Businesses are in frequent practice of ordering new things for the office, buying inventory, and spending money with vendors in a whole variety of ways. Some of our clients ask us questions about the “purchasing” process and about POs. But, what exactly is a PO? How do you read it and how do you need to create one? Who creates a purchase order for your organization?
Really, it is quite simple: a purchase order is a document that a buyer sends to a supplier as an order request. On the PO the buyer lists the quantity, the price, and other details such as where to ship the order to and when it should be received.
The purchase order is sent in to the seller and, once accepted, is usually a legally binding contract. The clearer that the buyer is on the PO about their requested terms, the safer they might be with any future disputes.
POs are very common with larger organizations, larger purchases, purchases with long lead times, or many other situations where it is important to document and get details of an order approved.
Keeping Purchase Orders Organized
As the buyer it is important to keep purchase orders up to date and in a system so that you can know what has been ordered, shipped, and received. This helps to keep a good handle on current and future inventory levels and to help predict when to buy again.
Why Purchase Orders Matter
It is obvious that a robust and organized PO system can help to keep your backroom and storeroom more in order. But, frequently businesses tend to forego the purchase order system because they prefer a more natural buying process through vendor relationships.
Procurify mentions on their blog that it is important to start out with a good PO system, even though it can be a lot of back office paperwork time. They say, that “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. If a buyer receives their order and it does not comply with the desired specifications, if there is no purchase order to use as a reference, it can be a nightmare for both parties to determine where the request went wrong.”
Having a paper-trail provides a great measure/point of reference when you inevitably run into a sticky situation with an incorrect shipment.
So, What is an Invoice?
It can be easy to get a PO confused with an invoice if you aren’t familiar with the system. An invoice is generally issued by the seller to the buyer in order to indicate the terms of payment for their purchase orders. An invoice is also typically sent only upon fulfillment of the terms of the PO.
The invoice will be issued (generally) after the PO has been received and will lay out the timeline for payment. This will, of course, differ based on the vendors terms. For example, the invoice may be issued only upon delivery of goods or there may be an invoice for a deposit and a final invoice upon delivery of goods.
Creating Purchase Orders
There is no one way to issue a purchase order but it is generally important to keep them looking consistent, accurate, and reliably made on time. If you need help with some back office tasks like PO management feel free to reach out to the Accountix team and we can talk about if it is time to bring in an outsourced accounting team for your business.