decisions based on both, qualitative, as well as quantitative metrics.
However, more often than not, hiring in-house accountants are often not feasible for companies because they have an underlying financial constraint they need to keep in mind when making these decisions.
Therefore, the best course of action, in this case, is to outsource the particular accounting division, so that the accounting department is duly taken care of by external third-party accountants.
Therefore, outsourced accounting can simply be defined as an act that involves an organization outsourcing its accounting and finance division to an external third party. This third party is not necessarily on the payroll for the company.
It mostly works on a contractual basis where the concerned person (or party) to whom the work has been outsourced to is responsible for managing accounts for the company.
Over the recent past, outsourced accounting has exponentially grown in popularity. Broadly, outsourced accounting includes the following fundamentals for the clientele:
Real-Time Accounting and Financing: Accounting and Finance records need to be perpetually maintained in order to ensure that all transactions are noted down in the system without anything being missed out. Outsourced accounting division helps to ensure that the respective accounting and finance data entry tasks are maintained in real-time.
Audit and Compliance Related Process: Outsourced accounting to reputable firms enables companies to comply with audit and compliance. Since it is outsourced to professionals who have a clear understanding of accounting and finance, it is easier for them to comply with the said rules and legislations. Similarly, it also acts as an aid in the preparation of the final audit.
Financial Modelling: Financial Modelling is considered to be a highly important decision-making tool for organizations. It is considered to be an important resource for quantitative and qualitative decision-making. Outsourced Accountants are also responsible to provide companies with financial models that can be used as viable sources for decision making.
Process Automation: The greatest advantage of outsourced automation is the fact that it helps organizations to automate their accounting processes. Firms that manage accounts for companies manage end-to-end automation, and it helps their clients to focus on the core activities. Knowing that the accounting division is fully outsourced helps them to be at ease knowing they do not have to worry about month-end closings and year-end reporting.
Personalized packages: CPA Organizations that manage accounts and finances for other companies normally have personalized packages for clients, which are best suited to their needs. For example, for medium and small-sized enterprises, they have different packages, and for larger organizations. The size of the company is never an issue when it comes to outsourcing accounting. It can always be managed and tweaked as per the requirements of the company.
Therefore, outsourced accounting provides numerous different benefits to companies on the grounds of much-needed flexibility to the users.
It is a cost-effective solution for companies that might have a dearth of financial resources to hire a permanent accountant on board.
It is also a viable option for small business owners who suffer from a lack of time to manage to account and bookkeeping themselves.
This can be attributed as the core reason behind the exponential growth in outsourced accounting over the course of time. Other than that, outsourced accounting has a number of advantages for the company, which are given below:
Increased Efficiency: With a major ancillary function outsourced, the existing human resources that were currently managing accounts can do something worthwhile. It not only minimized current expenditure but also gives a chance to the business owners (or managers) to offload their duties and responsibilities to specialized personnel.
Professional Help: Hiring professional help can be challenging for businesses because of the associated payroll costs. Outsourcing accounting gives the company a chance to have its accounts managed by certified personnel, at a limited cost.
Cost Reduction: The overall cost reduction, in the form of reduced hiring and recruitment costs, in addition to an infrastructural setup for accountants is also considered an important advantage of outsourced accounting. There is no need to set up hiring and recruitment posts, and this can result in considerable cost-saving advantages for the company.
Hence, it is safe to say that outsourced accounting is perhaps the best possible solution to modern-day problems. It can greatly help companies maintain their accounting records on a perpetual basis, without any cause of concern for the company.
Outsourcing accounting might seem to be a cumbersome task, but once it is properly executed, the results are flabbergasting in terms of higher efficiency, better reporting, and better compliance.
It is safe to say that outsourced accounting is considered to be a solution for companies looking for agility and receptiveness in the longer run.
During the normal course of operations, there are numerous financial transactions that are taking place within the company. In this regard, it is often challenging for companies to keep a proper track record of the expenses that they have incurred.
As a result, it might be challenging for companies to keep up to date with the expenses, and ensure that they are able to properly maintain a ledger listing down all individual accounts for the expenses that have been incurred.
Particularly in the case of small transactions, it is often challenging to keep a track record of all the expenses that have been incurred.
As a result, companies keep and maintain a petty cash book, so all such transactions, which are small or insignificant in nature can be recorded under one head.
