For small businesses, startups, or small orders, purchases of resources via emails or verbal agreements might suffice. However, as your business grows, a more organized and reliable system is needed for bigger inventory purchases.
Purchase orders (Pos) can simplify procuring resources, track the company’s expenditures, and streamline the process for future purchases.
What are Purchase Orders?
Purchase orders are legally binding documents that the buyer sends to the supplier stating the terms and demands for the purchase of products or services. The PO specifies the purchase request. It consists of the quantity required, order type, the mutually approved price and payment method, and a PO number for tracking purposes.
The purchase order represents the agreed-upon terms between the two parties and legally protects them both. If the buyer refuses to pay after legally making an agreement, the supplier is covered and vice versa.
Difference Between an Invoice and Purchase Order
Although an invoice and purchase order both contain order details, payment terms, price, date, and order details, they have drastically different purposes. An invoice is issued by the supplier to the buyer as a request for payment, while a PO is produced by the buyer as a request for products or services they require.
Steps Involved in the Purchase Order Process
Issuing a purchase order might seem like a hassle but it ensures a seamless transaction between the two parties involved. The steps involved in issuing a PO and receiving the required products are mentioned below:
Creating a PO:
The very first step in purchasing goods or services is creating a purchase order highlighting the order details, quantity required, price, and payment method. In large companies, the purchasing and procurement department is responsible for the creation of purchase orders.
Sending the PO to the supplier:
The vendor receives the PO and confirms that the buyer’s demand will be fulfilled. This makes the transaction between the vendor and the buyer legally binding.
Shipment and Receipt:
The vendor ships the delivery to the buyer along with the PO number so that the buyer can identify the shipped order.
The seller will also attach an invoice for the order with the PO number mentioned in it.
Authorizing Payment and Closure of Purchase Order:
If the buyer is satisfied with the quality of the products or the services, they will approve the invoice and authorize its payment. After the payment has gone through to the seller, the purchase order is considered closed.
Why Purchase Orders are Important for a Business
As a company grows, its demand for resources also expands. Conventional and straightforward purchasing procedures can no longer accommodate the company’s needs. Purchasing demands become more specific and complex and hence require a system to simplify them. Purchasing orders streamline the entire purchasing process.
However, issuing purchase orders through paperwork can not only be time-consuming but can also lead to issuing of wrong products through human errors. During the course of the PO cycle, several documents are produced. Any mistake in these documents or misplacing them can cause a setback for the company. Automating the process of product orders through an inventory management software will increase efficiency and significantly reduce the chances of errors. Through automation, the time required for completing a product order will decrease and the accuracy of orders will increase considerably.