A purchase order (PO) is an official document issued by a buyer who is committed to paying a seller for certain products or services that will be delivered in the future.
This allows the buyer to place an order with the supplier (seller) without making a payment in advance. The seller uses a PO as a way to offer credit to the buyer without risk, because the buyer is legally obliged to pay for the products and services that have been delivered
A PO has a unique number that makes it easy for buyers and sellers to track shipments and payments. Blanket purchase orders are the type of purchase orders used to commit buyers to purchase products or services on an ongoing basis, until a certain threshold is reached.
What Information is on a Purchase Order?
In general, a PO contains information such as:
- PO number
- Date of purchase order
- Vendor name and billing address
- Buyer name and shipping address
- Additional contact information, such as telephone numbers and email addresses
- Delivery date
- Shipping method
- Shipping terms
- Name of items
- Item description and technical information
- Quantity of items
- Unit price of items
- Total price
- Payment terms
How is a Purchase Order Used?
A PO is used to simplify the purchasing process, the flow typically looks like this:
- A buyer decides to purchase a product or service for their company
- The company issues a POs to the seller (or vendor), often digitally using a PO template
- The seller receives the PO and confirms that the company can place the order
- Otherwise, the seller notifies the buyer that the order can’t be fulfilled and the PO is canceled
- If an order is placed, the seller begins to prepare the order by withdrawing the item from the inventory or scheduling a clerk to do so
- The order is shipped with the PO number printed on the package so the buyer knows which order has arrived
- The seller sends an invoice for the order, using the PO number so that it can be easily matched with shipping information
- The buyer pays the invoice according to the terms stated in the PO
What are the Benefits of Using Purchase Orders?
- Enables them to track inventory and purchase history
- Enables them to order certain quantities of goods immediately
- Enables them to choose the delivery date desired
- Frees them from paying in advance
- Facilitates sales and repeat order tracking
- Makes it easier for them to create invoices for customers
- Acts as a legal security that commits buyers to pay
Why Does Your Company Need to Use Purchase Orders?
Companies that choose not to use POs, may think that administrative matters are just obstacles or unimportant processes. They merely rely on good relationships with their existing vendors, leaving aside various consequences.
When your business is still in its early stages, you tend to have a simple and easy purchasing process. However, as the company grows, and more hands are involved from beginning to end, the process certainly changes.
As the company gets bigger, purchasing requests become more complex, urgent, or specific, which means communication can be difficult and mistakes can occur, without using POs.
If buyers receive their orders without a PO number for reference, they will have difficulty finding out whether the order is correct or wrong. And if the invoice and payment have already been sent, this will add complexity to the legal situation between the two parties.
The PO serves as a legally binding document, providing clear instructions to the vendor and an available audit trail for reference when an error occurs.
What’s the Difference between Purchase Orders and Invoices ?
A PO is issued by a buyer (or client) at the beginning of a business transaction. This represents the client’s expectations with respect to the product or service ordered. The client sends this PO to the seller for approval. Once approved, the PO becomes a legally binding document.
An invoice is issued by a seller (or vendor) after completing the requirements as described in the PO. The invoice contains the price agreed in advance which the buyer must pay right after the order is completed. Invoices can also show details about how the seller wants to be paid (via electronic payments, checks, and so on).
An invoice must include the original PO number for reference. This will show the client’s accounting department that this transaction has been budgeted and approved in advance. In the end, invoices can help sellers get paid faster.
What’s the Difference between Purchase Orders and Purchase Requisitions?
A purchase requisition (PR) is an internal document in which one department requests permission from another department to purchase goods or services. A PR is created after a requisition and is a document used to actually buy goods or services from an external vendor.
A PR is an interdepartmental document that makes it easier for larger companies to handle their accounting and finances better. After the PR is approved, a PO can be created and sent to the seller or vendor.
Let’s Create POs Automatically!
The bigger the business, the more the need for the procurement process. Imagine how much time would be wasted if POs were created manually? How much loss could you experience if there were data errors or miscalculations in POs? ClickWork is here to help you prevent these problems!
With ClickWork, you can automatically create POs in just a few seconds, create blanket orders, allow your vendors to comment on POs that have been sent, and track order shipments. Start creating your POs automatically and for free here.