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As a CA fresher we know much on Accounting, Auditing, Taxation & Finance concepts but when it comes to practical exposure, we may not have idea of procedural aspects which take place in corporate.

Fresher’s who have done their internship from big chartered accountancy firms may have idea of procedures which take place in corporate environment however it may not be available to a just CA who is coming from a small or mid size CA firm.

Therefore in spite of doing genuine work during internship, the fresher’s are not able to professionally answer the questions asked in campus interviews. From my experience in job interviews one question on procurement cycle is asked frequently. A discussion on procurement cycle is shared for fresh professionals by me and I believe that it should be prepared before going for campus interview.

Procurement Cycle

Procurement cycle involves combine efforts of User (may be Technical Department), Purchase Department and Finance Department. The Process starts with submission of purchase requisition (PR) by the user department and ends with payment by finance department against supplies. The entire process can be evaluated in following steps:

1. The user department which will be using material or equipment as the case may be makes specification of type, features, quantity, and delivery schedule. The same is submitted to purchase department under purchase requisition note. (Here it is important to note that each PR should be supported by expenditure budgets made and approved at appropriate level. However if the some purchase requirement does not have a budget then there should be a specific approval for that at appropriate level).

2. The Purchase department on receipt of PR form user department invites quotations from different suppliers and evaluates them. While evaluating the quotations apart from price offered they shall consider following factors:

a. Quality & performance of the equipment

b. Compatibility with existing facilities

c. Degree of reliability

d. Product requirements including safety

e. Delivery time

f. After sale service

g. Previous business record & established business relationships with the supplier

h. Technical Feasibility of product

3. After comprehensive evaluation of quotations the purchase department finalizes the vendors having most attracting proposals. Then purchase department will commence initial negotiation with the selected suppliers to decide the final contract price and terms. Based upon the negotiation the supplier is finalized and further negotiation may be done with him to come over economic pricing.

4. The agreement is concluded between the supplier and company through a contact note commonly known as purchase order (PO). The obligations and liabilities of parties to the contract arise only when such purchase order is concluded. A copy of purchase order is forwarded to supplier. A purchase order consists following things:

a. Description of material/equipment, Qty & Rate.

b. Applicable Taxes & Duties viz Excise, VAT, Service Tax.

c. Terms in respect of freight charges, packing and forwarding charges, Insurance.

d. Delivery schedule and penalty/liquidity damages in case of late delivery.

e. Condition in respect of guarantee/warranty and performance bank guarantee to be obtained from supplier.

f. Payment Terms.

g. Other terms and conditions as may be required.

5. After supply of goods and its inspection by Quality Control (QC) department the role of finance department starts for approval and payment of invoice submitted by the vendor. The finance department applies a 3 way match procedure for verifying an invoice submitted by the supplier. For this purpose three documents viz Commercial invoice of supplier, Goods Receipt note (GRN) received from stores department and purchase order copy received from purchase department is taken into account. While making assessment of invoice the following this should be ensured:

a. GRN should be approved by QC department, head of stores department and project manager.

b. Verification of Rate from PO and Qty from GRN.

c. Deduction for short supply.

d. Deduction of penalty/liquidity damages as per PO terms in case of late delivery of goods.

e. Retention in case performance bank guarantee has not been submitted by the supplier.

f. Applying due date of payment based upon payment terms in PO.

g. Adjustment of Advance (if any).

h. After assessment of invoice when all queries are sorted out and all supporting documents are collected the finance department can approve the invoice for payment.

All this discussion is based upon the practical exposure I got. It may have a slight inclusion depending upon different situations. Hope this will qualify for a consideration.

Thanks

CA Nitin Agrawal

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