Purchase-to-Pay (P2P) Process

 Purchase-to-Pay (P2P) Process: 

 

An End-to-End Financial Control Framework:
The Purchase-to-Pay (P2P) process is a structured workflow that governs how organizations procure goods and services and settle supplier obligations. A well-defined P2P cycle ensures cost control, transparency, compliance, and efficient cash flow management.

Key Stages of the P2P Process:
1. Need Identification
The process begins when a business unit identifies a requirement for goods or services aligned with operational or strategic objectives. Requirements are clearly defined in terms of specifications, quantity, quality standards, and delivery timelines.
2. Purchase Requisition (PR)
A Purchase Requisition is raised by the requesting department to formally document the requirement. It includes item details, estimated cost, and budget reference, and is routed through the approval hierarchy to ensure authorization and budget availability.
3. Purchase Order (PO)
Upon approval of the PR, the procurement team issues a Purchase Order to the selected supplier. The PO serves as a legally binding document outlining pricing, quantity, delivery schedule, payment terms, and contractual conditions.
4. Supplier Confirmation
The supplier reviews and confirms acceptance of the purchase order. Any discrepancies are resolved at this stage to prevent downstream operational or financial issues.
5. Goods / Services Receipt
Goods or services are delivered in accordance with the PO. The receiving department performs inspection to verify quantity and quality, and a Goods Receipt Note (GRN) or service confirmation is recorded in the system.
6. Invoice Receipt
The supplier submits an invoice referencing the PO. The invoice includes unit pricing, total amount, applicable taxes, and payment terms, and is forwarded to Accounts Payable for processing.
7. Three-Way Matching
Accounts Payable performs a three-way match between:
• Purchase Order (PO)
• Goods Receipt (GRN)
• Supplier Invoice
This critical control ensures transaction accuracy, prevents duplicate or unauthorized payments, and strengthens internal controls.
8. Payment Processing
After successful matching and approval, the invoice is scheduled for payment in line with agreed terms. Payments are executed through approved channels such as electronic bank transfer or cheque.
9. Supplier Payment and Closure
Payment is released to the supplier, and the transaction is closed in the financial system. Accounting records are updated, ensuring accurate financial reporting, audit trail integrity, and regulatory compliance.

Importance of the P2P Process:
An effective P2P process enhances financial governance, improves cost visibility, strengthens vendor relationships, ensures compliance, and supports informed decision-making across the organization.

Transaction Classes in Oracle Receivables

Transaction Classes in Oracle Receivables 

 
Transaction Classes in Oracle Receivables (AR) define the type and business purpose of a receivable transaction. They control how a transaction behaves, how it affects customer balance and how it is accounted for in the system.

There are 6 transaction class in Oracle Receivables into which a transaction can be classified. 

These are:
1. Invoice
2. Debit memo
3. Credit Memo
4. Chargeback
5. Deposit
6. Guarantee

Invoice: It is a document which is sent to the customers to let them know that a transaction has been recorded and the customer balance due related to the transaction.

Debit Memo: It is sent to the customers to let them know that they were undercharged for a transaction. For eg: if you forget to charge your customer for freight amount for a transaction , you would send a debit memo to your customer rather than creating a new invoice for the same. Debit memo increases the liability (balance due) of the customer.

Credit Memo: This document is sent to the customers to let them know that they have been overcharged for a transaction. Credit Memo would bring down the liability(balance due) of the customer. Credit Memo has a negative amount. Eg: Suppose your customer returns back a defective item which you have shipped, you will send a credit memo to the customer to let them know the amount they have to pay less for returning the item.

Chargeback: This is sent to the customers to let them know of the balance due after only a part of an existing transaction has been paid. For eg : Suppose an invoice amount is 1000 PKR and your customer has paid you 800 PKR. You would chargeback an amount of 200 PKR to the customer.

Deposit: This document is created when your customer deposits an amount with you as a commitment before having any transaction with you. You have to create a receipt for the deposit and apply the deposit to the future transactions of the customer.

Guarantee: This document is created when your customer has promised to have transactions worth a certain amount but has not paid for it. In this case, you would record a guarantee first. Then you would create receivable transactions for the customer and apply receipt and guarantee document to the transaction.

Transaction classes in Oracle Receivables define the nature of receivable transactions and determine how they impact customer balances and accounting.

O2C vs P2P – Two Critical Pillars of Business Cash Flow

 O2C vs P2P – Two Critical Pillars of Business Cash Flow

Understanding the difference between Order-to-Cash (O2C) and Procure-to-Pay (P2P) is essential for anyone working in finance, accounting, or operations.

