Although purchase orders are a common term in most businesses, we are often unaware of their significance in a company’s broader procurement process.
Once you have chosen a supplier after much deliberation and dependable service, you are now ready to complete the purchase. If you are unsure how to formalize the legally binding agreements with the seller, consider using a purchase order instead of the typical legal contract or invoice request.
Functional purchase order processes are your best bet when you need a legally binding contract between parties that require more than an invoice but do not need a lengthy, multi-page contract.
In this blog, we will discuss how to use purchase orders for your business and all things on the purchase order process.
What is a Purchase Order?
A PO is a legally binding document that confirms the buyer’s intent to purchase from the seller. The PO is sent to the seller by the customer. Important other details such as quantity, delivery date, prices, rate, shipping instructions, terms, delivery date, and so on.
A PO can be used as an official document for the exchange if there is no existing contract between the two parties.
When the chosen supplier approves the purchase order, it becomes legally binding, and both parties are held liable for their duties. It can safeguard both parties when purchasing credit if one of them backs out from their responsibilities.
What is the Purchase Order Process?
The entire purchase order process, from PO creation to PO closure, is referred to as the PO process. It comprises the purchase order process steps taken by a corporation to create, validate, manage, and track purchase orders. This PO process begins when the client has a requirement and ends when the seller successfully delivers it.
It fulfills all of the purchase order process steps required for the purchase requisition of requested goods and services. Now, if you are wondering what a purchase order process consists of, let’s check below.
The procedures purchase order includes process consists of the following:
Purchase Order Creation
Before creating the formal purchase request, the employee in charge of purchase requisition in smaller companies generates a rough draft that is reviewed by the authorities. In larger companies, these operations are handled by a separate department, whereas in smaller firms, they are usually handled by the accounts team. A PO process can also be created instantly for a recurrent purchase.
Purchase Order Approvals
Once a required purchase order request is generated, it is submitted for PO approval to the appropriate authorities. The PO approval procedure is carried out by the predetermined workflows of the firm. Required modifications may be added or withdrawn before sending the purchase order.
Dispatch
The purchase order is finally submitted once a PO has been approved and preferred suppliers have been selected. It can be mailed or sent electronically. Using cloud software to transmit POs may be the most efficient option.
Binding Contract
When the provider receives the PO, it is inspected by the authorities. Any necessary adjustments may be requested by the provider before approval. If any incorrect or improper order details are detected, amendments are typically required.
Once approved by the supplier, the PO becomes a legally binding contract that holds both parties accountable.
Receipt of Goods or Services
The seller has now provided the goods or services. The buyer double-checks all of the specs listed on the PO.
Three-Way Matching
Three-way matching is performed as a precautionary measure to avoid any serious complications during order placement and receipt. The goods receipt, PO, and received invoice are all matched and double-checked. The buyer confirms the delivered goods or services once they are found to be satisfactory.
Purchase Order Closure
After the three-way matching is completed, the confirmed bills are given to the finance department for payment. This brings the entire process of the purchase order to a close.
How do Purchase Orders Work?
Keeping a business running smoothly is a key responsibility, and a purchase order is one tool to do so.
A purchase order process flow also allows for audit trials to keep track of the business’s expenses. Purchase order receipts can even be used to settle disputes if any may arise.
The following steps of the purchase order process flow:
- The procurement team from the company purchasing goods creates a purchase order and sends it for budget approval.
- A manager in charge reviews and after any changes are needed approves the PO.
- Once approved, the purchase order is finally sent to the supplier company.
- The seller company then approves the purchase order once all the details are verified with inventory management.
- The goods or services get delivered to the buyer company from the seller company.
- After the goods are delivered to the buyer, the seller sends an invoice with the due amount payment and due date.
- Once an invoice is received, it is approved by the buyer and the payment processing begins.
- To avoid any late fees, the seller is to be paid before the due date.
- Once the payments are cleared, legal documents must be filed for record keeping.
Importance of Purchase Orders
A purchase order process has numerous advantages for businesses of any size. Larger organizations’ procurement teams use purchase orders for controlling business purchases that don’t require substantial paperwork, while tiny businesses rely heavily on them to keep record-keeping under control.
The professional PO process has various key benefits, including improved control, visibility, and effectiveness.
Budgeting Process
Your finance department’s ability to accurately account for all the purchases and expenditures depends on having a consistent purchase order process. This aids in estimating and budgeting procedures as well.
Order Management
You can manage numerous incoming orders on a single platform if your purchase order process is consistent. You can gain insight into key related activities, such as cash flow, shipping method, and manufacturing planning. You gain transparency into each transaction touchpoint along the way with a strong purchase order process.
