In this blog, we will explore the fundamentals of purchase orders, their significance, and other essential details.

What is a Purchase Order?

A purchase order (PO) is a commercial source document issued by a business's purchasing department when placing an order with suppliers or vendors. The document includes all the details about the purchased items, such as the product code, pricing, and quantity. Overall, it is simply a contract created by the buyer buying goods from the vendor.

Importance of Purchase Order

As a business owner, the last thing you need is more paperwork. Not using the right purchase order can have implications for your business. 

Purchase orders are more prominent in keeping an accurate and detailed financial record. They might seem an unnecessary extra step, but knowing how to use them in the right way can benefit your business in the long term.

If you're a small business owner or managing procurement for a large enterprise, the correct purchase order system can help make a big difference. Keep reading to know more about the importance of having purchase orders in place for your business or company -

Offering legal protection - Purchase orders are legally binding documents regarding the prices and quantity of goods in your order, protecting you and the vendor or supplier. It's advisable to have a legal record of precisely what you ordered; a purchase order helps initiate that. This will also safeguard you against mishaps, such as sudden price surging, the wrong type of items or quantity received, or being charged an incorrect amount. 

Boost for inventory management — Buying goods is the first step in securing inventory. When you have a purchase order system in place, inventory management is improved in the long run. It helps keep track of what goods should be arriving, and then you can match them with the invoices to ensure the details such as types of goods and quantities. This will keep you informed about the status of your incoming inventory.

 Saves time —Creating a purchase order document is crucial as it saves you time in the long run. To begin with, a well-established purchase order system with several features eases down the entire ordering process. Once the system is up, the experience will be hassle-free. Plus, after your orders arrive, you'll save time as you only have to check the invoice against the purchase order to ensure accuracy. The system makes everything you need readily available.

 Avoid any mishaps—Purchase orders clearly mention a record of the goods and order details, protecting you from any kind of mishaps when ordering, such as someone getting a phone order wrong. You can always refer back to POs when there's any disagreement about the ordered goods. Having this type of documentation in place safeguards you against any goof-ups that might happen.

 Budgeting Assistance — If you're handling a large project, purchase orders can help with budgeting. To generate the correct POs, you must be precise about the order quantities before the project starts. In addition to big projects, purchase orders also come in handy for daily purchases while running the business. They’re also helpful for budgeting goals by providing records of purchases. This way, you’ll always be prepared to plan for future budgets.

Identify performance issues—If the bulk of the goods are not focused where you would like, a quick look at purchase orders will provide essential insights about performance. By analyzing the details of purchase orders, you'll learn what is selling well and what is not. This data will also provide knowledge on production and other factors that might influence your business.

What are the different types of Purchase Orders?

There are four main types of POs that businesses use based on different purposes and circumstances -

Standard purchase orders - These are the most common type of purchase order. They are created when a company is required to buy goods once. A standard purchase order will include the necessary information, such as payment and delivery details. These can be the best options when you are conducting one-off purchases and have fixed delivery dates and payment terms.

 Planned purchase orders - Similar to standard purchase orders, these are typically not used for one-time transactions. Instead, they cover the entire scope of an ongoing transaction, with payments and deliveries occurring in installments. For example, a company might plan to acquire 50 new Bluetooth speakers over six months but will issue specific orders for ten at a time as needed. This systematic approach allows businesses to strategically plan their procurement activities and manage their cash flow by spreading out payments instead of making a single large upfront purchase.

 Blanket purchase orders - Blanket purchase orders are generally used for recurring purchases. They allow companies to request an indefinite quantity of a specific good from a vendor over an unspecified period. This arrangement includes an agreement to procure goods or services from the vendor, with detailed specifications to be decided later.

 Contract purchase orders - Great for complex projects or ongoing services. They are legally binding agreements that outline the terms, conditions, and detailed scope of work expected from your vendors. By clearly defining expectations and deliverables upfront, contract POs help ensure compliance, minimize risks, and promote strong, long-lasting relationships with your suppliers.

 Examples of Purchase Order

A typical purchase order acts as a blueprint for a business transaction, containing key details agreed upon by both the buyer and seller. It usually includes the buyer's company information, a unique PO number for easy reference, and a detailed list of the items or services being purchased, including quantities, individual prices, and total costs.

 The PO also specifies the delivery address, anticipated delivery date, and any relevant terms and conditions. Payment details terms, such as when the invoice is due, are also outlined. Finally, the document features designated spaces for authorized signatures from both parties, indicating formal agreement to the purchase terms.

 This standardized format ensures clarity and transparency, providing a comprehensive overview of the transaction for everyone involved in the procurement process.

Here’s an example of a purchase order from Unilever Australia to TKN PO Supplier 1 in London. The order details a request for 10 pieces of "Stuff1" and 5 pieces of "Stuff2" at unit prices of 10.00 AUD and 5.00 AUD, respectively, plus 10% tax. The total cost before taxes is 125.00 AUD, and the order was placed on 12/11/18.

How does a Purchase Order work?

 Purchase orders (POs) are usually initiated and sent by the purchasing department within a company's procurement process. The information contained in the PO is then used to monitor shipments, facilitate payments, and integrate relevant data into the broader inventory management system for accurate record-keeping and maintenance purposes.

 Here's a general outline of a typical PO process:

Step 1: Buyer Creates and Assigns PO Number - After an internal purchase request (PR) for inventory is approved, a purchase order (PO) is generated, containing essential details like a unique PO number. Some companies have a formal PR process prior to PO creation, while others may have a more streamlined approach based on their size and needs. Regardless, once the PO is created, it implies internal approval process for the purchase requisitions.

