While running your business, you'll likely need to purchase many goods and services from suppliers, vendors, and service providers. Purchase orders play a vital role in this purchasing process as it not only protects both parties, but also help you manage your inventory better, make budgeting and planning easier, and simplify your expense management.
But what are purchase orders, and how do they work? In this post, we’ll look at these questions in more detail.
What’s a Purchase Order?
A purchase order is a legal document that you’ll issue to request a certain product or service from a supplier or vendor. There are several types of purchase orders that you can use depending on the circumstances. For example, a standard purchase order is ideal if you're making a once-off purchase. Conversely, blanket purchase orders are the best option if you want to buy products on an ongoing basis.
No matter what type of purchase order you use, it sets out all the details of the product or service you intend to purchase, the price you’ll pay, the payment terms, and when the product or service should be delivered. More importantly, it also has a unique PO number that allows both the buyer and the seller to track the purchase throughout the procure-to-pay process.
So, why should you use purchase orders? One of the main benefits of using purchase orders is that they allow you to keep better records and, by implication, improve your inventory management processes. In addition, they can also help you budget and plan better in, and they have the ability to improve your account payable processes.
What Information is Included in a Purchase Order?
A purchase order will contain all the information of the order you want to place with the seller. This typically includes:
- Your company’s full details including company name, address, and more.
- The supplier or vendor’s information, including their company name and contact details.
- The products or services you would like to purchase, including product names, codes, model numbers, and the quantity you would like to purchase.
- The price per unit and the payment terms.
- The date on which you want the products or services to be delivered.
- Where the order should be delivered.
- The billing address where the seller should send the invoice after delivery.
- Any other relevant information including details of any discounts applied, further terms and conditions, and the like.
Keep in mind, though, that this information is not set in stone and the information you include on a purchase order will depend on your specific circumstances and the type of purchase order you're using.
How Does the Purchase Order Process Work?
Now that we’ve seen what a purchase order is and what information you’ll include on it, let's look at the process of how a purchase order works in more detail. Here, the steps are:
- The process starts when you or one of your employees realizes that you need a product or service. Once this happens, a purchase requisition will be generated that sets out all the requirements of the products or services you require and their cost.
- Either you or a manager will then review the purchase requisition and if it meets your administrative or budgetary requirements, it will be approved. Keep in mind, however, that in some cases like, for instance, low-value products, your procurement plan might forgo the approval of the purchase requisition.
- Once the purchase requisition is approved, you'll generate a purchase order. During this step of the process, it's important that all the information relating to the purchase be carefully recorded because, as mentioned earlier, the purchase order is a legal document.
- You or an employee on your team will then send the purchase order to the supplier or vendor. The seller will then review the purchase order to determine if they're capable of fulfilling the order. If they are, they'll accept the purchase order, resulting in a purchase agreement.
- The seller will then deliver the products or render the services at the delivery address specified in the purchase order. During this step of the process, it's also important to compare the goods or services delivered to those specified on the purchase order. Once delivery is complete and verified, the purchase order will be marked as closed.
- The seller will then issue an invoice for the products or services delivered and send this invoice to you. When received, you’ll match the invoice with the purchase order and the packing slip that accompanied the delivery.
- Once you've confirmed that the products or services on the purchase order match those on the packing slip and invoice, you’ll issue the payment to the seller. If they don't match, you'll likely need to obtain further approvals for payment or contact the seller to clear up any differences.
To learn more about purchase orders or how Controlhub’s purchase and procurement software can help you, visit our website for more information.