Written by Marijn Overvest | Reviewed by Sjoerd Goedhart
Fact Checked by Ruud Emonds | Our editorial policy
Non-Purchase Orders — Everything You Need to Know
Key takeaways
- Non-purchase order is a document reflecting requests of goods and services without adhering to the entire traditional purchasing process.
- NPOs speed up the procurement process and are more cost-effective and flexible.
- NPOs present many risks, such as corruption and loss of control, despite being easier and more accessible.
The procurement department of a business highlights focus on purchasing goods and services which means it is responsible for precise acquisition processes by creating purchase order (PO) invoices. They reflect the product, quantity, and price agreed by both the seller and buyer. However, there are just some purchases that may require a non-purchase order (NPO) invoice. Yet, NPO is not just all about the contradiction of PO. What does NPO really entail?
In this article you will learn the following:
- What PO and NPO is;
- How does a PO differentiate from NPO,
- Examples of NPO;
- Advantages of NPO;
- Risks about NPO; and
- Mitigation Strategies
Differencesbetween PO and NPO
What is aNon-Purchase Order?
Contrary to a purchase order, non-purchase order is a document reflecting requests of goods and services without adhering to the entire traditional purchasing process. Unlike the former, NPO is usually used for short-term requirements, low-value items, and internal purposes. They only reflect small and less formal transactions that suggest more flexibility and versatility to boost the acquisition of products swiftly.
NPOs may also be known as expense invoices that stipulate a business’s indirect purchases and are also commonly not pre-approved.
What is aPurchase Order?
Purchase order invoices are more common in the world of business. It is a legally binding document that is issued from a buyer to the seller, in contrast to an invoice where it is issued by the seller to its buyer, before the delivery of goods and services. It indicates the product, quantity, and cost. In addition, PO can be used to control the purchasing of goods and services from external suppliers.
Differencesbetween PO and NPO
The most obvious distinction between PO and NPO is established in their formal implications and processes. Purchase orders are legally bound documents that outline the terms and conditions of the agreed-upon transaction between the buyer and seller. On the other hand, NPOs lean towards informality and do not involve legal-binding commitments. Aside from formalities and legalities, both purchase and non-purchase orders have a lot of distinct differences. These include:
1. Approval Process
Purchase orders: POs go through a regal and rigorous approval process involving not only the buyer and seller but also stakeholders and everyone involved in the transaction. This is to ensure compliance with proper procurement policies and budget constraints.
Non-purchase orders: NPOs require little to no levels of approval which makes them the better option when it comes to immediate needs of goods and services.
2. Item Complexity
Purchase orders: POs are generally used for high-value items like machineries and software. Purchasing bulk materials also uses POs where detailed specifications are required.
Non-purchase orders: NPOs are better convenient for low-value items and ad hoc services like minor office supplies and urgent small expenses.
AdvantagesAssociated with NPOs
1. Flexibility
The most obvious and one of the primary advantages of NPOs is the fluidity in handling urgent and low-value procurement requirements. They provide a quicker and more flexible way in purchasing goods and services. Moreover, because it invites speed in transactions, business can run smoothly with haste.
2. Cost-Effectivity
Because NPOs are better suited in acquiring low-value items promptly, they eliminate unnecessary paperwork and streamline the purchase of minor supplies which opens organizations to better resource optimization.
3. Procurement Process Expedition
Delays are non-existent in NPOs. Unlike traditional POs, they bypass lengthy approval formalities which expedites the procurement process remarkably. This is highly beneficial for time-constraint matters and situations like equipment repairs or last-minute project requirements.
RisksAssociated with NPOs
While non-purchase orders offer fluidity and expedited procurement for short-term requirements, they also come with inherent risks that may impact financial control, consistency and compliance, and supplier management.
1. Lack of Oversight and Control
With a less stringent approval process, procurement teams and other departments of companies might be tempted to ad-hoc purchase decisions that might not align with the organization’s budget. With that, companies may find it difficult to track expenses and control costs effectively. In addition, the chances of fraud may also increase.
2. Non-Compliance with Procurement Policies
In the absence of formal procedures, employees may be tempted to bypass standard procurement policies and guidelines when using NPOs. This also risks the organization getting exposed to potential legal and financial dangers since abuse of NPO usage can lead to non-compliance with internal regulations, legal requirements, and industry standards.
3. Fragmented Supplier Management
Taking advantage of NPO usage can lead to poor supplier management. When departments and employees engage with the same supplier independently, the company may risk opportunities for bulk and favorable terms in purchasing.
4. Financial Reporting Inaccuracy
NPOs can create difficulties in accurately tracking and reporting financial data because of numerous small and informal transactions happening throughout the organization. Thus, maintaining precision in record-keeping may become a tedious task which may also lead to unwarranted discrepancies in financial reporting.
MitigationStrategies Against NPO Risks
1. Establishment of Guidelines for NPO Usage
Implementing clear and well-defined thresholds in using NPOs ensures proper oversight of monetary constraints. This would also limit and prevent overspending due to regular review and analysis of NPO expenditures to determine areas for improvement and cost optimization.
2. Educate Employees
Training employees and educating them about the importance of following through conventional procurement policies and the risks associated with non-compliance can help them understand why exactly not to disobey procurement rules. You may also implement internal audit mechanisms to address any non-compliance effectively.
3. Centralization of Supplier Management
Companies should be able to negotiate better and improve supplier management and relationships by designating specific personnel to focus on bridging and engaging with suppliers and consolidating procurement activities.
4. Financial Management Investment
Investing in efficient financial management systems is a huge help in tracking all purchasing activities, no matter how small or big. It also ensures accuracy in decision-making processes and financial reporting upon regular reconciliation of data.
Conclusion
Non-purchase orders serve as an agile solution for companies that require immediate access to goods and services. However, there are limits to its usage. They should be used judiciously as they are more vulnerable to inherent risks associated with financial management and compliance. Yet, by deeply understanding the importance of NPOs and utilizing proper oversight, companies and organizations may be able to drive a balance between efficiency and financial responsibility in their procurement tactics.
Frequentlyasked questions
What is a Non-Purchase Order?
Non-purchase order is a document reflecting requests of goods and services without adhering to the entire traditional purchasing process. Unlike the former, NPO is usually used for short-term requirements, low-value items, and internal purposes. They only reflect small and less formal transactions that suggest more flexibility and versatility to boost the acquisition of products swiftly.NPO may also be known as expense invoices that stipulate a business’s indirect purchases and are also commonly not pre-approved.
What is the difference between a Purchase Order (PO) and a Non-Purchase Order (NPO)?
A Purchase Order (PO) is a legally-binding document used in formal purchasing transactions that outline product descriptions, quantities, and costs. It involves a rigorous approval process and is commonly used for high-value items. On the other hand, a Non-Purchase Order (NPO) is a more flexible document used for short-term, low-value, and immediate purchases. It involves little to no approval process and is suited for urgent procurement needs, such as small office supplies or maintenance services.
What are the advantages of using Non-Purchase Orders (NPOs)
Non-Purchase Orders offer several advantages, including:
Flexibility: NPOs allow for swift acquisition of goods and services, especially for urgent needs. Cost-Effectiveness: They streamline the purchase of minor supplies, optimizing resources and reducing paperwork. Procurement Process Expedition: NPOs expedite procurement by bypassing lengthy approval formalities, benefiting time-sensitive situations like equipment repairs or last-minute project requirements.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
