As a small business owner, you'll frequently have to buy additional inventory or supplies. Usually, accomplishing this involves completing a purchase order and submitting it to one of your suppliers.
This article will help you understand everything you need to know about the purchase order process and show you how to draft your purchase orders for the future.
Purchase order: a definition
What is a purchase order? A purchase order (PO) is a document created by you, the buyer, and sent to a seller. A purchase order will indicate the items or services you wish to obtain from a vendor, and once the seller accepts your purchase order, it becomes a binding contract.
Purchase orders will typically be drafted and submitted by your purchasing department as part of your company's procurement process. You can then use the details included on your purchase order to track shipments, make payments, and integrate this data into your broader inventory management system.
Advantages of purchase orders
If your company is not already relying on purchase orders in your business, now's the best time to start. Purchase orders offer the following benefits:
They let you buy now, pay later
One of the reasons companies love using purchase orders is that they can place orders without paying immediately. Because the final price is contractually secure, this can help a company better plan its purchases around its overall cash flow.
For the seller, this also provides the chance to extend credit to a buyer since they are contractually guaranteed to receive full payment once the goods are delivered.
They create a paper trail
You’re creating a documented record of each sale by using a purchase order. This record can be helpful in two specific situations. First, it can help if you and your supplier ever disagree over the terms of a sale.
For example, suppose that you order three dozen widgets but only receive two dozen. In that case, your original order serves as a legally-binding document holding the vendor responsible for their end of the sale.
Second, a purchase order can be helpful during a financial audit. Having a record of your purchases can clarify your business expenses rather than relying on separate receipts and invoices.
They help you track your shipments
Each purchase order will have its distinct purchase order (PO) number. The PO number makes it easier to track your shipment, and it can also remind you of your method of payment.
Suppose the supplier agrees to a particular delivery date. In that case, you'll also have confidence that your shipment will arrive when you need it, which can be vital if you need to make arrangements for unloading, warehousing, etc.
They save time for you and your supplier
Most of today's major vendors are accustomed to receiving incoming orders through a standard purchase order. Relying on an established process can eliminate the back-and-forth between you and a vendor and ensure a smooth purchasing process for both parties.
Times you shouldn’t use a purchase order
The advantages of purchase orders far outweigh any disadvantages, which is why these documents should be a regular part of your purchasing process. There are, however, a few scenarios when you might skip the purchase order:
Not every transaction demands a purchase order. You may find that using an official order for every transaction can result in too many documents and create an administrative nightmare for your purchasing department. You might better accomplish smaller sales simply by using a company credit card or having employees submit reimbursement requests for business-related expenses.
Additionally, not every company is set up to process purchase orders. Instead, they may have their own internal procedures, and you may be bound to terms set by the seller rather than those set by a purchase order form.
Certain regular expenses such as utilities or subscription services don't need a purchase order. Recurring suppliers will usually bill your company monthly for these expenses or on an annual basis, depending on the terms of your subscription.
How to create a purchase order
What do you need to start creating purchase orders? Each order form should include the following data:
- Buyer information
First, you'll want to include as much information about your company as possible. Make it look professional by attaching your company logo. You might also want to assign a point of contact to avoid a lot of back-and-forth between you and the seller.
- Vendor information
Next, you'll include details on the seller, such as their company name and contact information. This data can be helpful for your internal records, helping you track what orders are issued to which suppliers.
- Purchase order (PO) number
Each order should be assigned its own unique number. You can use this for tracking purposes, and in the same way, your supplier will later send an invoice with a number that corresponds, which helps make it easier to monitor the transaction from start to finish.
- Description of goods or services
The main part of your form will include a description of the goods or services you're purchasing from your vendor. Be as specific as possible. If you have access to part numbers or SKU numbers, include this data to eliminate any possibility of confusion.
- Quantity and price
Each item on your order form should be accompanied by the quantity you wish to order and the price for each item. You'll use these figures to calculate your order total and any tax applicable to the final transaction.
- Delivery information
You want to make sure to include the shipping address and expected date of delivery. If there are any special unloading instructions, you'll want to record them here so your supplier knows what to expect when the shipment arrives.
- Payment terms
Finally, you'll include any details about payment, indicating your payment method and the date you anticipate paying your seller. Depending on the vendor, you may be bound to the terms and methods they allow, so always double-check before placing an order.
