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A purchase order (PO) system is a method of tracking promises of payment to vendors. People inside the business create a requisition to buy something, managers approve it, and the accounting people review the documentation. A purchase order indicates the price, quantity, timing, and other relevant details of the purchase that can then be matched or reconciled when the goods or services are delivered. It’s administration that seems like overkill…until it isn’t.
When a small business reaches a certain size, the leadership can struggle to manage cashflow by feel. Where they used to just look at the bank balance and do some quick mental math to figure out their cash position, added volume increases the complexity of these mental gymnastics. Surprise bills start to show up (e.g., that one subcontractor who submits their invoice months after the project is completed and the client has already paid). Suddenly, profit on the job tanks. Suddenly, vendors are calling on overdue invoices. Thoughts of cash become increasingly frequent and worrisome. An occasional look at the bank balance becomes a daily (multiple times a day?) ritual. It’s really stressful to worry about cash. And often unnecessary.
With an effective PO system the company knows the future cash outflows they’ve agreed to. They can create short-term forecasts to predict when revenues will come in to match their expenditures. They can ensure that what they ordered was in fact what was received. The right quantity, the right price, and in the right time frame. Surprise invoices from vendors are eliminated as are unexpected cash expenditures. The greatest predictor of employee theft is opportunity, and the chance that anyone is ordering a little extra on the side for their personal use decreases significantly when POs are involved.
Most entrepreneurs started their business to make money. Yes, they love what they do. Yes, they had a higher purpose in mind. But also, they wanted to get paid. Why, then, do they spit the word “overhead” when referring to the expenditures on managing their finances? It seems a worthwhile investment to protect the rewards that could come from their labour.
If, deep down, you know you should be paying more attention to the numbers, but always seem to find an excuse to avoid it, face the fear. There are people that can help you translate the numbers on your financial statements into actionable plans that will lead to higher returns. All you need to do is reach out.
“Revenue is vanity, profit is sanity, and cash is king.”ALAN MILTZ
Bellrock helps business leaders look at their numbers from a managerial perspective and translate them to actionable plans that improve results. We also train managers on execution. Our purpose is to develop life-long relationships and raving fans. If you found this article valuable, don’t be stingy. Share