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Purchase Order Threshold

Lola Jung's Profile

Purchase Order Best PracticesWhat is considered a standard or common purchase order threshold?

Answers

Topic Expert
Paul Benedetto
Title: CFO, Director of Finance, Consultant
Company: Nextwave Software, Rethink Fabrics
(CFO, Director of Finance, Consultant, Nextwave Software, Rethink Fabrics) |

For the last couple years as a general rule I have used and recommended a USD 250.00 as a PO threshold. Depending on what other internal controls in place (e.g. expense report, travel and AP approvals) and transaction volumes, you may want to modify up or down accordingly.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

A PO Threshold (low) can also be used to track expenses that may hit multiple projects. While an individual PO would have limited effect, aggregate POs change pose a financial risk if the information of the invoice lags greatly.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

I am inclined to think it depends on the industry and as mentioned what internal controls are in place. When I worked in the Hospitality industry that PO threshold was much different than in the Wireless Industry. In our industry this also can vary by GL. For example our PO threshold on Office Supply purchases will differ from our Inventory.

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

I agree with the comments that it depends on what controls are in place and the risk profile of the company as it relates to different types of spending. I would suggest an internal discussion as to what role the purchase order and related approval process is intended to play in the organization.

David Rubinfeld
Title: Finance Manager (FP&A)
Company: searching for my next opportunity
(Finance Manager (FP&A), searching for my next opportunity) |

When considering P.O. limits, one should also consider the full cost of creating the P.O. and circulating it for approvals. One of the large companies I worked had a completely manual process. We estimated the cost of each P.O. at somewhere between $75.00 and $100.00. With that in mind, I would consider a P.O. floor of $500.00, combined with a widely circulated expense policy laying out what is permissible for expensing and any pre-approvals required.

Anonymous
(CFO) |

Be considerate of past practice.

I am CFO a public entity which has grown from a couple of million in funding to $22M in annual operating expenses over 30 years. But, many of the same people are here who were here in the beginning and, in the executive suite.

Our PO process has been almost non-existent and, new auditors that we engaged this past year beat me up pretty good over the lack of following the PO procedure that is in our purchasing policy. (They have no idea that, we not only don't follow it, in the few cases where POs are used, they are usually issued after the purchase with the procurement department's consent because no one understands what they are for, how they should be used or why they are necessary. POs are viewed as just another piece of paper with no real value, that adds to existing bureaucracy.

In trying to have that internal discussion over our need for better controls including the use of POs, I've gotten nothing but push-back right up to the CEO. I've gotten a reputation as someone who "wants to have a say in everything" even though I've explained numerous times that I want controls in place and function, not to "have a say" in any expenditure for which I am not directly responsible.

I've even tried to use a third party blame by saying that the auditors are demanding that we review our procedures and modify and follow them as necessary. Management here is so ignorant of the process that, they suggest I find new auditors because they feel they have no right to impose such demands on us.

As I say, one needs to consider not only the existing cost controls for expenditures and the particular industry as well as size of the entity involved but past practice as well. Making changes at many organizations, particularly those of the governmental ilk is often like turning the Titanic.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

As above, I have related it (and seen it) based on David's cost/benefit, risk, company size and manager's role.

I have seen discretionary spending go as high as $25,000; that was a large project for which the manager's discretionary budget was well established over time. The budget and the approval process forms the control in these cases, not the PO process.

We tend to bring in the PO itself when there is a direct purpose to it. Either: track spending that gets re-billed, capitalized, etc., or; have purchasing get in the middle to negotiate terms, which becomes more valuable if it is a repeat-purchase or if there are non-shrinkwrap items involved.

So, for example buying computers may get a $1000 limit before the PO process gets brought in, as they need to go through the system since they're over the threshold for capitalization. Sales T&E gets a higher limit (depending on the role), as our Japan rep can easily break that limit on a single client dinner.

This doesn't mean that they're aren't controls. Budgets are limited, payment processes are based on that and on approval limits, and spending reviews (including within limits) happen retrospectively to determine if the process needs to change, or if there are outliers (like frequent stays at a given hotel, where we may want to solidify a relationship).

Robert Meybohm
Title: Owner
Company: Meybohm & Bodell, LLC
LinkedIn Profile
(Owner, Meybohm & Bodell, LLC) |

This is an interesting question. I think many companies would benefit by moving away from excess use of PO's and gravitating towards heavier use of P-Cards. An effective company does not micro-manage at a transaction level, but rather empowers the employees and staff to get the job done. Thru intelligent use of budgeting and budget review (which again should be done at a fairly high level, and not at a micro line level), it is quite easy to monitor performance to planned spend.

When one considers that one of the largest single costs in any business is usually payroll, it does make sense to try to help make sure that the people you are paying are spending most of the time doing what they are good at; they should not be spending their time approving decisions that have already been made by a person that was competent to make them.

Workflow software exists to enable this type of process, and to cut out excess time spent on duplicate approvals (or any approvals). In the end, a decision has to be made; are you going to get bigger and grow by letting the more junior people in the organization take on more responsibility and make decisions, or are you going to micro manage every decision. If you go the path of micromanaging then recognize that YOU are the chokepoint, and YOU are the reason why the company is not growing as fast as you want. Delegate and monitor! Do not delegate and control.

Cheers,

Bob

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