Everything You Need To Know About Purchase Orders
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The Purchase Order - A certificate of guarantee for both buyer and seller
If there’s one document that serves as a reference point for the procurement, quality control, administration and finance departments of a company, it is the Purchase Order - most often alluded to as the PO. Whether your business is large or small, the Purchase Order plays a key role in tracking your inventory, ensuring the quality standards of your product or service and the efficacy of your financial planning.
Table of Contents
- What is a Purchase Order
- Legal Status of Purchase Orders
- What is an Invoice
- Purchase Order vs Invoice
- How Purchase Orders Work
- Track your Purchase Orders to Increase Efficiency
- The Importance of Purchase Orders for Your Business
- The Benefits of Automating your Purchase Order Process
What is a Purchase Order
A Purchasing Order is a procurement document raised by a company with details of items to be procured for the purpose of administration, production or service. A PO contains particulars about the type and quantity of products/service to be purchased, technical specifications, price, date and address of delivery, time limit for probable cancellations, terms of payment, and other terms and conditions.
In small businesses a PO is raised by the business owner or CEO. In large organisations a procurement or purchase requisition is usually raised by managers of a department and sent to the procurement head or finance manager of the company, who in turn makes out a Purchase Order. A PO is the beginning of a transaction between a Buyer and a Seller.
Legal Status of Purchase Orders
A PO by itself is just a list of things to procure. However, when a Seller or Vendor accepts and signs on it, a Purchasing Order becomes a binding contract. The Seller is then legally obliged to deliver the items required by the Buyer as per the guidelines of the Purchase Order; and the Buyer is bound to clear payments as per the mentioned schedule. A confirmed Purchase Order is legal to the extent that it can be used as a guarantee by financial institutions to provide trade finance to your business.
What is an Invoice
An Invoice is a payment demand raised by a Vendor/Seller for fulfilling a PO. It is the bill, and is based on a Purchase Order and typically contains the PO number along with an invoice number and an itemised price list. The Invoice is made according to the terms of payment mentioned in the Purchasing Order. If the Buyer has committed to an advance payment, the Invoice is raised before the items are shipped; otherwise, the Invoice is delivered along with the procured items. The Buyer is legally bound to make the payments as per the terms of the Purchase Order. (What is a proforma invoice?)
For instance, Bill White, the sourcing & procurement manager of a five star hotel, gets a purchase requisition from the patisserie chef for a waffle cone maker, bread boxes and chocolate moulds. Bill White fills out a Purchase Order with clear specifications of the required equipment, delivery date and expected price, and sends it to a kitchen equipment company.
The kitchen equipment company receives the PO and confirms that they can fulfil the order. They ship the order along with an Invoice to Bill White. When the shipment arrives, Bill White and the accounts manager of the hotel do a 3-way match to verify the delivery note against the PO and the Invoice. Once the verification is complete, the accounts manager processes the Invoice for payment. After the payment is made, the Purchase Order is marked as closed and the Invoice is sealed as paid.
Purchase Order vs Invoice
Even though a Purchasing Order is used to make an Invoice, they are both separate documents used by different people at different stages in the purchasing process. Here are some essential differences between the two.
A Purchase Order:
- is made by the buyer before a purchase
- lists details of products/service to be purchased
- has a proposed payment schedule.
- is raised by the seller after the sale (purchase)
- confirms the products/service delivered with itemised price list
- specifies payment schedule with dates.
How Purchase Orders Work
Purchase Orders are also an indication of the growth forecast of your business. Decisions on what to purchase and in what quantity are based on the amount of business that you foresee in the near future. Once these needs are identified, Purchase Orders can be made with specifications of the products or services required.
Simultaneously, vendors/sellers can be identified to fill the requirement and Purchasing Orders sent to them for approval. The seller reviews and confirms whether they are able to meet the timeline and fulfil your requirement, and approves the Purchase Order, which then becomes legally binding.
Accordingly, the seller is responsible to ensure that the products or services are delivered to you on the terms of the PO. The seller also raises the Invoice and payments are made by your company as agreed upon in the Purchasing Order.
Track your Purchase Orders to Increase Efficiency
Purchase Order Tracking or PO Tracking is the process of monitoring your Purchase Order from conception to final delivery. Traditionally, once a PO was approved the buyer called the supplier or the shipping company for the status of the shipment. Quick and efficient technology has completely replaced the traditional slow mode; and shipments can now be tracked every step of the way.
Standardised electronic Purchase Orders forms have made processing fast, efficient and more economical. Smart Tracking Solutions enable complete real-time visibility and reporting of the entire process of your Purchasing Order:
- submission of PO
- multi-stage approval
- advance shipping notice
- payment closure
The Importance of Purchase Orders for Your Business
At the start up stage it might be easier for you to strike a clear-cut communication channel with vendors. However, as the business grows so do requirements at various levels and with different teams of people. It is, therefore, advisable to put in place a system to create Purchase Orders to ensure that details of an order are not lost, payments are not missed or duplicated for the same order, save time and establish an audit trail. Properly documented Purchase Orders give a transparent history of what items were bought by your company, who bought them and when, who are the regular vendors, and how much spending capital is available at a particular point in time. This, in turn, will enable better financial management.
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The Benefits of Automating your Purchase Order Process
Purchase Order Automation is the streamlining of the entire purchase order process. The greatest advantage of Purchase Order Automation is in saving time and effort. In large organisations the automation platform enables team members to automatically send purchase requests to the team head for evaluation and approval. The PO would then be automatically created, thus eliminating the need for paperwork, duplication of data entry at different stages of approval and other challenges like:
- lack of efficiency and accountability
- lack of process control
- privacy and security risks.
Save time on low value activities. Increase overall efficiency
Whatever the size of your business, the benefits of Purchase Order Automation are many. With real-time processing and approval, automation ensures that rules and controls are followed, while it increases the process efficiency of your team and reduces human error to a large extent. Besides, it provides a full audit trail, thereby avoiding the hassle of searching for missing paper files. With a streamlined process and cost and time savings comes flexibility, control and visibility into the processes. In addition, an automated purchase platform enables seamless invoice matching in an automated AP department.