Did you know what is a key element in maintaining precise and error free orders that your company receives? That’s right- it’s a Purchase Order!
It will be extremely harder for your company to track and handle shipments and prior order history if they don’t employ purchase orders in their business ordering procedures.
Let’s learn more about this vital document below.
What is a purchase order?
Often known as a PO, it is a legal document that specifies the terms of a transaction between a buyer and a supplier or vendor. The document provides information regarding the specifics of the items that are to be acquired.
This will include the kinds of commodities, the amount, and the cost of each item. Every PO is assigned a one-of-a-kind number that both the buyer and the seller can use to trace the status of their deliveries and payments.
How do Purchase order work?
Purchase orders define a buyer’s buying process. They will allow a buyer to tell a seller what products and quantities they want. The steps involved in the purchase order process are:
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Initiate the purchase requisition process
Your company’s management will inform the purchasing department that an order needs to be placed for a product or service.
When it comes to making repeat purchases, a PO will generate without the need for a purchase requisition.
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Confirmation and Approval of the Purchase Order
When the PO will deliver to the finance department, a group of authorities will continue the process of purchasing goods by inspecting the PO. The approval procedure at a company will define who needs to give their stamp of approval to the order.
Once the order is approved, they will fill out a purchase order that specifies in great detail what will be purchased.
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The delivery of the PO to the provider
After that, the purchase order is being delivered to the supplier. Once it’s approved, it will turn into a legally binding document.
Typically, it is transmitted using an online procurement platform or via email.
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Dispatch
Now that the items have been shipped, the seller awaits the purchaser’s approval before continuing.
At this point in the process, the goods are subjected to a quality inspection. The vendor will be contacted if there is a problem with the order, such as missing or damaged goods.
The amount of time needed to complete this stage can change according to the kind of product being ordered.
The provider sends an invoice together with the shipment once it has been determined that they are ready to be delivered.
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Three way matching
Before agreeing to pay an invoice from a supplier, it is common procedure to perform what is known as a “three-way match”. This is where the purchase order, the goods receipt note, and the invoice from the supplier are compared.
Because it is able to spot any inconsistencies in the process, this stage makes the process more efficient.
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Closure
When the purchaser has indicated that they are content with the order, the PO is submitted to be closed.
The finance team will initiate the steps necessary to pay the vendor the amount that is specified in the purchase order.
What Information is Needed on a Purchase Order?
It’s crucial that purchase orders include comprehensive corporate and vendor information. Purchase orders can also be altered to meet your company’s requirements.
A purchase order’s list of items may include, but is not limited to:
- The good or service being bought
-The specifics of the acquired item, such as its name, size, color, or model number, should be provided. Compared to a barcode, this is frequently simpler to recognize.
- Amount of the item purchased
-The quantity of each ordered item should be specified. Quantities should clearly correspond to the description.
- Cost per unit
-Both parties should be able to easily see the initial amounts that are being charged. So it is important that the costs for each item be given with the quantities.
- Terms and methods of payment
-This where the payment method and terms like estimated delivery date etc. are provided.
- PO number
-Giving the PO a distinct number will make it easier for both parties to quickly and effectively access the information.
- SKU
-If a purchase order contains raw materials, each SKU number should be listed there.
- Contact information
-Here, we’ll list the names, addresses, phone numbers, email addresses, and other contact details for both businesses.
- Drop-off date
-The date of drop off by the vendor is mentioned here.
- Delivery address
-Precise location details are provided to avoid any delay or error in delivery.
- Totals and taxes
-Both parties are able to view the taxes, discounts, and overall total of the order by looking at these amounts. This may be found on the bottom right side of the page.
Is a purchase order legally binding ?
A purchase order is a contract that is enforceable once the vendor has accepted it.
Even if there is only a little miscommunication, it is much simpler to discuss your PO with your supplier than it is to search through previous emails or attempt to recall spoken exchanges.
Benefits of Using Purchase Orders
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Less time spent on procurement process.
There will be real time access to information since the entire purchase team is working together on a dedicated system.
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Improved approval time
When a purchase request is made in the system, members of the approving team are immediately notified.
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Assures high data quality
Excel and Word are excellent choices for purchase orders. Additionally, it will verify that the right PO number is issued and that all buyers utilize the same PO information.
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Effective record-keeping
Paper-based records are easily misplaced, damaged, or destroyed. All of these issues are avoided with digital records. Hence, a purchase order system aids firms in optimizing inventory management.
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Cost control in real time
It can lessen the likelihood of your organization paying for items that have not been received yet. This happens by providing better approval mechanisms and three-way matching.
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Enhanced tracking
It’s simple to monitor where your money is going with a PO system because it keeps all of your purchasing data in one easy-to-search location.
Importance of Purchase Order for your business
Whether you run a small business or manage purchasing for a bigger organization, the correct purchase order system may make or break your company’s purchasing process.
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Aids in budgeting
Purchase orders can assist with budgeting if you’re planning a significant project. If you can easily access records of how much you spent in the past, you’ll be better positioned to manage future budgets.
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Orders are not duplicated.
Using purchase orders for all purchases on a consistent basis helps to avoid duplicate expenditure. Hence, POs enable full visibility into your spending by keeping a digital, accessible record of every purchase, making mistakes considerably less likely.
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Legal help is available.
Purchase orders safeguard you by providing you with a legally binding record of precisely what you ordered. Also, it protects your organization from unanticipated price hikes. If you receive the incorrect quantity or type of things, or are charged the incorrect amount, you can refer back to the purchase order to help rectify the problem.
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Enhance inventory management
Inventory management is aided by an easy-to-use purchase order system.
Invoices vs Purchase Order
Here are some major differences between the two:
- The buyer gives the vendor a purchase order, which must be filled by the vendor. The vendor then sends the buyer an invoice, which must be paid by the buyer.
- A purchase order is created to give permission to buy something and set the terms of the deal between the buyer and seller. An invoice will be provided and is used to ask for payment.
- A PO is a legally binding document, but an invoice is just a bill with no legal obligations.
- Before the products or services are sent, a purchase order is made.On the other hand, an invoice is made after the products or services have been given.
- Both the buyer and the seller usually sign a purchase order, but only the seller usually signs an invoice.
- A purchase order will not guarantee payment, but an invoice for the goods or services listed on it does guarantee payment.
Download Purchase Order Templates
Purchase orders are advantageous for both you and your suppliers since they eliminate the possibility of misunderstandings occurring during the purchasing process.
When you use the correct template, the process of placing a purchase order can become very streamlined and effective. Smart Sales Kit brings to you a free purchase order template that you can download right here!
