Accuracy and accountability are key when purchasing goods or services for a business. A purchase order (PO) is a crucial document that ensures the goods ordered match the ones received and that the buyer is charged the correct amount for the goods.
This article will explore the importance of purchase orders, how they work when required, and what comes after the purchase order.
What are Purchase Orders Used for?
Purchase orders are used to initiate a transaction between a buyer and a seller. They serve as a legally binding agreement that outlines the details of the purchase, including the quantity, description, and price of the goods or services. Purchase orders provide a clear transaction record, ensuring both parties are on the same page.
Additionally, purchase orders help to streamline the purchasing process by providing a standardized format for requesting and approving purchases. They also help businesses keep track of their expenses and maintain accurate records for financial reporting purposes.
4 Types of Purchase Orders
There are four common types of purchase orders that businesses may use:
- Standard Purchase Order: This is the most common type of purchase order, used for one-time purchases of goods or services.
- Blanket Purchase Order: This type of purchase order is used when a business wants to establish a long-term agreement with a supplier for recurring purchases.
- Contract Purchase Order: A contract purchase order is used when a business enters into a formal agreement with a supplier for a specific project or a set period.
- Planned Purchase Order: This type of purchase order is used to plan future purchases based on anticipated needs, without committing to a specific quantity or delivery date.
How Does a Purchase Order System Work?
A purchase order system is a software solution that helps businesses manage and automate their purchasing processes. It typically involves the following steps:
- The requester submits a purchase requisition to the purchasing department.
- The purchasing department reviews and approves the purchase requisition.
- A purchase order is generated based on the approved requisition.
- The purchase order is sent to the supplier.
- The supplier acknowledges the purchase order and provides an estimated delivery date.
- The goods or services are delivered to the buyer.
- The buyer matches the received goods with the purchase order and verifies their accuracy.
- An invoice is generated by the supplier based on the purchase order.
- The buyer matches the invoice to the purchase order to ensure the correct amount is charged.
- The buyer approves the invoice for payment.
A purchase order system helps streamline and automate these steps, reducing the risk of errors and improving efficiency in the purchasing process.
Purchase Order Process
The purchase order process involves several key stages:
1. Requesting a Purchase Order
A purchase order is typically requested by an employee or department within a business. They provide the necessary details of the goods or services required, including quantity, description, and any special instructions. The requester submits a purchase requisition to the purchasing department for review and approval.
2. Generating the Purchase Order
Once the purchase requisition is approved, the purchasing department generates the purchase order. The purchase order includes all the relevant information, such as the buyer’s and seller’s details, the item description, quantity, price, and any terms and conditions.
3. Sending the Purchase Order
The purchase order is then sent to the supplier via email, fax, or an online procurement system. It is important to ensure the purchase order reaches the supplier promptly to avoid any delays in processing the order.
4. Acknowledging the Purchase Order
Upon receiving the purchase order, the supplier acknowledges its receipt and confirms the estimated delivery date. This step is crucial for both parties to have a clear understanding of when the goods or services will be delivered.
5. Receiving and Verifying the Goods
Once the goods or services are delivered, the buyer matches them with the purchase order to ensure they are accurate and meet the requirements. Any discrepancies or damage should be documented and reported to the supplier for resolution.
6. Matching the Invoice
After the goods are received, the supplier generates an invoice based on the purchase order. The buyer then matches the invoice to the purchase order to ensure the correct amount is charged. Any discrepancies should be resolved before approving the invoice for payment.
7. Approving the Invoice
Once the invoice has been matched and verified, the buyer approves it for payment. This triggers the payment process, which may involve the finance department issuing a payment to the supplier based on the agreed terms and conditions.
What is on a Purchase Order?
A purchase order contains several important pieces of information that help facilitate the purchasing process. These include:
- Buyer’s Information: The name, address, and contact details of the buyer.
- Seller’s Information: The name, address, and contact details of the seller or supplier.
- PO Number: A unique identifier assigned to the purchase order for tracking and reference purposes.
- Item Description: A detailed description of the goods or services being purchased, including quantity, unit price, and any applicable discounts or taxes.
- Delivery Instructions: Any specific instructions regarding the delivery of the goods, such as the delivery address or preferred delivery date.
- Terms and Conditions: Any agreed-upon terms and conditions, such as payment terms, warranties, and return policies.
Having all this information on a purchase order helps ensure clarity and accuracy in the purchasing process, reducing the risk of misunderstandings or disputes.
When is a Purchase Order Required?
A purchase order is typically required in business-to-business transactions, especially for larger purchases or when establishing formal agreements with suppliers. It helps protect both the buyer and the seller by providing a clear record of the transaction and ensuring accurate invoicing and payment.
While smaller purchases may not always require a purchase order, it is still good practice to use one to maintain consistency and accountability in the purchasing process. This helps prevent any potential issues or disputes that may arise from miscommunication or misunderstandings.
Who Receives Purchase Orders?
Several parties are involved in the purchase order process:
- Buyer: The individual or department within a business that requests the goods or services.
- Purchasing Department: The department responsible for reviewing and approving the purchase requisition, generating the purchase order, and managing the purchasing process.
- Supplier: The company or individual that provides the goods or services requested by the buyer.
- Finance Department: The department responsible for approving and processing payments based on the purchase order and invoice.
Each party plays a crucial role in ensuring the smooth execution of the purchase order process and maintaining accuracy and accountability in business transactions.
What Comes After The Purchase Order?
After the purchase order has been processed and the goods or services have been received and verified, the next steps may include:
- Payment: Once the invoice has been matched to the purchase order and approved, the finance department proceeds with the payment process according to the agreed terms and conditions.
- Supplier Evaluation: Depending on the business’s practices, the purchasing department may evaluate the supplier’s performance based on factors such as delivery time, product quality, and customer service.
- Record Keeping: All purchase orders, invoices, and related documents should be properly stored and organized for future reference and auditing purposes.
By following these steps and maintaining accurate records, businesses can ensure a smooth and efficient purchasing process while minimizing the risk of errors or discrepancies.
Purchase Order Template – Word