Could you explain what is meant by purchasing procedures?

Purchasing procedures vary with the levels of approval required within a company, as well as with the sophistication and internal controls relating to asset acquisitions. They will also vary with the cost of equipment. In larger organizations, purchasing procedures ensure that financial resources are spent wisely and only on assets that are absolutely required to run the business efficiently.

Justification

• Has a cost-benefit analysis been completed to justify its purchase?
• What is the payback period, and is it reasonable?
• Some companies assess capital asset acquisitions using an internal rate of return calculation.

Financing

• Are funds available, or will you have to finance the purchase?
• Do you need to purchase this, or would it be more cost-effective to lease or rent?
• What is the most appropriate and cost-effective source of funding?

Approval

• A purchase order includes specifications to make sure the equipment does the job, and defines special installation requirements such as power supply and floor support, as well as the associated cost.
• A purchase order must be approved by a responsible person with the appropriate level of authority, who will also have checked that the company’s capital budget can cover the purchase.

Purchase

• Identify several reputable suppliers and ask for quotes. Determine the best value and complete the purchase.