Purchase Orders: All You Need to Know About Them

Kanya
Purchase Orders All You Need to Know About Them

As demand for your product increases, your business processes may become more complex. When you first start your business, you can simply order materials from your suppliers by phone or email. But when your business gets bigger, sourcing supplies becomes harder to manage. If that’s the issue you’re currently facing, you may want to consider using purchase orders. Here’s all you need to know.

So, what are purchase orders?

Purchase orders are official documents created by a buyer that include a summary of the goods or services they purchase from a seller or supplier. These documents also act as legally binding contracts between the two parties.

What info should you include in a purchase order?

Similar to an invoice, a purchase order should contain important details related to the items that will be purchased by a buyer which includes:

  • Buyer’s name
  • Company’s name
  • Billing address
  • Shipping address
  • Shipping date
  • Phone number
  • Email address
  • Type of product
  • Item quantity
  • Item price
  • Preferred payment method
  • Preferred shipping method
  • PO number
  • Transaction terms

How are purchase orders different from invoices?

Purchase Orders All You Need to Know About Them

The key difference between purchase orders and invoices is who creates the documents. Purchase orders are sent by a buyer to a seller or supplier. While invoices are made by the seller after the purchase orders have been confirmed and then sent to the buyer so they can immediately make payments. Both documents are equally important for any business.

What happens after a purchase order has been sent?

After the buyer has sent a purchase order to the seller, then the next decision is in the hands of the latter. The seller may approve or disapprove the buyer’s requests. When the seller has agreed to sell the items with the quantity and price requested by the buyer, then the seller may send an invoice to the buyer based on the approved contract.

Example:

Ali is responsible for purchasing the materials needed by the manufacturing company he works for to create a new product. He then makes a purchase order which includes the quantity and price of the items as well as his specific requirements to a supplier.

The supplier who provides the materials required by Ali received the purchase order. Once they approve it, then they make an invoice stating the total cost to be paid by Ali. After the payment is fulfilled by Ali, the supplier sends a receipt and ship the order within the specified time.

Why are purchase orders important to your business?

Many companies are still reluctant to use purchase orders, because they perceive them to be a hassle that slows transactions down. Some of them don’t want to use them simply because they think they don’t need them since they’re very close with their vendors or suppliers. Placing orders by phone or SMS may be reasonable when your business is small. But as your business grows and your needs become more complex and specific, problems may arise due to the lack of details of your requests.

Imagine when you receive an order and it doesn’t comply with your desired specifications. Meanwhile, you don’t have a document that you can use as a reference. This can lead to misunderstandings between you and your supplier. Your business relationship with them can also be tenuous. This scenario is unlikely when you use a purchase order.

Purchase orders are important to your business because they contain information related to your orders in detail. They’re very useful especially when you order different items in a large number. They also act as contracts between you and your suppliers, and they can be used as references for when things go wrong. For example, when the quantity of items you receive is less than that of you requested, you can always notify your supplier while referring to the purchase order you sent.

Manual purchase orders vs. digital purchase orders

Purchase Orders All You Need to Know About Them
A Digital Purchase Order

Manual purchase orders are the paper-based ones. While they look okay, they’re actually inefficient. In every purchase cycle, there are quite a lot of documents involved, including requisitions, purchase orders, quotations, goods received notes, invoices, and so on. If you keep them in a pile of paper, there are many consequences that can arise.

Paper-based records can be easily lost and damaged. You may have trouble spotting duplicate purchase orders and any other documents. You may also lose your previous transaction records at any time. An automated purchasing system is the best solution to these problems.

In addition to allowing you to create digital purchase orders, the automated purchasing system also allows you to create requests for quotations, blanket orders (contracts), purchase approvals, and any other procurement related documents digitally. Everything is securely stored in the system and you can easily track the documents whenever you want. The system also connects you with suppliers through an online portal, thus speeding up the ordering process.

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