Financial Accountability
A paper audit trail is also created when you create a purchase order, allowing for easy financial control of cash flow and increasing accountability for the transactions made. These records can be used as transaction proofs for banks, auditors, and court cases.
Dispute Resolution
No company is safe from legal disputes. No of the size of the business, the purchase order procedures serve to clarify roles and settle conflicts. The transaction’s terms and conditions have been established and defined.
Set Up Clear Expectations
A company may help suppliers understand what is expected of them and keep open lines of clear communication with the vendors by having a well-established purchase order process. This guarantees both sides obtain what they require at the final step.
Purchase Order Best Practices
You can apply the following best practices to your business operations:
Provide Written Guidelines
To minimize misunderstandings, it’s a good idea to create precise rules and specifications for purchase orders. It should thoroughly explain and discuss each stage of the internal approval procedure.
Review the Details
Once PO is received and accepted, it becomes legally binding. This protects both parties in case of any disputes regarding the order.
Put yourself in the place of someone ordering office supplies. However, as expected, you do receive the wrong things on the delivery dates.
Focus on your End Goal
Your purchase order procedure’s objectives should be made crystal clear. Pay close attention to any signs of prompt deliveries, dependable suppliers, or reduced spending.
Create and Provide Access to Written Policies
The best strategy to apply industry best practices and standards throughout the entire organization is to use clearly defined procedures.
These rules and policies should include the details needed for each essential step of the PO process, the number of approvals needed, and the names of the internal reviewers.
Create a List of your Top Vendors
With this list at hand, your finance team can conveniently choose from a short list of vendors. A dependable business relationship and an official confirmation with these vendors has already been established, and you can compare prices.
Make Budget Allowances and Expense Categories
The purchase order process is streamlined by these financial restrictions automatically applying purchasing process criteria. The finance team is aware of how much must be spent on necessities if a company has a $1,000 monthly budget set up for office supplies.
Appoint Employees to Oversee the Purchase Order Process
By providing a point of contact for any questions that may come up during the implementation of a new procedure, the person in charge of this procedure enhances acceptance within the entire organization.
Utilize Technology
By incorporating an efficient PO system into your company’s purchase order process, you can easily standardize operations and eliminate repetition using automation. It will reduce the time-consuming manual process.
Work Order vs Purchase Order
Although the work order and PO sound similar, there is a magnitude of difference between the two.
Here are the key difference:
| Purchase Order | Work Order |
|---|---|
| PO is used when buying goods, and services required from an outside vendor. | Work order is used when a particular task needs to be completed. |
| It is used when orders are placed from an external company. | Organization performing work for either external or internal customers uses work orders. |
| This legal document details the list of goods or services requested with details of payment terms, quantity, rate, due date, etc. | It summarizes the details of particular other tasks that need to be done. |
The payment information on a purchase order of purchase requisitions are as follows:
|
The same information on a work order is as follows:
|
Benefits of Automating the Purchase Order Process
When your company expands and demands more items or services at the agreed-upon price, your finance department must manage a specific number of standard purchase orders and invoices as the first step. When the purchase requisitions increase, you should use digital procurement process management software to centralize and automate your PO process and procurement processes.
Functional automation software, which speeds up operations and allows your team to focus on more critical tasks, can greatly boost efficiency.
The e-procurement software makes it simple to keep track of the progress of the procedure and quickly refer to the planned purchase order when necessary. Additionally, it is quicker, safer, and more responsible.
By moving forward with PO automation, both the buyer and seller can begin to enjoy the following advantages:
- Remove unnecessary documents.
- Quickly route POs with specific invoice number to the responsible authorities.
- With a few clicks, you can quickly generate purchase requests.
- Eliminate human error and manual entry of all the information
- Increase the efficiency of the system’s approval process.
- Establishing budget-driven expense constraints simplifies expenditure control.
- With the click of a button, you can easily create a PO from scratch or based on a request.
- Manage all of your contacts, bills, merchandise, and vendors in one place.
Create Customized Purchase Orders for your Business
With Moon Invoice, you can customize and send standard, planned, and contract purchase orders online using free templates.
Conclusion
Your company’s procedures for handling purchasing process have to be efficient. Without a reliable and efficient purchase order system for managing the PO process, time and resources are wasted, and mistakes are common.
Although implementing a procurement system may appear to be a simple solution to any PO-related financial risk, it is a very difficult process. If you want to ensure that your procurement tool is working properly, you must follow a few buy-order best practices.
Using the right automated system like Moon Invoice and all the best practice mentioned above, to create purchase orders you can improve your problematic PO process, increase efficiency, and increase ROI.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
