What are the key documents needed when ? You will probably think of a ‘purchase order’. The term ‘purchase order’ is often heard when a transaction of good or service is being raised by the company.
However, if you haven’t been involved in a business purchasing process before, you might be wondering why companies use purchase orders. Purchase orders are like the glue that holds your company together. They enable you to keep track of your orders and collect payments promptly. Any business that requires raw materials or external services needs to issue a purchase order, possibly to several vendors.
To provide better clarity of it, we have listed 7 key points about the purchase order you need to know.
A purchase order, or PO, is an official document created by a buyer and delivered to the seller for the sale of products or services they wish to purchase. It is the written confirmation of an order being placed and a legally binding contract between the two parties when the document is approved by the seller.
Every employee needs to know that purchase orders should not be confused with invoices. Although both of them contain similar elements, they are two different documents that serve different purposes. The buyer produces purchase orders while invoices are created by the seller or vendor – the individual or company supplying materials, items or work. When a purchase order is accepted, the seller will then arrange delivery to the company together with a delivery note, once that is completed supplier or vendor would then issue an invoice to the buyer based on the purchase order. An invoice is a commercial instrument to charge the buyer for their provided goods and/or services.
On the other hand, purchase requisitions are different from purchase orders too. Compared to PO, a purchase requisition is more like an internal document in which one user from a particular department would like to begin the process of purchasing a product or service following the company’s policies and approval levels. The necessary reasons, justifications and attachments would usually need to be included in a purchase request such as quotation from vendor or multiple vendors. No particular orders are being made at this stage, but merely going through the necessary internal approval all the way to once the final approver approvers, a PO (purchase order) would then be generated.
Now that you know purchase orders are used by companies to improve business spend management, do you know there are several different types of them?
Every company has different requirements when procuring from their suppliers or vendors. Hence, there are different types of purchase orders available to them in today’s business world. Below are 4 ways to determine the different POs and how they are different from each other.
Whether your company is raising a purchase in an old-fashioned way by issuing out a paper document and sent to the vendor through fax or mail or creating POs electronically, there is some information that a proper purchase order format should include.
The information needed is:
Today, you can easily find proper purchase order templates in excel or even word form on the internet. Thus, POs play an important role in the accounting system and facilitate recordkeeping. Although the final form of PO might vary by business, there is always an important takeaway which is – the more detailed a PO, the more value each PO generates that leads to lower unnecessary risk a business must bear. You should always clearly communicate requests to vendors to avoid any confusion when they receive the PO.
In the purchase order process, there is a different range of stages involved. The PO process is a part of a wider procurement process involving the confirmation and specification of the actual necessity for products or services before the purchase. It also entails payment processing and the results of auditing. These can vary from business to business, but the most widely used are the ones mentioned in the following.
When most small businesses start, they forgo a purchase order process in favour of a more informal approach. During this stage, it might still not be a big issue because they tend to have a smaller amount of procurement that’s simple and straightforward. However, as companies grow and their purchases become more complex, specific and urgent, a good PO system is extremely important for them to avoid any confusion.
For example, if your company receives orders without a PO number for review, it can be a struggle to find out where the request went wrong. Thus, POs are a basic requirement for doing business of all sizes.
Here are 4 key benefits of purchase orders to business:
Purchase orders have always been printed in the past and completed manually and routed for internal approval. This kind of old-school method could take weeks to complete, which is very time consuming, inefficient and costly to maintain. There are too many documents needed just to process a single PO. A recent study conducted by American Productivity & Quality found that using a paper-based system for PO processing can cost companies as much as $506.52 per PO. Hence, your organisation should automate the purchase order process through digital. Here are some of the best reasons for you to automate your manual purchase order process:
We hope this article was insightful to you and that you have a better understanding of what a purchase order is and why it is so important. PO, when implemented properly, will help you keep track of your supply needs and make smart financial decisions for your company.