Petty Cash Book can, therefore, be described as a ledger that lists down all the petty cash expenses that the company has incurred over a specific course of time.
It includes balances and transactions which if otherwise individually managed might be harder to keep a track of. Hence, all such transactions are booked under the petty cash account.
Some examples of petty cash expenses include stationery costs, printing costs, as well as regular plumbing works. These expenses might be recurring or might be one-off, but the common denominator is the fact that they are insignificant to be kept under the track in a separate account.
Key Features of the Petty Cash Book
As mentioned earlier, it can be seen that the petty cash book entails smaller transactions that take place within the company. However, there are some salient features of petty cash books that are common across all different petty cash books. They are included as follows:
A petty cash book has a debit and a credit side to show the incomings and the outgoings of the cash from the petty cash account.
Just like a normal cash book, a petty cash book is periodically maintained across a month.
It has dates and other relevant columns that are supposed to be included in order for auditors (or accountants) to reconcile the amounts that have been disbursed as petty cash book payments at the end of the subsequent accounting cycle or the month.
Example and Format of Petty Cash Book
Petty Cash Book format, and creation can be illustrated via the example given below:
Graze Inc. is a trading concern. They maintain a petty cash book. As per the company policy, the number of general expenses classified as petty cash is deposited in the petty cash account at the beginning of the month, followed by which due subtractions are made across the month. For the month ended November 30, 2019, Graze Inc. had the following transactions:
On 1st November 2019, Petty Cash had a previous balance of $2400.
As per company protocol, on 1st November 2019, the petty cash account was deposited with an amount of $3000.
During the month, the following expenses were incurred:
Casual labor charges: $250
Stationery charges: $450
Charitable Donations: $200
Office Cleaning Equipment: $180
AC repair: $320
This is the number of expenses that were incurred under Petty Cash by Graze Co. At the end of the month of November 2019, the Petty Cash Book will look something like this:
1st November 2019
31st November 2019
30th November 2019
Balance Carried Forward
How to reconcile and review Petty Cash Book?
Reconciling and Reviewing Petty Cash Book is a very integral part of internal control and should be highly prioritized by companies.
It is important for organizations to ensure that they are able to periodically reconcile these differences, in order to ensure that there is no chance of fraud or any financial malpractice within the company.
Therefore, it is a good idea to have a monthly round-up of expenses that are paid by the company, so that proper balance is maintained in the company.
The reconciliation and review process help organizations safeguard against any leakages because it is often harder to keep track of these expenses. However, a petty cash book maintains all balances that can be subsequently double-checked, if there is a need to do so.
Importance of Maintaining a Petty Cash Book
As mentioned earlier, it can be seen that maintaining a petty cash book is very important for the company in order to ensure that there are proper reconciliation and review, which reduces the chance of error.
In the same manner, maintaining a petty cash book is also important because it helps the decision-makers to have an idea about the expenses that are included in petty cash disbursements, and how can those expenses be minimized, if there is a need to do so.
A transferrable letter of credit can be described as a financial guarantee, that one of the parties, is going to transfer all, or a part of the credit that they have to the other party. Letters of credits are seen as protecting covenants that ensure that payment is made to the supplier of those particular goods and services.
Transferable Letter of Credit includes the buyer (who applies for the Letter of Credit), the middleman (or the First Beneficiary), and the seller (who is the final beneficiary). The Letter of Credit is used between these parties in order to ensure that payment is guaranteed from one party to another.
Key Features of Transferable Letter of Credit
Transferable Letter of Credit normally involves four parties.
The first part is the buyer. The buyer procures raw materials from the supplier, who might be situated abroad. Therefore, the seller of the goods and services might need a guarantee from the middle man (who is facilitating the purchase), that the seller is going to be paid for the goods or services.
Given the fact that the middle man might not always have the resources to pay the seller an amount as a guarantee, so he asks the first beneficiary to create a transferable Letter of Credit. Therefore, using this particular type of letter of credit, they are able to carry out the transaction in a safe and secure manner.
Therefore, the key features of the Transferable Letter of Credit include information about the transaction and the related parties that might be involved. It might also include covenants in the cases where the buyer lays down some terms and conditions about what is expected from the overall analysis.
How do Transferable Letter of Credits work?
