Purchasing Cards: Understanding the Pros and Cons

‍

Are you part of a hardware-centric, procurement-heavy company looking to streamline your financial management processes? If so, it's worth considering the benefits and drawbacks of using purchasing cards, also known as P-card.

P-cards are usually found as part of procurement software

These cards can enable your employees to make purchases quickly and easily, without the need for purchase orders. They also offer easy control and monitoring of spending, efficient cash flow management, and easy reporting methods. Additionally, they can be used globally and can save your company money on exchange rates.

However, it's important to note the potential risks of misuse, changes in vendor policies, and the need for proper employee training and reviews. Understanding both the pros and cons of purchasing cards can help you make an informed decision on whether they are the right investment for your company's financial management.

Straightforward Benefits of Purchasing Cards

‍

• Speedy Transactions: Like credit or debit cards, P cards let employees buy things fast, cutting down on the time it takes to make a purchase.
• Simple to Oversee: They make it easy for bosses and workers to watch spending, identify where too much is spent, and make changes. They help prevent fraud.
• User-Friendly: Employees don’t need to spend their own cash and wait for payback. For managers, it's simpler to handle expenses than tracking individual spends.
• Better Cash Handling: P cards help manage money better, freeing up cash by delaying payments for up to 56 days, which is great for businesses with tight budgets.
• Worldwide Use: Can be used globally, ideal for travel expenses, and often get better exchange rates than personal cards.
• Tracking Spending: Makes it easy to see where money goes on projects with e-invoices that fit into current systems, plus helps in making detailed spending reports.
• Lowers Admin Costs: Cuts down on paperwork and saves money on managing finances, as tracking and paying off spending is more streamlined.
• Encourages Financial Discipline: With set credit limits, P cards help employees stick to budget constraints, promoting responsible spending.
• Streamlines Procurement: Simplifies the process of buying goods and services, reducing the need for purchase orders for small transactions.
• Enhances Vendor Relations: Timely payments to vendors can improve relationships and potentially lead to better terms and discounts.

Downsides of Using Purchasing Cards

• Misuse Potential: Even with better oversight, there's a chance of fraud or personal use, which is tricky in tight budgets. Training is essential to curb misuse.
• Changing Vendor Policies: Vendor rules for P card use can change, requiring companies to keep up to avoid errors.
• Risk with Virtual Cards: Virtual cards are prone to unauthorized access, posing financial risks, especially on a tight budget.
• Training Required: Clear rules on what purchases are allowed are needed, alongside training on P card use, adding to company expenses.
• Constant Monitoring Needed: Regular checks on P card use are vital to prevent misuse, demanding time and resources.
• Integration Challenges: Integrating P card data with company systems can be complex and costly, hindering efficiency.
• Limited Acceptance: Some vendors may not accept P cards, restricting purchase options and potentially increasing costs.
• Over-Reliance Risks: Heavy reliance on P cards can obscure individual transaction details, complicating budget and expense management.

‍

P card vs Credit Card?

Credit cards allow users to make partial payments and revolve balances, on the other hand purchasing cards, or P-cards, require you to fully pay your balance each month, determining when are expenses recognized. Their statements generally include more information than credit card statements and often eliminate the need to retain invoices.

What is the expense recognition principle?

The expense recognition principle, a core guideline of accrual accounting, dictates that expenses should be recognized in the period they are incurred, regardless of when the cash payments are made. This principle ensures that financial statements accurately reflect a company's financial performance by matching expenses with the revenues they generate. For example, if a company incurs costs to produce goods sold in a specific period, those costs are recorded as expenses in the same period the related revenues are recognized, providing a clearer picture of the company's profitability during that timeframe.

What's the Difference Between Purchase Requisition and Purchase Order?

In the buying process, purchase requisitions and purchase orders are steps that help businesses communicate what they need and how they plan to pay for it. A purchase requisition is an internal request. It's when someone within the company asks for the green light to buy something needed, detailing what, why, and sometimes where to buy it from. It's about getting approval before making a purchase.
A purchase order, on the other hand, is an external document sent to a vendor. It confirms the business wants to buy something, detailing the items, amounts, prices, and delivery info. It's a formal agreement to buy, laying out the terms of the purchase.

‍

Learnings

Purchasing cards, or P cards, have become a popular tool for financial management in many hardware-centric, procurement-heavy companies. These cards work much like credit or debit cards, allowing employees to quickly make purchases without the need for purchase orders. This can greatly reduce the time it takes to make a purchase and streamline the overall purchasing process.

P Card Advantages: Straight to the Point

• High Efficiency: P cards streamline buying processes.
• Spending Oversight: Offers straightforward ways to monitor and control expenses.
• Cash Flow Improvement: Payments can be made within 56 days, aiding in better cash management.
• Global Use: They're usable worldwide, convenient for travel expenses.
• Simple Reporting: Provides uncomplicated methods for tracking and reporting spending.
• Quick and Simple Transactions: P cards make buying things fast and easy.
• Spending Control: Managers can easily check spending, find where money is being wasted, and fix it.
• Better Cash Flow: Bills are paid within 56 days, so there's more time to pay without using cash right away.
• Worldwide Use: Great for travel costs, accepted globally, and often offer good exchange rates.
• Detailed Reporting: Helps track project costs with clear reports on where money goes.

However, it's important to note the potential risks of misuse, changes in vendor policies, and the need for proper employee training and reviews. While P cards can greatly improve financial management processes, they can also be misused, and vendor policies can change frequently, requiring companies to stay on top of those changes to minimize risks. Additionally, there is a need to create policies and procedures for using and overseeing P cards, and to provide effective training programs for employees to minimize the risk of mistakes or miscommunications.

Overall, understanding the pros and cons of purchasing cards can help hardware-centric, procurement-heavy companies determine if this type of investment could benefit their financial management processes. While they offer many advantages, it's important to carefully consider the potential risks and develop effective policies and procedures to ensure their proper use. With proper oversight and management, P cards can create an efficient way for companies to manage their finances, allowing them to focus on the growth and success of their business.