Purchase orders help you order and track the purchase of goods and services more efficiently. In this blog post, we’ll answer the question, “What is a purchase order?” so you can use this crucial document to streamline communication and maintain accurate financial and inventory records.
Key Takeaways
- A purchase order is a legally binding document issued by a buyer to a seller to authorize a purchase.
- Purchase orders contain the company’s name, billing, and shipping address, order details, delivery date, payment terms, shipping costs, and total price.
- Types of purchase orders include monthly subscriptions, standard, contract, planned, one-off, and blanket.
- Benefits of using purchase orders include legal protection, tracking, cash flow management, inventory management, and improved procurement processes.
- To ensure consistent and professional purchase orders, use a template and verify vendor information, establish clear payment and delivery terms, communicate with the seller, regularly review orders, and consider implementing an electronic purchase order system to improve efficiency and gain insights.
Purchase Order Definition
A purchase order (PO) is an official document issued by a buyer to a seller that states the details of a purchase. It’s a legally binding contract between the two parties that concisely records the transaction. It also ensures both sides understand the terms and conditions of the sale.
Purchase orders include information about the purchased products or services, the agreed-upon price, and the delivery details. These details prevent misunderstandings between the buyer and seller and provide legal protection during a dispute.
The purchasing department usually handles these documents, but it might be the owner or marketing/sales manager in smaller organizations.
Benefits of Using Purchase Orders
Keeping accurate records of what’s been ordered and from whom is vital to tracking expenses for all businesses. Not only do purchase orders fill this need, but they offer several other benefits, including the following:
- Legal protection: These legally binding contracts between buyers and sellers provide protection and keep the purchasing process running smoothly.
- Streamline purchasing: Purchase orders enable you to track incoming orders and manage inventory levels easily.
- Manage cash flow: Using purchase orders lets you better manage your cash flow by clearly recording your financial commitments.
- Maintain accurate inventory levels: These documents record the products you’ve ordered and when they’re expected to arrive.
- Streamline the procurement process: POs clearly and concisely record each transaction.
What Information Is on a Purchase Order?
In order for a product or service delivery to go smoothly, each PO must be filled out completely and accurately. This avoids any issues and misunderstandings between the buyer and seller.
A correctly completed PO should contain the following information:
- Purchase order number (PO number): A unique identifier for the order used for tracking.
- Company name: The name of the company placing the order.
- Billing address: The address where the invoice is sent.
- Shipping address: The address where the products will be delivered.
- Order details: A detailed list of ordered items with quantities and prices.
- Delivery date: The agreed-upon date when the products will be delivered.
- Payment terms: The terms and conditions related to payment, including the due date and any applicable discounts.
- Shipping costs: Any additional costs related to shipping the products.
- Total price: The total order cost, including product and shipping costs.
Purchase Orders vs. Invoices
Wondering what the difference is between purchase orders and invoices? While purchase orders and invoices appear similar, they serve different purposes in the sales process.
The buyer issues a purchase order to the seller, outlining the details of a specific purchase. Conversely, an invoice is issued by the seller to the buyer, requesting payment for the products or services.
Both documents are essential in sales, as they provide a clear transaction record. They also ensure both the buyer and seller understand the terms and conditions of the sale. Both documents offer legal protection for both parties in the event of a dispute.
Types of Purchase Orders and Their Uses
The purchase order you use depends on the transaction type. Understanding the differences between each PO will help you choose the best one for your business needs.
Standard Purchase Order
The standard purchase order is the most recognized and commonly used form. This purchase order is created for a one-time purchase, such as office furniture. The order details, including estimated costs, quantities, and delivery dates, are known beforehand.
Blanket Purchase Order
Blanket purchase orders are used if you make multiple purchases over time. For example, a business using cleaning services every few weeks uses this order since it’s a long-term agreement for the same service over time.
Contract Purchase Order
This order type is used when you need a long-term agreement with a seller. There are no specific product details given in the contract purchase order. Instead, both parties sign the contract containing the purchase terms before issuing the first purchase order.
Planned Purchase Order
Do you need a product or service but don’t have any specific details, such as the exact quantities or delivery dates? The planned purchase order allows you to wait until you order the item before giving the seller this information. This purchase order type is useful for businesses with seasonal demands, such as holidays and special events.
