What if you place an order only to find out too late that your go-to supplier is out of stock or closed for renovations? What backup plan to have? If you have implemented a purchase order process, this awkward situation could have been avoided. Your supplier would have been able to inform you timeously that they would not be able to fulfill your order this time, leaving you enough time to contact another supplier. This is just one possible scenario that purchase orders can help to avoid. To help you make the best decision for your type of business and its needs, here is a closer look at the ins and outs of purchase orders. We’ve also included two templates that you can adapt.
1. What Are Purchase Orders?
In short, a purchase order (PO) is a document that a business (the buyer) sends to a supplier to give official permission for or an approval to a purchase. In this legal document, information like the product name and quantities are outlined, with more specific orders typically including more information.
2. Is a Purchase Order a Legally Binding Contract?
Purchase orders are regarded as a legally binding contract. This means that if a buyer does not want to pay, the seller is protected. In fact, because of this legally binding contract status, commercial lenders might use purchase orders when offering financial support. This is known as purchase order financing.
3. Are Purchase Orders and Invoices the Same Thing?
While both invoices and purchase orders have similar details, there are slight differences between these two distinct types of documents. Usually, a purchase order has a lot more technical details, like order information, which are typically omitted on an invoice. Also, invoices are created by the seller and not the buyer. The seller will either create an invoice to collect payment before a set payment due date (if the products were sent before payment) or can instead send an invoice to confirm that the payment was already received and the current balance is zero.
4. What Are the Benefits of POs?
Purchase orders can help both parties (in other words, the buyer and supplier). While small businesses might still be able to cope fine without using it, things become a lot more intricate as the business grows. For large companies, the use of purchase orders can help streamline communication and the procurement process and help prevent errors. For example, if the buyer receives an order without a purchase order number, it can be challenging to decipher which department placed the order and if the products were already paid for. Also, as mentioned earlier, it offers some legal protection. By ensuring that your purchase orders are clear and detailed, it ensures that the relationship between your business and sellers remains professional. While purchase orders are recommended, they do, however, offer one main disadvantage. You have probably guessed what that is already – more paperwork. This extra paperwork can especially feel like a burden if it’s only a small purchase.
5. What Types Do You Get?
Depending on your requirements, it might make more sense for you to use something other than a standard purchase order. While all of the following four purchase orders are very similar, they differ in how much information is included.
Standard purchase order
The most common type of purchase orders is a standard purchase order. It can, for example, be used for services, products, consignment, and subcontracting. On this type of PO, you will list details like the product type, quantity, and by when it should be delivered.
Planned purchase order
Unlike a standard purchase order, when you are using a planned purchase order the quantity is only an estimate and the delivery date provisional. This type of PO is used when you are anticipating that you will need more of a specific product soon and you want to send the order in the meantime.
Blanket purchase order
While standard and planned purchase orders are usually for a single order, a blanket purchase order is used for placing multiple orders at the same time in the hopes of getting a better price. So, if you know that you can get a better deal, it can make more sense to send several orders simultaneously if it means that you can save money.
Contract purchase order
For the most legal protection, it is best to go the route of using a contract purchase order. When using this type of PO, both parties (the buyer and the seller) will sign a contract as well.
6. What Information Should Be Included?
The buyer is the party responsible for creating the purchase. In the header, they should include the name and address of their business, date of the purchase order, and the order number. Below this information, the information of the seller should appear. This includes the name of the business and contact person as well as the business address of the seller. Next to this block of information, the shipping details can appear. These include where the order should be shipped to, the shipping method, and proposed date of delivery. With that sorted out, you can now finally get to the actual order. In a table, the buyer will list the different products included in the order. This information will include the name of the product or description of the service along with the SKU number/product code. The buyer will also need to indicate how many items are needed per product and by when it should be delivered. To see how everything comes together, below is a template of a purchase order that HubSpot offers as a free lead magnet on their website. Here is another example of a purchase order shared by Procurify, a procurement and purchasing software solution.
7. How Does the Process Work?
It all starts with the buyer. Once the buyer has identified which product, the quantity, and deadline, a purchase order can get created. The buyer will now compile a draft purchase order using this information. Once it is ready, it should be sent to the seller who needs to approve it first. To ensure that the rest of the process runs smoothly, it’s important that the buyer also indicates a date by which the order should be approved. This way, if the seller for some reason can’t fulfill the order, the buyer will still have sufficient time to contact an alternative seller to help with the order fulfillment. Once the seller has approved the PO, it becomes a legally binding document for both the seller and the buyer. In other words, the seller will now be responsible for ensuring that the product is delivered in the right quantities and on time. While the seller is getting the goods ready, they can in the meantime create and send the invoice to their customer (the buyer). Depending on the payment terms outlined in the invoice, the buyer will then have to ensure that the invoice gets settled on time.
8. Should You Switch to Using Purchase Orders?
The short answer: it depends. Depending on the size of your business and how your business is taking care of purchases at the moment, it might make more sense. So, before deciding on whether or not POs will be a good fit for your type of business, consider the following aspects.
Are you sticking to your budget?
If you often find that you exceed your budget, purchase orders can help you to exercise better control over the amount you have set aside for employee spending. By using POs, it is much easier to keep tabs on what your staff are buying and it also gives you insight into employees’ usage of supplies.
Do you often buy in bulk?
While purchase orders can help you to save money by keeping better track of usage and spending, the real money-saving value that they offer relates to volume discounts. If you often buy products in bulk, blanket purchase orders can help you to get better deals from suppliers. Also, by using purchase orders, the person in charge of approving them before they get sent to the seller can start to identify if there are any patterns. This way, your business will be in position to switch to bulk ordering, if necessary.
Are you in control of your orders?
If you often find yourself feeling that you have know idea who ordered what and from whom, it could be time to put in place a purchase order system. While it might mean more paperwork, all it takes is reaching out to your regular suppliers to inform them that from now on you will be sending purchase orders.
9. Paper-based or Electronic POs: What Works Better?
The best way to introduce purchase orders is with the use of an electronic purchase order system. This way, your purchase orders will be centralized. By using the same online platform for all your orders, all the stakeholders will be able to view a purchase order whenever they need. A procurement and purchasing software will also send a notification whenever an employee has created a PO. This way, unnecessary details get prevented.
