What is a Purchase Order?
November 9, 2018
Did you know that your business could be damaged in the long term by not using purchase orders, or by creating them manually? This post will take you from the basics straight through to getting yourself set up with an easy process to manage purchase orders. If you want to protect your business and capitalize on the opportunities that a good PO process offers, keep reading.
So, what is a purchase order exactly?
When you need to top up on inventory, and you place an order with one of your suppliers, you should be sending them a purchase order to act as a paper trail and a document you can both refer back to if there are any issues.
Here’s what typically needs to go on a purchase order:
- Date of purchase
- The name of your company
- The items you need, along with quantities required
- Prices of individual items
- Your business’s postal address
- Billing address
- Payment terms
- Purchase order number
What’s the difference between a purchase order and an invoice?
The biggest difference is that a purchase order is sent by the buyer at the beginning of the order process, and an invoice is sent by the vendor once the order’s complete. The invoice can then be matched up to the purchase order to make sure everything is correct.
An invoice (generally) includes the same info that’s listed on the purchase order, along with:
- Invoice number
- Vendor’s contact info
- Payment schedule
- Payment amount
As you’ll see below, it’s a good idea to not just rely on invoices for your official documentation.
The typical purchase order process
Shopify put together this handy walkthrough:
- You need to order some items
- You send a purchase order to your vendor
- Your vendor receives it and lets you know if they can fulfil the order or not
- If they can’t, the purchase order is cancelled
- If they can, they pick the inventory requested
- They ship the order to you with the PO number on the packing list so you know which order it is
- Your vendor sends over an invoice with the PO number on it so you can match it with the delivery info
- You pay the invoice according to the payment schedule detailed in the purchase order. Job done!
Why are purchase orders important?
When you first start a business, it may make sense to have a pretty informal arrangement with your vendors. You give them a quick phone call and that’s it. You don’t have extra paperwork to mess about with and you’re happy with that. And you may still be doing this further down the line because it seems preferable to taking on extra admin hassle.
Or maybe you’re painstakingly counting stock and typing out what you need. And then manually inputting the information when you’ve received the order. Not only does this leave a lot of room for inaccuracy, but it takes forever and you hate doing it. (Hint: there’s a much better way which we’ll get to shortly).
Both of these methods can be bad for business.
As Kenneth Loi over at Procurify points out:
“Once a company grows and the purchasing demands become more specific, urgent, and/or complex, communication challenges can arise if a purchase order isn’t used or certain details are not correct on the order.”
Stock is your single biggest asset so it’s a good idea to implement effective inventory management practices. Prevention is better than cure!
Here are the main benefits of purchase orders:
They help prevent over purchasing
If you have a team and no decent PO trail, there’s always the risk that more than one staff member will put in an order for the same items. This is a waste of money and would be even worse if the business was having a particularly poor month. But if they have a way to check what orders have been placed, and the status of those orders, they know its already being taking care of.
They set expectations between you and your vendor
It’s difficult to ‘reverse engineer’ and see where an order went wrong if you have nothing to refer to. You may realize that an order is incorrect once you’ve already paid the invoice, which can make things cloudier from a legal perspective. A purchase order means there’s no dispute. The document proves what was agreed, including price.
This also means that your supplier can’t sneakily increase their prices between the time you place the order and when they invoice you.
They’re legally binding
A benefit so powerful that it deserved its own headline. Once the vendor accepts the purchase order, you’ve entered into a contract with them. Of course, you have to hold up your end of the deal too (but that’s not the concern here). What business owner doesn’t love having legal backup?
They help with your audits
Auditors sniff around for gaps in the records and any financial anomalies. Having all your purchase orders readily available provides a clear paper trail to help you pass.
No unexpected expenses
A purchase order confirms your commitment to pay. However, you usually don’t have to pay until the order is complete and you get the invoice. So you could potentially forget about it and then not have enough money when the invoice arrives. By using purchase orders, you can make sure you have enough funds to cover the costs.
You can work out profit targets
Spending blindly is never a good idea. Purchase orders lay out the number of items and the cost. So you can calculate what you need to make to turn a profit and then create your action plan.
They help with planning smart budgets
Full visibility of spend means you can factor these costs into your budgets. Planning budgets without a complete overview means expenses can spiral out of control.
Get better at predicting future spend
Not sure what you will end up spending next quarter? The best thing to do is to look at your past spend as a ‘blueprint’. You’re sure to see patterns emerging so you can predict the needs of the business. As an added bonus, you’ll also see what sells well and what doesn’t. You could even use this information to make better decisions about which products to sell and maybe discontinue a few lines if necessary.
Spot trends and cycles
Being able to see your purchase order history will give you the opportunity to spot and predict trends and cycles. This is valuable when mapping out your strategy, as you’re basing decisions on data and will be much more confident that you’re making the right choices.
If you’re not using purchase orders at all, you’re missing out on all these awesome benefits for your business (and leaving your business open to problems). And if you’re following a tedious manual process, it’s not as reliable. Trying to keep on top of that as well as everything else means a few errors are bound to slip through. To reap all the rewards you need a fast, automated process.
Inventory management software can help
Using software to manage your stock makes everything so much smoother. If you use a solution like ChannelGrabber, there’s no reason to not do purchase orders as it’s so easy (and you won’t be trying to put it off all week).
So we’re going to run through how it works. Once you’ve added your inventory and quantities in, that means no more manual counting when putting together orders. Yay!
This is how simple ChannelGrabber makes it:
1) Search your product database to find the items you need to order. You can see what quantities you already have before deciding how many to order. One click to add it to your PO. You can then download your PO to send to your suppliers.
2) Eagerly await your delivery. The status bar shows you at a glance which orders are pending so you can chase it up if its taking forever.
3) When you’ve got your delivery, you can check it against your PO and alter any quantities if needed. Click complete and its done! The software then updates your stock levels.
4) This is not really a step, but worth noting. You can view your completed orders anytime, and use your PO history to help with business decisions and growth (as spoke about earlier).
Ready to implement an easy PO system for your business?