What’s the Big Deal about a Purchase Order?
Purchase orders (POs) seem like simple things, but when you consider it, they play an important role in the purchasing process. POs are legally binding documents sent from a buyer to a seller, as a request to order specific products or services.
A basic PO will include:
- A number for tracking the purchase order throughout the process
- What item or service is being ordered
- Quantity requested
- Price and payment terms
The PO is the legal commitment to the seller that the buyer intends to pay - this is important since often the selling is fulfilling the terms of the PO before payment is received. If a buyer refuses payment, the seller is protected because the document is legally binding.
Ensuring you have detailed purchase order terms and conditions covering all relevant scenarios, including specifics like when you can cancel a purchase order, will ensure clear boundaries to maintain good relationships between buyers and sellers.
Purchase Orders versus Invoices
Buyers create the purchase order to request the goods or services, and sellers issue invoices to request payment against that PO.
The purchase order is often used to create an invoice, as a reference for the goods purchased and their prices. However, each document is used at a different point in the buying process, and they are used by different people as well.
Here’s a quick list of differences buyers and sellers need to know:
- Created by the buyer
- Created before purchase
- Specifies goods or services needed
- Includes payment details
- Created by the seller
- Created after purchase
- Confirms goods or services delivered
- Requires payment on a specific date
Why issuing and tracking POs are important to your business
The simplest and most important reason to have a defined procurement process and to track purchase orders throughout that process is to have visibility on spending. A PO system offers a clear record of what’s being purchased, how frequently and in what quantity. The ability to access and review that data gives you insight and control into the efficiency of your business operations, and flags potential areas for improvement.
If you are concerned about overspending in one department, you have a record of the amount, of who ordered what, and can dig into any potential issues that may be impacting your expenses. Conversely, this data can be leveraged to create budgets, since you have a record of what your average spend is for a product or service, providing you with predictability and a more accurate budget forecast.
A PO system also ensures that invoices are paid only once, that a process is in place for ensuring goods or services were indeed delivered, and that both buyer and seller have transparency throughout the transaction. If there is a dispute, or a change to the order, there is a paper trail for all parties to reconcile against. A defined process creates efficiency and minimizes errors.
The paper challenge and the automation solution
As your business grows and your needs in your PO system become more complex, automating the PO process can save time and money, as well as stress for your team. An online PO system will track electronic purchase orders through the entire process.
Businesses currently using a paper-based system often generate more documents than necessary. Many companies will process up to seven documents over the course of the purchasing cycle, including requisitions, purchase orders, quotes, order acknowledgments, goods received notes, packing slips, and invoices. Keeping track of all of this, for every single purchase, in paper files is overwhelming for your team. Paper records also have more errors, can be easily lost or destroyed, and are harder to share between employees and customers. Time is wasted and frustration builds when team members are hunting for documentation between files, then needing to copy or scan it to get it to a waiting customer.
Automating your purchase order process digitizes the entire procurement process by using electronic purchase orders and other documents. All the important documents are tracked in a centralized system with an audit trail to tell you who takes what actions and when. Plus, you can upload other documents to vendors and purchase orders, such as prior contracts, additional terms, and payment schedules, to keep track of all your vendor information and other details in one accessible system.
A defined PO process, and one that is automated, can bring significant benefits to your business. It not only improves efficiency in the day to day management of ordering and delivering goods and services between buyers and sellers, but ensures legal protection for both parties. This process also clearly tracks spending in a way that allows you to create accurate budgets and identify areas for closer examination when it comes to spending. While smaller businesses may be using paper, or excel spreadsheets, investing in an automated, online system as you grow is a wise investment.