Historically, most small dollar purchases were made using a system of petty cash balances and a voucher system, maintained at each managerial level.
Unfortunately, a petty cash system has several drawbacks. A cash box sitting in an office, even if it contains only a small amount of cash, is an obvious temptation to theft.
To reduce that risk, it was customary to keep petty cash balances very low. Sadly, if only a small amount was available, many expenses could only be made through the more formal purchase order route.
To circumvent these problems, most organizations of any size have supplemented the old petty cash system with the use of purchase cards (P cards) that permit expenditures by the holder up to some predetermined ceiling.
In many cases this is set as high as $5,000, which is an amount vastly more than what would have been allowed as a petty cash expenditure.
In addition to providing flexible methods of purchasing as well as necessary supplies to staff in the field, a further basic aim in the use of purchase cards is to reduce the transaction cost associated with processing a purchase order.
As the federal auditor general explains: Before cards were introduced, employees arranged for small purchases using inefficient paper-driven systems based on numerous purchase orders.
Rather than have departments process many purchase orders and pay individual suppliers, the intent was to consolidate purchasing through credit cards and to pay card companies once a month. Several benefits expected including shorter procurement times and a reduction in the number of supplier invoices and payments.
Cards are used to buy such diverse items as computers and software, tools and hardware, equipment and furniture, office and maintenance supplies, training services, fees and subscriptions, storage services as well as food and field supplies.
In principle, a P credit or similar purchase card system allows management to track individual expenditures which thereby introduces some measure of accountability into the use of the card.
It allows greater flexibility than a petty cash system. In contrast, a purchase card may be provided to every supervisor on each jobsite, whereas such a distributed system would never be possible for a petty cash-based system.
Thus, the use of a purchasing card represents a significant change over traditional purchasing methods. The full extent of these differences is often not appreciated.
Traditionally, purchases were approved in advance by an individual’s manager. In contrast, the purchase card process allows the individual to make purchases using the card without formal pre-approval.
Accordingly, it is essential with such a process to have in place appropriate approvals and monitoring to ensure purchases are made properly and only for authorized purchases.
The expected benefits resulting from using purchase cards include:
- Reduced administrative costs in paying for low-dollar-value purchases. Companies can replace multiple cheque payments to numerous vendors with one payment to the purchase card service provider;
- reduced use by employees of petty cash and accountable advances; and
- a simplified purchasing process for employees.
To give one example of how purchase cards work, the road crew of a construction company may distribute purchase cards to every supervisor in charge.
If while the crew is digging up a street, it bursts a section of water pipe, it will obviously need to correct this problem immediately. If there is no usable pipe in the yard’s storage facility, the supervisor will have to procure a suitable supply.
In such a case, the purchase is of an emergency nature and the normal concerns with respect to competitive supply must be subordinated to the immediate need to rectify the problem that has arisen.
Thus, the purchasing card provides an immediate response to a pressing problem.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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