As mentioned earlier, it can be seen that the transferable letter of credit creates an exchangeable provision between the parties involved. This works in the way that the buyer of the goods and services goes to the bank, in order to ask it to be an intermediary in the process.
This means that the bank is taking guarantee to the seller of the goods and services that they are going to be paid by the buyer.
This is important because the seller of goods needs to be ensured that they will eventually be paid for the goods that they sell. They can only process the order once they have the guarantee, and that is why they require the letter of credit.
In the case of transferable letter of credit, the bank that issues the letter of credit includes provision the extension of the credit to the agreed upon second beneficiary.
In this case, the second beneficiary is bound to be entitled to payment of the loan, if it is required that the time of payment. However, it must be noted that the first beneficiary is considered to be liable for the payments in the case where they are disbursed by the bank.
Transferable Letter of Credit vs Back-to-Back Letter of Credit
As far as Back to Back Letter of Credit is concerned, it provides the option to the intermediary, or the first beneficiary to use the Letter of Credit as security when conducting a transaction with any other supplier.
Regardless of the fact that this can be used as a credit document, yet back to back letter of credit involves the first beneficiary requesting the buyer to issue a transferable so that the transaction can be furthered and used for the supplier.
On the contrary, as far as a transferable Letter of Credit is concerned, it can be used as a credit document without any further perusal, because the beneficiary can be transferred.
Non-Transferable Letter of Credit
Non-transferable letter of credit is another type of letter of credit, which does not allow the transfer of credit to any other beneficiary except for the first beneficiary. Therefore, as far as a non-transferable letter of credit is concerned, only the first beneficiary can claim credit for it. It cannot be transferred, so it does not give the option to the first beneficiary to transfer the funds to anyone else.
A lot of organizations might prefer to work with non-transferable Letter of Credit because of the fact that they want to make sure that their letter of credit is not transferred without their discretion. Hence, in this case, it can be seen that there is a need to have clear discretion about the letter of credit being transferable, and only being specific to one party, the single beneficiary that the buyer has decided.
During the normal course of the business, there are numerous different transactions that the business carries out. In this regard, it is highly important to ensure that all the transactions are properly recorded, and are able to be retrieved with proper and relative ease.
In the same manner, it is also important to have clear and discrete communication channels established with both, the internal, as well as external stakeholders of the company.
Purchase Order is one such document that facilitates better communication and record-keeping during the day operational practice of the business.
A purchase order is a document that is sent from the purchaser of the goods to the seller of the goods, in order to communicate their intention to purchase certain goods and services from the seller.
Purchase Order simply acts as a communication tool between both the parties, and it helps organizations to ensure that they are able to dispatch the items that have been requested by the purchaser.
Key Features of a Purchase Order
Given the fact that the main rationale behind the purchase order is to ensure that there are clear directives from the purchaser, to the seller regarding the goods that need to be invoiced. Therefore, it includes a number of components, and key features, that are mentioned below:
Date: Purchase Orders include the date on which the purchase orders are being issued, as well as the date where the company expects to receive the items they want to purchase. This is important because it communicates to the seller regarding the timeline they have to deliver the goods and make the necessary arrangements.
Particulars: Purchase Orders should include the specifics of the products that are being ordered. This includes the items, as well as the description of those items. These particulars should ideally be mentioned in order to avoid any confusion. Therefore, the purchaser of the goods is expected to include the specifications of the product item in the most detailed format possible.
Quantity of the goods: In addition to the particulars of the goods that are being purchased, it is also important to include the desired quantity of those particular goods and services.
Pricing: In the same manner, it is also important to mention the agreed-upon pricing in the purchase order. This is to show that the company has agreed on those particular prices, and the seller can subsequently generate an invoice based on those prices.
Usages of a Purchase Order
Purchase Orders tend to be extremely crucial for the company because of a number of reasons. Those reasons are mainly vested on the following grounds:
Acting as a communication tool between the seller, and the purchases. This acts as a resource using which the seller of the goods prepares the order.
This acts as a reconciliation tool between the purchasers and the seller. It acts as proof that this was what was ordered, and subsequently, the relevant orders were delivered. This means that in the case where the purchaser makes the claim that the goods that were delivered were not what they had ordered, they can go back to the purchase order, and settle the difference.
During the audit process, purchase orders are important because they can identify if the correct amount was subtracted from the ledgers, and the relevant entries were carried out in a proper manner.