🔹 Procure-to-Pay (P2P)
Focuses on how a company buys and pays

• Vendor onboarding & PO creation

• Invoice verification (PO, GRN, Vendor Invoice)

• Payments to suppliers

• Part of Accounts Payable (AP)

• Impacts cost control, vendor relationships, and cash outflow

• Nature: Liability | Cash Goes Out


🔹 Order-to-Cash (O2C)
Focuses on how a company sells and collects

• Sales order & invoicing

• Receivables management

• Collections & bank receipts

• Part of Accounts Receivable (AR)

• Impacts revenue realization, cash inflow, and customer relationships

• Nature: Asset | Cash Comes In


📊 Why it matters:

Strong P2P = controlled spending & timely supplier payments

Strong O2C = faster collections & healthier cash flow

Efficient AP & AR together = financial stability and growth

For finance professionals, mastering both cycles is a major value-add to any organization.

3-Way Invoice Matching

 ✅ Understanding 3-Way Invoice Matching: A Key Control in Accounts Payable

In every organisation, accuracy in vendor payments is essential for strong financial controls, reduced leakage, and audit compliance. One of the most widely used internal control processes is the 3-Way Invoice Matching system.

🔍 What is 3-Way Matching?
3-Way Matching is a verification process used in Accounts Payable to ensure the company only pays for goods actually ordered and received.
It matches three critical documents before approving the invoice for payment:

⸻

🔗 1️⃣ Purchase Order (PO)
• Issued by the company to the vendor
• Contains item details, quantity ordered, and price
• Serves as an agreement between buyer and supplier

⸻

📦 2️⃣ Goods Receipt Note (GRN)
• Prepared when goods are delivered
• Confirms quantity received and the condition of items
• Ensures what was ordered is actually delivered

⸻

🧾 3️⃣ Supplier Invoice
• Sent by the vendor
• Lists the items supplied, quantities, and total bill amount
• Basis for vendor payment

⸻

⭐ How 3-Way Matching Works (Simple Workflow)
1. PO is created and shared with vendor
2. Goods are delivered → GRN is prepared
3. Vendor sends invoice
4. AP team matches PO, GRN, and Invoice for:
• Quantity
• Price
• Item description
• Terms & tax
5. If all three match → Invoice is approved for payment
6. If there is a mismatch → Invoice is put on hold until resolved

⸻

🛡️ Why 3-Way Matching Is Important?

✔ Prevents duplicate or fraudulent invoices
✔ Ensures company pays only for goods received
✔ Supports audit requirements & internal controls
✔ Reduces vendor disputes
✔ Improves procurement-to-pay accuracy

📌 When Is 3-Way Matching Used?
• Material purchases
• Inventory items
• High-value procurement
• Industries with strong compliance needs (Manufacturing, FMCG, Insurance, etc.)

⸻

🧠 Example:
• PO quantity: 100 units @ ₹50
• GRN quantity: 100 units received
• Invoice: 100 units @ ₹50
👉 All match → AP approves payment

If invoice shows 110 units → On hold until vendor clarifies.

🔥 Final Thought

3-Way Matching is not just an AP task—it is a safeguard for profit, compliance, and operational efficiency.
Implementing it well can significantly reduce payment errors and strengthen vendor relationships.

2-Way Invoice Matching

 🔹 What is Two-Way Invoice Matching?

It is a verification process where the Accounts Payable team matches two key documents:

1️⃣ Purchase Order (PO)
2️⃣ Vendor Invoice

If both documents match in quantity, rate, taxes, and total amount, the invoice is cleared for payment.

⸻

🔹 What Exactly Gets Matched?

During matching, AP verifies:

✔ Item Description – same product/service as ordered
✔ Quantity – invoice quantity should not exceed PO quantity
✔ Price/Rate – must match the approved PO rate
✔ Taxes & Charges – GST, freight, discounts, etc. as per PO
✔ Payment Terms – credit period, due date
✔ Vendor Details – vendor name & PO number must match

⸻

🔹 Workflow of Two-Way Invoice Matching

Step 1: Vendor shares invoice
Step 2: AP team retrieves the corresponding PO
Step 3: System/analyst compares invoice values with PO
Step 4:
• If matched → invoice approved → payment scheduled
• If mismatch → discrepancy raised → vendor or procurement team resolves

⸻

🔹 Benefits of Two-Way Matching

✔ Prevents overbilling by vendors
✔ Eliminates duplicate invoices
✔ Ensures contractual pricing compliance
✔ Improves accuracy of vendor payments
✔ Strengthens internal financial and audit controls
✔ Reduces manual errors in AP
✔ Speeds up the invoice approval cycle

⸻

🔹 When Should Companies Use Two-Way Matching?

