What is a purchase order

In the early days of your business, you might not think about purchase orders. Some startups simply place orders when they need to without developing a formal purchase requisition process. However, your company's purchasing needs will likely grow more complex over time. Implementing a standard purchase order process early can help you develop good financial habits.

In this article, you'll learn how purchase orders can ease the complexity of the purchasing process, making it easier to maintain your accounting books.

Purchase order: A definition

A purchase order is a legal document that lists the items a buyer wants to purchase from a vendor. It serves as a written request for products or services and includes details like quantities, prices, and terms. 

Once approved, the purchase order becomes a legal agreement. If one party fails to adhere to the terms, they can use the purchase order as legal protection.

Overall, purchased orders helps both parties keep track of the items ordered and ensures proper payment and delivery.

Key elements and components of a purchase order

Most companies include a few standard components in their purchase orders. Each element fulfills a different purpose for buyers and vendors. Some of the most common features of purchase orders include the following:

Vendor information and contact details

A purchase order includes the vendor's name and contact information, such as a phone number and email address. Including the vendor's name helps reduce the potential for purchase mix-ups. The vendor who receives the order will know it is for them. They can review the buyer's request and decide if they can fulfill it.

Contact information is helpful to buyers who need to contact the vendor for any reason. For example, the buyer may need to make a change to their order. They can simply reach out to the vendor to inquire about an order alteration.

The buyer will include their contact information within the purchase order, too. That way, the vendor can reach out if they encounter any issues.

Detailed description of Goods or Services

A carefully drafted purchase order will list the items ordered, whether they are products or services. Including a product or service description eliminates buyer and seller confusion. They both have a defined document that outlines the items in the transaction.

Quantity, unit price, and total amount

Purchase orders usually indicate the item quantity, unit price, delivery rates, and total amount due. That helps to avoid any pricing confusion when it comes time to pay the vendor's invoice. Both parties know the cost of the order and the number of items requested.

The buyer can inform the seller if the delivered items vary from the purchase order. The seller will need to fix the issue.

Payment terms and conditions

A purchase order details the terms of payment. For instance, the buyer may indicate they will pay their bill within 30 days of receiving the items ordered. The vendor will review the payment details and decide whether they are acceptable. If the vendor wants to revise the payment terms and conditions, they must ask the buyer to submit a new purchase order.

Why purchase orders are essential for an efficient procurement process

With a purchase order, you can easily track your purchases and manage inventory. You'll find it much simpler to streamline the payment process and strengthen vendor relationships. Here are a few ways purchase orders can benefit the procurement process.

• More robust internal controls: Adopting a purchase process is good for your internal controls. Rather than buying goods and services whenever the need arises, you'll have steps for your team to follow. They'll seek the appropriate approval before initiating a purchase, creating an audit trail.
• Strengthen vendor relationships: Using purchase orders can improve relationships between buyers and sellers. Companies that regularly purchase from the same vendor become more familiar with their sales staff. Sometimes, vendors will provide repeat customers with beneficial discounts.
• Limit unnecessary purchases: Purchase orders can help you manage your inventory effectively. According to a Verusen study in 2020, 71% of organizations surveyed felt that data management was an important strategy for helping them survive the pandemic supply chain issues. Purchase orders are an important part of data management to tell you what you have and don't have and when you need to purchase. You'll be less likely to place unnecessary orders when you know how much stock you have. Implementing a blanket purchase order system for regular purchases will help ensure you don't run out of items you need.
• Streamlined payment process: When you begin using purchase orders, you'll likely notice improvements in your accounting and payment processes. Your accounting team can easily match purchase orders and vendor invoices. They won't need to spend as much time communicating with staff about price differences or confirming item deliveries. If your company undergoes financial audits, you'll find them easier to complete.

Some companies choose to automate the buying process with accounting software. Automating your vendor payment system will save your staff valuable time. It also helps to minimize payment errors and provides you with real-time financial data and financial statements you can use to make business decisions.

Establish effective purchase order systems for a successful startup

A solid purchase order system can do wonders for your business processes. Implementing a purchasing procedure now provides clarity for your operations and accounting staff. They'll find initiating orders, tracking inventory, and making payments more manageable. You'll feel more comfortable about your procurement process knowing you have a set procedure in place.

Solid accounting software that includes purchase order functionality can streamline your procurement functions. With the proper tools, you can add automation and reduce paperwork in your purchase order process.