Businesses need a paper trail. Don’t worry; it doesn’t really need to be paper, but you do need evidence of everything going in and out of your business. You receive invoices from suppliers, but you need to create purchase orders to record your expense. The idea that no-one likes a ‘know-it-all’ doesn’t exist within business – here’s our know-it-all guide to purchase orders.
What is a purchase order?
A purchase order (PO) is a document created by a buyer of goods and services. Buyers send POs to the seller as intent to make a purchase. It should contain the key information for any purchase:
- The item purchased
- The quantity of each item bought
- The agreed price
Remember, these are just the bare minimum requirements for a legally binding agreement. The more detail you put in your purchase orders the better. Upon acceptance by the seller, purchase orders become legally binding agreements, so detail is vital. Don’t get caught fumbling in the dark; be clear and concise in your dealings.
Wait, is that not an invoice?
In short, no. It is the seller of goods and that creates an invoice. This document is a request or confirmation of payment in relation to the initial purchase. It is more concerned with the closing stages of the transaction.
Invoices will contain details of payment, such as whether it is to be by cash or direct debit and the due date. They will also usually contain the purchase order number so that both documents correspond. However, the details of the purchase order mentioned above are not included on the invoice.
Why are purchase orders important?
Nobody likes paperwork, but there are some jobs you just can’t avoid. No matter the size of your business, you need a paper trail. When your business is small, budgets are tight. You need to make sure you know exactly where every penny is going. As your business grows and your demands become greater, purchase orders become vital to maintain order in a potentially chaotic system of multiple suppliers.
When you are receiving larger orders, things can become complicated. You need to know that you’re receiving the right product in the right way at the right time. This is why purchase orders are useful: they smooth over any possible misunderstandings or miscommunications about your transaction.
Purchase orders provide not only the details of the agreement but also legal protection. If the supplier doesn’t carry out the agreement then you have the document as evidence of breach of contract.
How do I create a purchase order?
Creating a purchase order is easier than you would think. It has three sections:
- Header – This includes vital details such as your contact information and business name. It also contains the purchase order number, date and payment terms, such as how soon you expect to pay.
- Body – Description of the goods/services you have purchased, including the quantity of each item.
- Footer – This is where to put in the grand total of all items purchased. The amount listed should have the pre- and post-tax totals. You should also include a delivery date so the supplier knows when you expect delivery.
That sounds like a lot of work. Is there an easier way?
That’s a bit of an understatement. A manual purchasing system can create a huge amount of paperwork and can take an excessive amount of time to create. Ultimately, it involves a lot of administrative work with no tangible business benefit. Not only are you needlessly making extra work for yourself, but you can also lose or accidentally destroy paperwork.
Purchase order automation, however, can save you valuable time and money. When you go digital you can find everything you need about an order at the click of a button without the risk of damage or loss.
Build an effective purchasing department
Your purchasing department operations can make or break your business. Having knowledge, control and accountability over movements of stock and funds is vital to success. This way you won’t spend more than your business can afford.
There are many ways in which you can make your department run more efficiently, but one of the simplest is through the effective use of purchase orders. So there you have it – the know-it-all guide to purchase orders.