One-Off Purchases
If your business can’t commit to a long-term supplier, the one-off purchase order is used. This type of order is a good fit when a one-time delivery of goods or services is needed. For example, If your company plans to host a special event and needs a large, one-time order of catering supplies, then the one-off purchase order is submitted.
Monthly Subscriptions
Monthly subscriptions are for ongoing purchases, such as software or maintenance services. For example, if your company needs office supplies delivered at the same time each month would also use a monthly subscription order.
What Is the Purchase Order Process?
The process starts with a purchase order request, but where does it go from there? Here’s a detailed look at the steps involved in creating a purchase order from start to finish.
Buyer Issues a Purchase Requisition
The PO process begins when the buyer needs to order a product or service from the seller. The buyer fills out a purchase requisition form and sends it for approval to a manager within the company.
Purchase Order Is Sent to the Seller
After the requisition is approved, the buyer creates a purchase order form and sends it to the seller. The purchasing department checks their inventories to confirm they can fill the buyer’s order as described.
Seller Approves the Purchase Order
After they’ve verified they can fulfill the order at the agreed-upon price and delivery date, the seller returns the purchase order to the buyer for confirmation.
Order Is Fulfilled
After both parties agree upon the purchase order terms, the seller fulfills the order. The seller creates an invoice for the buyer for payment. The buyer pays the seller based on the terms on the invoice.
Tips for Creating and Managing Purchase Orders
Creating and managing purchase orders efficiently saves your business time and money.
The following best practices will streamline the purchase order process and minimize the chances of errors:
- Use a purchase order template: This ensures the necessary information is included and your purchase orders are consistent and professional.
- Establish clear payment terms and delivery dates: Doing so helps prevent misunderstandings and ensure both parties agree on the sale terms.
- Verify all vendor information: This includes contact details and billing addresses — ensure all is correct before submitting a purchase order.
- Communicate with the seller: Ensure they’ve received the purchase order. Verify that they can fulfill it according to the agreed-upon terms.
- Review the documents: Regularly review your purchase orders to ensure you’re within budget.
- Use a PO system: An electronic purchase order system increases efficiency, reduces errors, and improves communication between buyers and sellers. Use the built-in tools these systems include to gain valuable insights into your purchasing habits and identify areas for improvement.
Purchase Order Software and Tools
Modern technologies, such as automation and artificial intelligence, help improve the efficiency and accuracy of the purchasing process.
Some potential applications of technology in this process include:
Automated Data Entry
Reduces the time and effort required for manual data entry. This minimizes errors and improves the purchase order process efficiency.
Kissflow Procurement Cloud, Coupa Procurement, and Precoro are popular purchase order systems for automated purchase order entry.
AI-Powered Analytics
Analyzes purchase order data. This provides valuable insights into trends and patterns that help inform sales strategies and improve forecasting accuracy.
Smart Purchase Orders is an app that uses real-time data to predict trends and save several hours in purchase order creation. Retalon is also a powerful platform that uses AI for order management forecasting. Kissflow Procurement Cloud also generates data-driven analytics.
Digital Collaboration Tools
Cloud-based platforms and project management software help facilitate communication and collaboration between sales and procurement teams. This ensures that all parties are informed and aligned throughout the PO process. Popular platforms that include digital collaboration are Kissflow Procurement Cloud, Spendwise, and SourceDay.
By embracing technology and integrating it into the purchase order process, sales professionals help to streamline operations, reduce errors, and drive greater success and profitability for their organizations.
Final Thoughts
Now that we’ve answered the question, “What is a purchase order?” you can use these legal documents to protect your purchases and streamline your process. With purchase orders, businesses can easily monitor what was ordered, when it was ordered, how much was paid for it, who approved the order, and when it arrived.
All of this makes the job of reconciling invoices much easier at month-end. In addition, having all these details in one place helps ensure compliance with internal policies, government regulations, and vendor contractual agreements.
Richard Brooks is a sales expert who has worked in the industry for decades. Richard enjoys staying current on emerging sales trends and learning about new tactics to help deploy across his team. Based in Atlanta, Georgia, Richard loves to explore the city with his wife, sampling all the craft beer and great food.