 Step 2: Supplier Reviews and Accepts PO - The buyer sends the PO to the seller, who can either accept or reject it. If details are incorrect, the seller can request amendments. If the seller cannot fulfill the original PO, it's canceled, and the buyer is notified. The buyer can then resubmit a PO with updated terms or find a new supplier. Upon seller acceptance, both parties are legally bound to the contract.

 Step 3: Seller Issues Invoice - Depending on the PO terms, the seller may expect payment before, during, or after delivery. They will send an invoice to the buyer specifying the payment terms.

 Step 4: Purchase Order Matching - The buyer reviews the invoice, verifying that the information aligns with the PO and any receipt details. This comparison process, known as purchase order or invoice matching, helps identify discrepancies before payment.

 Step 5: Invoice Approval and Payment - Once matching is complete and any issues resolved, the invoice is routed for approval and payment is released to the seller. If the PO is fully fulfilled, it's closed. For partially fulfilled POs, it remains open, and the accounts payable team repeats steps 3 and 4 as needed.

 How to track Purchase Orders?

Purchase order (PO) tracking involves monitoring the entire lifecycle of a purchase order, from its creation and transmission to the seller through acknowledgment, fulfillment, shipping terms, and, ultimately, receipt.

Process To Track A Traditional Purchase Order

One way to understand the history of purchase order tracking, is simply to analyze the traditional manual procedures and unrealistic expectations from end systems that have always been in place.

Instead, let's walk through an example process of one department ordering more stationary supplies.

Step 1 - When a the company purchasing department contacts the department to purchase more stationaries.

When they buy, the first thing that triggers in them is whether this fits within their given budget.

Step 2 - When The request is approved, the purchasing department creates a purchase order from its stationery supplier.

Step 3 - The purchasing department then manually sends the PO to the paper supplier, usually via postal mail The task of order insertion and physical delivery now falls on the supplier.

Step 4 - Upon being emailed the PO the Department can ring supplier, advise them of PO number and ask for delivery status update.

Issues with the Traditional Way

Such paper-based process was cumbersome and all over the place. However, tracking orders was challenging and slow with frequent delays.

Transition to Automated Purchase Order Tracking

The PO tracking has changed a lot with the technological advancements. Track order status and movement in real-time by automation.

Benefits of Purchase Orders

 Purchase orders offer numerous advantages for both buyers and sellers. They streamline procurement, improve budget management, and foster better communication overall.

 Let's take a quick look at the key benefits of utilizing purchase orders -
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Seller Performance Tracking — The Purchase order creates a valuable audit trail by documenting intricate details such as order date, promised delivery date, ordered quantity and price, received quantity and date, and invoiced quantity and price. By analyzing this data, you can gain insights into which vendors consistently deliver on time, within budget, and without any human error. This enables you to recognize the top-performing suppliers and make informed decisions about future formal contracts for your business.

Serves As Significant and Formal Documentation — The purchase order is important because it provides a written and legal document recording the details of the entire purchase transaction. This ensures clear communication of expectations and minimizes the potential for misunderstandings or disputes between your business and the seller.

Preventing Duplicate Orders - As your business expands and manual purchase requests multiply, tracking who ordered what, when, and from whom can become increasingly difficult. Accidental duplicate orders can also occur, adding to the confusion. Implementing a consistent purchase order system for all purchases helps mitigate duplicate spending. By creating a searchable digital record of every transaction, POs provide a comprehensive view of your spending, making errors less likely and ensuring better control over your procurement process.

Spend Smarter, Automate Your Purchase Orders with Spendflo

Managing purchase orders can be a complex and time-consuming process. If handled poorly, it can negatively impact your business's financial health. Spendflo offers a solution to this challenge by providing the right tools to optimize your PO management.

By transitioning to Spendflo, a cloud-based platform, you can automate every step of your purchase order process, minimizing the risk of errors that often cause operational delays.

 Spendflo's key features include:

• Streamlined approval workflows: Simplify and expedite approvals for faster processing.
• Real-time budget tracking: Maintain clear visibility into your spending and budgets at all times.
• Hassle-free integration: Easily integrate Spendflo with your existing financial systems for a unified workflow.

These features ensure a user-friendly experience while providing enhanced control and transparency throughout your procurement process.

 Experience the benefits firsthand—get a free savings analysis with us today!

 FAQs

 How does a purchase order work?

A purchase order (PO) outlines the details of a transaction, specifying the list of items a buyer agrees to purchase, the agreed-upon price, delivery date, and payment terms.

How does a purchase order get paid?

A buyer initiates the process by creating a purchase order for a vendor to fulfill. The vendor then issues an invoice for the purchased items or services. Typically, the buyer pays upon receiving the invoice. However, in some cases, processing payment may occur after the shipment arrives, as per the agreement outlined in the purchase order.

What is a vendor invoice and its relationship to a purchase order?

A vendor invoice is a document sent by the seller to the buyer, usually accompanying the goods. It provides a detailed breakdown of costs for the list of items mentioned in the purchase order. The invoice should match the PO details to ensure accuracy and facilitate payment processing.

What is a goods receipt and how does it relate to an effective purchase order?

A goods receipt, also known as a packing slip, is a document detailing the contents of an order shipped by the seller. The buyer uses it to verify that all items listed on the PO are present in the shipment.

Can a purchase order be canceled?

Yes, a purchase order can be canceled after issuance, as long as the vendor still needs to be paid. The buyer responsible for issuing the PO would typically handle the cancellation request.