Best suited for organizations that have:
• A standard procurement process
• Low to medium risk purchases
• Clear PO-based ordering
• Need for faster AP processing compared to 3-way matching

Industries using it widely: IT services, consulting, agencies, trading, retail, manufacturing (low-risk items).

⸻

🔹 Example

PO: 100 units @ $50 each = $5,000
Invoice: 100 units @ $50 each = $5,000
→ Matches perfectly → Invoice approved.

If invoice shows 110 units or $55 rate → Mismatch → Put on hold.

⸻

🔹 Two-Way vs Three-Way Matching
• Two-Way: PO ↔ Invoice
• Three-Way: PO ↔ GRN ↔ Invoice (more strict)
Two-way is faster; three-way is more robust for goods receiving.

⸻

💡 Two-Way Matching helps companies maintain accuracy, transparency, and strong financial governance while keeping AP operations efficient.

Order to Cash (O2C) – End-to-End Process

 Order to Cash (O2C) – End-to-End Process

Order to Cash (O2C) is a critical business process that covers the entire customer lifecycle—from receiving an order to collecting payment and closing the books. A strong O2C process ensures smooth operations, healthy cash flow, and customer satisfaction.

📌 Key Steps in the O2C Process:

1️⃣ Order Management
• Customer places an order
• Sales order is created in the ERP system
• Order details (price, quantity, delivery date) are validated

2️⃣ Credit Management
• Customer credit limit and payment history are checked
• Order is approved or put on credit hold if limits are exceeded

3️⃣ Order Fulfillment / Delivery
• Goods are picked, packed, and shipped
• Delivery confirmation or Proof of Delivery (POD) is generated

4️⃣ Billing / Invoicing
• Invoice is created based on shipped goods or services delivered
• Invoice is sent to the customer (email / EDI / portal)

5️⃣ Accounts Receivable (AR)
• Invoice is posted to customer account
• Due date and payment terms are tracked

6️⃣ Cash Application
• Customer makes payment (NEFT, RTGS, cheque, online transfer)
• Payment is matched with open invoices
• Differences are resolved (short payment / deductions)

7️⃣ Dispute & Deduction Management
• Customer disputes or deductions are investigated
• Adjustments, credit notes, or re-billing are processed

8️⃣ Collections & Reporting
• Follow-ups on overdue invoices
• Aging analysis and DSO monitoring
• Month-end closing and reporting

⸻

🎯 Why O2C Matters:

✔ Improves cash flow
✔ Reduces revenue leakage
✔ Enhances customer experience
✔ Ensures accurate financial reporting

⸻

📢 A well-managed O2C process connects Sales, Logistics, Finance, and Customers seamlessly.

Accounts Receivable (AR) – End-to-End Process

 Accounts Receivable (AR) – End-to-End Process

Accounts Receivable plays a critical role in maintaining an organization’s cash flow and financial health. Below is a simplified view of the end-to-end AR cycle:

🔹 1. Customer Onboarding & Credit Assessment
• Customer master creation
• Creditworthiness check & credit limit approval
• Payment terms finalization

🔹 2. Sales Order Processing
• Receipt of customer order
• Order validation against credit limits
• Order confirmation

🔹 3. Goods Delivery / Service Completion
• Dispatch of goods or completion of services
• Proof of delivery (POD) or service confirmation

🔹 4. Invoice Generation
• Invoice creation as per agreed terms
• Tax calculation & compliance (GST/VAT)
• Invoice dispatch to customer

🔹 5. Accounts Receivable Accounting
• Invoice posting in ERP
• Customer ledger update
• Aging report generation

🔹 6. Collections Management
• Follow-ups on due invoices
• Customer communication & dispute handling
• Collection strategies as per aging

🔹 7. Cash Application
• Receipt of payment (bank/cheque/online)
• Payment matching with invoices
• Short / excess payment handling

🔹 8. Deductions & Dispute Resolution
• Investigation of deductions
• Coordination with sales/logistics
• Credit note issuance (if required)

🔹 9. Reconciliation & Reporting
• Customer account reconciliation
• AR aging analysis
• Month-end closing & reporting

🔹 10. Bad Debt Provision / Write-off (if applicable)
• Evaluation of doubtful debts
• Management approval
• Write-off posting

📌 Efficient AR management improves:
✔ Cash flow
✔ Working capital
✔ Customer relationships
✔ Financial accuracy