Streamline your invoicing process
Now that you understand how to use purchase orders in business, you might consider how our mobile app can streamline your invoicing and payment processes. If you’re an Invoice2go subscriber, our mobile app allows you to send custom invoices and accept money from anywhere in the world.
FAQs about purchase orders
If some of the above information sounds familiar, it's because these documents naturally overlap with many of your other core financial processes. It's essential to understand the unique features of a purchase order. To help you understand these documents better, we've provided answers to some common questions:
Exactly what information belongs on a purchase order? Every order form should contain the following information:
- The name of the buyer
- Contact information/billing address for the buyer
- Name and details of the seller
- Description of goods and services being purchased
- Specific brand names, SKU numbers, or other details
- Quantity of items
- Price per unit
- Delivery date
- Shipping address
- Payment terms
Any additional terms or conditions that apply to the sale
Remember, the more details you include, the better. Including more information will make the order more effective, as it will add additional specificity to your request.
In addition to the benefits we've highlighted above, most companies find that purchase orders become necessary as their needs become more complex.
Small businesses, for example, can often get by using simple order forms and simplified credit card payments. But as your company grows, you'll likely need the specificity and legal protection that comes from using an official document for every significant expense.
Larger companies may require their employees to go through an official procurement process when purchasing goods on the company's behalf. Businesses can use the purchase order to allocate funds and provide approval for each transaction, streamlining internal processes.
What are the steps involved in the PO process? Generally, you can expect to follow these steps:
- The buyer decides to buy goods from a supplier
- The buyer sends a PO to the seller
- The seller receives the PO and confirms that their company can fill the order
- The buyer receives the goods purchased on the agreed-upon date
- The seller assembles the necessary inventory (and any related employees)
- The seller ships the order with the PO number on the packing slips for tracking purposes
- The buyer receives an invoice that matches the order number
- The buyer pays the supplier based on the agreed-upon payment terms
In some cases, buyers will first have to create a purchase requisition form so that management can approve the expense internally before the transaction is finalized.
Note: the above steps represent the most straightforward scenario. What if the seller rejects the initial purchase order? If the seller can't complete the original PO for any reason, the original PO is canceled, and they will notify the buyer. The buyer can then submit another PO based on the conditions set by the seller or choose another supplier entirely.
Most modern business processes are no longer paper-based, and the PO process is no different. Buyers can submit electronic purchase orders, and these digital systems often integrate with a company's accounting software to keep the entire operation streamlined and efficient.
The same is valid for invoicing, of course, and today's digital platforms allow companies to send invoices and accept payments faster than ever before.
A purchase order bears a lot in common with a sales order, though the two forms are used for slightly different purposes.
A purchase order is sent from the buyer to the seller to indicate what goods or services are being ordered. A sales order is sent from the seller to the buyer to confirm the order details and approve the sale.
Think of a purchase order and an invoice as two sides of the same coin. They're both involved in the process of purchasing goods from a vendor, though they're used at different stages of the transaction.
A purchase order:
- Is sent by the buyer to the seller
- Is created before the goods are purchased
- Describes the goods that are needed
- Is sent by the seller to the buyer
- Is created after the goods are delivered
- Describes the goods that are delivered
Additionally, an invoice typically contains an invoice number corresponding to the purchase order number, making it easier for companies to track their orders and payment details. Invoices can also be submitted electronically, making it efficient and straightforward to collect money from customers.
Once the seller approves the purchase order, it becomes a legal contract. Therefore, these legal documents bind both the buyer and seller to the terms specified in the document itself, which means that it's important to confirm as many details as possible ahead of time to avoid confusion (or legal challenges) down the line.
Some commercial lenders may use purchase orders when providing financial assistance to your company through what is known as "purchase order financing."
Buyers are expected to pay the supplier according to the terms set out in the order itself. Generally, this means that buyers will pay the vendor after receiving an invoice for the purchased goods, though sometimes the seller may specify a payment deadline. Some sellers may request payment upon delivery, so make sure to check the terms before the date of delivery.
Pay attention to this deadline, as some vendors attach late fees and other penalties for payments received after the due date. If you clarified this deadline on your order form, you are legally bound to its terms