When a company enters into a purchase or sale agreement, both companies must ensure that they are protected within that transaction. The entity purchasing goods or services needs some type of guarantee that it will receive the items it is purchasing and, on the other hand, the seller seeks assurance that it will receive payment from the buyer.
These types of transactions are carried out in all companies in all sectors. It could be that a manufacturing plant is purchasing raw materials or a retail store is purchasing a new set of merchandise. Before completing the sale, i.e. shipping goods or offering services, obtaining a purchase order offers peace of mind to businesses on both sides of the transaction.
As a contractual agreement, a purchase order is a standard part of most business transactions today. Without one, both parties could end up in vulnerable positions, so it's best for everyone involved to prioritize purchase orders. If you're not already using this practice within your organization, don't worry. We'll tell you everything you need to know about using a purchase order, how to integrate it into your business practices, and how technology can make your purchase orders even easier. Keep reading if you want the following questions answered:
- What is a purchase order/what is a purchase order?
- What is the definition of a purchase order?
- What is a purchase order use case?
- How do I complete purchase orders?
- What are the different types of purchase orders and when are they used?
- How can technology simplify the purchase order process?
What is a purchase order?
From a technical perspective, the definition of a purchase order is a contractual agreement between buyers and sellers that details the specific items being sold, the quantity of goods or services, the price of the transaction, and the two businesses involved. The use of a purchase order, often called a purchase order, for all transactions is in the best interest of buyers and sellers.
The first step in healthy supplier relationship management is purchase orders, which should be considered as a tool. They go beyond offering legal protections in case a deal falls through; They are also referenced and relied upon for organizational purposes. When warehouse teams have visibility into incoming purchase orders, they can better manage inventory and production planning. When purchasing teams can track outstanding purchase orders, they can help your organization avoid duplicate purchases or chase backorders.
To reap the benefits of purchase orders, it is important to establish a routine process for how they are completed, approved, and tracked. Today, there are many tools available to businesses to facilitate purchase orders, but before implementing the technology, focus on understanding the basics of a purchase order.
How does a purchase order work?
Before you send a purchase order to a seller or supplier, it must contain detailed and accurate information. Standardizing your purchase order form will help ensure that all purchase orders have the necessary information included and can be easily completed at all times. Every purchase order must have the following information clearly listed:
- Product or service information (description, SKU, price, quantity)
- Purchase order number
- Purchase order date
- Date of delivery
- Supplier's company name and contact information.
- Buyer's company name and contact information.
- Shipping Address
- Shipping Address
- Payment terms
- Legal requirements
- Sales tax information
- Total bill
If you make a lot of international purchases with purchase orders, you may need to include customs information or additional details for international shipping. Be sure to check with the provider and local immigration office. Purchase orders do not have to be overly complex or sophisticated; They simply need to be functional, consistent and applicable to your needs.
Once you have successfully completed a purchase order, the purchasing process can begin.
Understand the role of POs in the purchasing process
Before your purchasing team buys anything from a supplier or seller, they may talk to the supplier's team and agree on preliminary pricing or other parameters. At that time, a purchase order must be completed to begin the purchasing process. The cycle that each PO will go through is as follows:
- Decide to buy: As a buyer, you will make the decision to place an order for a product or service. Calculate how much of that product or service you want and when you need it. If you need more wood to make products for a Christmas surge, be sure to find out when you will need the wood.
- Write the PO: Complete the purchase order with the information mentioned above.
- Send the purchase order: Once ready, send the purchase order to the seller for review. At this point, they will decide whether or not they can meet your needs within the requested delivery time.
- Seller approval: If your supplier can fulfill the order, they will approve the purchase order. Once the seller approves a purchase order, it becomes legally binding on you and them.
- Order completion: The supplier is legally obliged to deliver the goods or services to you on the agreed date. You will likely receive an invoice from the seller during this time; either before or after the order is fulfilled. Before paying the bill, rely on your AP's internal controls to verify that the bill is accurate.
- Bill payment: Once you have completed the three-way comparison to verify that the purchase order matches the invoice and that both match the goods or services received, you can submit the invoice for approval. Once approved, the invoice must be paid. Try to pay bills early if they have an early payment discount clause, this will save you money and every dollar counts! If you want to streamline your vendor payment process, this is a great place to start.
- Close the purchase order in your system: This last step helps keep everything organized in your PO system. If a purchase order is left open after the invoice has been paid, your AP team could accidentally send duplicate payments.
What is the difference between purchase orders and invoices?
Although purchase orders and invoices are critical parts of the purchasing process, they are NOT the same. As detailed in the steps above, purchase orders arrive earlier in the process than invoices. A supplier creates an invoice in response to a purchase order. Additionally, the buyer is responsible for completing and submitting the purchase order, while the seller is responsible for submitting and monitoring the invoice. If you're still wondering, “What is a purchase order?” Read this.
What are the different types of purchase orders?
In essence, the definition of a purchase order remains more or less the same, but there are different types of purchase orders that are better used in certain situations. Each requires slightly different information, so make sure you know the type of purchase order you are using in each purchasing process.
Standard purchase orders
When answering the question “What is a purchase order?” The standard purchase order is going to be the most classic. These purchase orders are used in many situations and for many types of transactions. If you're just purchasing a single item or buying products for the first time from a new supplier, you can't go wrong with a standard purchase order.
Planned purchase orders
If you know you will need certain goods or services in the future, completing a planned purchase order can save time in the long run and help the supplier ensure it has the inventory necessary to fulfill orders that will be placed several months from now. The price, payment conditions and products are established, but delivery times or amounts may be slightly adjusted as the date approaches. This is great for planning, but still offers some flexibility for both parties.
Open purchase orders
After discovering the answer to “What is a purchase order?” The next question you should ask yourself is: “How can I get a discount?” The answer is a general purchase order. If you commit to purchasing a larger quantity, the supplier may offer a bulk order discount. Although you will be contractually obligated to pay a large amount of change, overall you will save money.
Contract purchase orders
Adding another layer of legal protection and security for buyers and sellers, a contract purchase order establishes a legal agreement before a purchase order is created. These can be used to set prices on future purchase orders, or simply to create clean legal boundaries before sending a binding standard purchase order to the supplier.
Digital purchase orders
Increasingly common today, digital purchase orders (DPOs) are purchase orders submitted through an automated purchasing system. If you are looking to go paperless or want to automate manual purchase order processes, this is a great option.
Automation of purchase order systems
If digital purchase orders sound appealing, it may be worth looking into purchase order systems that can bring your purchasing process into the digital age. Purchase order automation, automated approval flows, and easy comparison capabilities can often be found in AP software tools. At Nanonets we create AP automation software that revolutionizes the purchasing process, but it doesn't stop there.
Within finance and accounting functions, there is a lot of room for automation and digital transformation. Once your organization successfully implements and begins using one of these solutions, you will see a massive change in the way your teams operate. Suddenly, productivity will increase, work-life balance won't be as difficult to achieve, and employee satisfaction will skyrocket. Investing in digital solutions today will position you for a better future tomorrow.
What is a purchase order? Now you know!
Purchase orders are widely used across industries, regions, and companies. Because of the legal protection they offer to organizations around the world, using them is a no-brainer. Be sure to complete all necessary information before sending a purchase order to your suppliers. There are many free purchase order templates available if you're not sure where to start. When you're ready to improve your purchasing process, find the right digital accounting solution for your business.
