If you’ve worked in a corporate environment or within the financial or supply industries, you’ll be familiar with purchase orders. Whether you deal with them on a daily basis or it’s just a phrase you’ve heard from time to time, how much you might know will vary but there’s still lots to learn about the purchase order process.
They might seem like an extra level of bureaucracy that has been invented by someone obsessed with paperwork and fussy processes, but they play a hugely important role in how businesses operate and we’ll demonstrate why here, along with everything else you need to know.
What is a Purchase Order?
A purchase order (PO) is a document issued by a buyer to the seller, providing the information about the details of the order. That is the quantity, type of product, prices, etc.
You might be wondering, “what’s the difference between a purchase order and an invoice? It’s an easy misconception to have because they both involve a customer and a supplier arranging payment for products or services.
But the key difference is in the timing, as a purchase order (as the name suggests) is used at the start of the process to form a legal contract between supplier and customer and lay out the details of exactly what the supplier will be required to deliver.
An invoice is generated at the end of the process by the supplier, using the information from the purchase order to request the agreed payment from the customer.
What Does A Purchase Order Contain?
Here are some of the essentials that a purchase order tends to contain:
- PO number (which is then referenced in the invoice to connect the two documents, something that is particularly important for finance departments in large companies)
- Contact information for the customer
- Payment information
- Description and quantity of goods/services ordered
- Invoice and delivery address (if different)
What Is The Purchase Order Process?
There are a number of stages involved in the purchase order process. These can vary from company to company, but the ones listed below are the most commonly used:
- Purchase Requisition is created – This takes place within the company making the purchase and sees the person responsible for the purchase requesting approval from finance and line managers to do so.
- Purchase order is sent – Assuming the first stage doesn’t end with a firm ‘no’, the purchase order is created and sent to the supplier, detailing what is wanted and providing the information the supplier will need when creating their invoice.
- Supplier approves purchase order – Again, this assumes that the supplier is happy with the purchase order they have received. Once they have reviewed it they will acknowledge receipt and acceptance of the order.
- Buyer records purchase order – Now that the binding contract has been agreed, the purchasing company will officially record the purchase order and the supplier will start to do what is required of them to fulfill the order.
What Is The Purchase Order Process Used For?
The purchase order process has many purposes beyond the straightforward answer of acting as the initial agreement of what work will be completed by the supplier.
Here are some of the ways that using purchase orders will benefit your business:
Particularly in companies where there are constant streams of income and expenditure flowing through the finance departments, purchase orders are essential to ensure that there are no nasty surprises when invoices come in.
Without the purchase order process, an invoice for $1m could arrive, demanding payment within 30 days, and the finance department could have had no warning that it was due, making it difficult to find that money in time to pay it.
With a purchase order, they will have been able to budget for it in advance, and that works the other way around too, as the finance staff at the suppliers have been able to know that payment will be coming in even before the invoice has been sent.
Managing Orders & Expectations
As well as being able to forecast what the budgets will be, the purchase order process can help suppliers track incoming orders and manage inventory levels with knowledge of what is expected.
Purchase orders are a set in stone way of agreeing on these expectations at both ends of the supply workflow, so the suppliers know what they will be supplying and can prove that it is what was requested if there are any disputes.
Or, of course, vice versa.
Evidence For Financial Audits
In some smaller businesses, orders can be placed and recorded on scraps of paper, which might work fine for their internal processes, but isn’t the kind of solid and substantial evidence needed for a financial audit.
Using purchase orders demonstrates a healthy flow of orders and income or sensibly-managed expenditure and is an excellent way to prove to auditors, banks and tax agencies that your business is doing things the right way.
Legally Binding Contract
Once a purchase order has been sent and accepted by the supplier, it acts as a legally binding contract between the two parties, so if a dispute arises and there is any question of payment or goods/services being withheld, the contract between them is clear. Anyone acting as arbitrator or mediator between parties in dispute has a document detailing exactly what has been agreed, and it should be easy to come to an agreement.
Making the Purchase Order Process Run Smoothly
During the purchase of goods and services, companies can generate a lot of paperwork, including:
- Purchase orders
- Advice slips
If this is all being done manually, that’s a lot of paperwork that needs to be generated, recorded, distributed and filed away, and also offers plenty of opportunities for human error to creep in and cause chaos.
The physical paperwork also has the potential (and tendency) to disappear, leaving gaps in the workflow and evidence that can cause problems at audit time or in disputes. Automating the purchase order process minimizes the possibility of these issues.
Using a software solution means that it’s easy to track where the process is up to and to refer to the purchase order quickly when required. It’s more efficient, more accountable, quicker and safer.