Updated: Jun 30, 2022
A purchase order is very crucial for a well-managed purchasing process that makes it easier to track your inventory and order supplies and sellable goods. However, many small business owners have not fully understood the importance and process which is certainly essential for the success of your company.
In this guide, we’ll cover:
Purchase Order Definition
Purchase Order Process
The Purpose of Purchase Order
Key Differences Between Purchase order vs Invoice
What is a Purchase Order?
A purchase order (PO) is a commercial document that is officially issued by a business’s purchasing department to its vendors or suppliers when they place an order. The document shows the details on types, quantities, and prices for products or services. By submitting an order, the buyer is committing to purchase goods or services at the agreed-upon amount.
Put simply, a purchase order is the contract drafted by the buyer when placing orders from the sellers.
What Information is on a Purchase Order?
A purchase order will contain the order details, including:
The company name of the buyer and the seller
The products or services to be purchased; brand names, SKUs, model names, etc
Quantity purchased, price per unit
Payment terms and conditions
Delivery date and location
Signature of the issuer
What is the purchase order process?
Step 1: Buyer creates a purchase requisition
First, the company’s purchasing department creates a purchase requisition which is a document issued to keep track of the goods ordered. Additionally, the purchase requisition also helps the buyer keep an account of their expenses.
Step 2: Buyer creates a purchase order
The purchase order is created after the goods that need to be purchased are agreed upon. The PO lists include all the detailed information of seller and buyer, description of the goods being purchased, item number, price quantity, and the PO number.
The PO number is a unique number associated with a specific order. The Po number is to ensure that the goods ordered match the ones that are
Step 3: Seller accepts (or rejects) purchase order
Depending on whether the seller has the inventory to fill the order or not, they’ll accept the purchase order or reject it. If they do, the seller fulfills it and delivers the items on the agreed due date. The seller will then send a bill or sales invoice for the purchased items.
Step 4: Buyer records purchase order
The buyer pays for the items and records or files the purchase order for future references.
Why is a purchase order important?
Whether you’re a small business or a large company, using POs for order placement, especially in large quantities is beneficial.
First, a purchase allows you to clarify your requirements and set a clear expectation for your vendors from day one.
Second, when the order request volume increases, you may end up making duplicate requests for order placement, causing a loss to your business.
Next, the document indicates the detailed information of the items so you can clarify the initial pricing agreement in case the supplier decides to increase the price. In this way, you prevent cost overruns.
Without POs, you can fail to manage your inventory, such as inventory stockouts. The purchase order system will help you determine how much stock you should keep and whether it’s time to refill. It’s particularly important to streamline your operation and enhance your inventory management.
Purchase Order vs Invoice: Key differences
Purchase orders and invoices are two of the most confusing financial terms and are considered synonyms. Though both refer to goods and services, their time of occurrence is different.
An invoice is a bill, created by the seller or supplier of goods as a way to keep track of, and solid payments. Sellers send out invoices after the terms of a purchase order have been agreed upon.
The key difference between a purchase order and an invoice is that a purchase order is issued by buyers to vendors to track and control the purchasing process. Whereas an invoice is an official payment request sent by buyers once their order is fulfilled.
Issued by a business’s purchasing department to its vendors or suppliers
Created by the seller or supplier of goods as a way to keep track of and solid payments
Generated when the buyer places an order
Generated after the order is fulfilled
Lays out goods needed
Confirms goods delivered
Includes proposed payment details
Require payment on a specific date
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