Purchase Order tends to be used as a confirmation from the purchaser that he is interested in purchasing those particular goods. Therefore, it is an order form, which gives a heads up to the seller, that he can start preparing those particular goods. Without a purchase order, there is no proper and formal proof that the order has been placed.
Importance of Purchase Orders
The importance of creating and managing purchase orders is more than just a communication-related tool. It is necessary for organizations to keep a proper record of purchase orders, primarily because of the following reasons:
Purchase Orders tend to protect both the parties (the buyer, and the seller) because they provide contractual, legal protection.
From the seller’s perspective, purchase orders are helpful because they help to keep and maintaining the company’s persona, and ensuring that they are able to keep a track of all the incoming orders.
They can also be helpful in invoice creation, and subsequent tracking of payments as well as order protocols.
Purchase Orders are also helpful because they help companies avoid any duplication of orders. It helps them to schedule their processes in accordance with the purchase orders. Therefore, it acts as a very resourceful planning tool for the companies.
Material refers to the raw material, or the inputs that are required by the company to fulfill the production process.
Subsequently, material Control comprises managerial activities that are undertaken by the decision-makers of the company in order to ensure that the quality, as well as the quantity of the materials that are used in the production process, are not managed such that there are no bottlenecks in the production process.
It also covers ground to ensure that cost-effectiveness pertaining to sourcing, and stocking of materials is taken into consideration.
There are a few major objectives of material control. These objectives are as follows:
Ensuring smooth and uninterrupted production flow: During the normal course of business, there are certain unprecedented situations because of which demand might increase or decrease. In this regard, it is important for the managers to ensure that they are well prepared for such an event, and they do not suffer consequences in the form of halted production because of material unavailability. If not managed properly, this might result in considerable financial losses to the company.
To have proper knowledge about reordering intervals and lead times: When dealing with materials being sourced from another vendor, managers need to ensure that they are able to have a clear idea regarding the lead time (the time is taken from when they place the order of materials, till when they receive the materials), so that they are able to subsequently calculate their reordering intervals. It is imperative for managers to plan this properly so that they are able to avoid any production halts.
Minimizing costs associated with Material Ordering: Material Control also helps companies to ensure that they can identify the Economic Order Quantity, in terms of ensuring that they are able to keep the costs associated with the material order at a minimum. They need to incorporate ordering costs, as well as stocking costs, in order to ensure that material ordering costs are minimized.
Material Control is a very important aspect of production planning, and hence, should be taken very seriously. In the case where managers are able to execute material planning properly, they can seek the following benefits:
Minimized Costs and Wastage: This is because they would exactly know the amount that is required to execute the production process, and they would not end up ordering more than they actually need.
To identify areas of improvement: By using ratios like material price variance, and material quantity variance, businesses can identify areas for improvement. This can help them prepare budgets for the coming production cycles, which would help the process to be efficient and effective.
To prevent theft, and loss of inventory: If businesses keep proper track of material inventory, they are unlikely to face issues, like theft, or any fraudulent practice pertaining to materials.
Regardless of the fact that material control is considered a good metric for planning, yet it has certain limitations. They include the following:
Material Planning is an important component that needs to be taken seriously. In this regard, it is highly important to ensure that budgets and planning schedules are not made too strict or tight.
Material Planning might not always align with the actual figures. Existing variance might cause unrest between the employees, and might put unnecessary pressure on the workers.
It is harder to implement material control policies because a number of factors are beyond the control of the company.
5 best practices for material control
Therefore, there is no doubt to the fact that even regardless of the limitations that exist, material planning tends to be an increasingly important metric, which can be really helpful for companies. Here are 5 best practices for material control:
Creation of budgets, and then comparing them with actual figures end of the year, to identify causes for variance. Subsequently, it also includes working to improve variance in the next production cycle.
Implementing policies like Just in Time (JIT), or Kaizen to ensure that companies are able to optimize the material handling process.
Having RFIDs installed with material, so that companies can automate tracking of inventory.
Proper warehousing arrangements to stock and store inventory can ensure that the risk of material being damaged as a result of mishandling is minimized.
Weekly audits to ensure that the relevant stocking is undertaken by the company in order to ensure that concurrent feedback is taken from the team on a real-time basis, and any issue that might arise is solved on a perpetual basis.