If your business needs to purchase goods or services, you need a way to track those orders. Using a purchase order system will allow you to do this. Not sure what a purchase order (PO) is and how a system that manages them will benefit your business? This article will help you answer those queries.
What is a purchase order?
A purchase order (also known as a PO) represents the intentions of a buyer to buy a certain quantity of a product or service at an agreed price from a supplier. It’s a legally binding document.
Here’s what you’ll usually find on a PO:
- Purchase order number
- Purchase order date
- Buyer address
- Supplier address
- Product/services list and prices
- Payment terms
How can a purchase order system help me?
Having a purchase order system in place can be beneficial for your business. From making sure the right information goes to your suppliers, to having an overview on your stock levels, it makes sense to have a system that works seamlessly.
Using a purchase order system will save you time and money too.
Here are six reasons why having a purchase order system will help you.
1. Get orders right first time
Sending a purchase order to your supplier is a legal offer to buy their products or services. If your supplier accepts the purchase order, it usually forms a contract between you and your supplier. No contract exists until they have accepted the PO.
Purchase orders provide accurate documentation of what has been ordered in case of a dispute. A PO lists the item description, quantity, price, discounts, delivery instructions if applicable and date of ordering. This leaves less margin for error than a verbal order.
Making sure the details are correct on the PO will help when it comes to dealing with payments.
2. Manage projects and purchases
A PO system outlines costs up front before a job begins. An order can be placed for a single project or several projects at the same time.
When goods or services are ordered for a project, the project reference should be applied to the order, to link the goods on order with the project.
This will automate the allocation of stock and application of costs to the project at each stage of the purchase order life cycle. A good purchase order system starts with tight job quotes.
If you want accurate POs, you must calculate actual purchase order quantities and determine costs before a project commences.
3. Save your employees time
When your suppliers send an invoice that references your PO number, your employees won’t have to see if the bill is legitimate. The contract that is formed when your supplier accepts your PO eliminating any dispute.
The PO process has already ensured that it is legitimate and the proper accounting of it should be simple. The invoice would be entered to your accounting system referencing your original PO, recording delivery and updating your stock levels seamlessly.
4. Allow you to do business with government and local authorities
Many government agencies and authorities will only pay invoices upon receipt of a valid purchase order. If you cannot create this, you are limiting your business opportunities going forward.
A business producing purchase orders suggests it is on top of its finances and cash flow gaining more confidence over businesses without this system.
5. Help you streamline your stock
An effective PO system will show you your financial commitment on inventory. Current stock levels, stock on hold, reorder levels and free stock are all areas that many businesses do not have clarity or control on leading to stock shortages.
Purchase ordering will allow you visibility on all these areas along with cost prices and sales prices, meaning you can see your product profit margins.
6. Discover your super suppliers
Many businesses do not know who their best suppliers are. Who do they order most of their products from? What was the cost of previous products and should they be receiving preferential discounts?
These are just a couple of the questions many businesses leave unanswered.
A great purchase order system leaves none of these questions unanswered allowing for business control and clarity. Are you using a PO system for your business and is it helping you to manage your processes? Let us know your stories in the comments below.
Editor’s note: This post was originally published in September 2013 and has been updated for accuracy and relevance.