Everything You Need to Know About Purchase Orders

It doesn’t matter how big a company is: Purchase orders can help streamline many processes and keep things traceable and organized. 

The Basics of a Purchase Order

A purchase order is a document that a buyer gives to a supplier, indicating what goods or services they want to purchase. POs specify an agreed upon quantity and price of the goods. A PO includes all the specific terms of the purchase that the buyer is making as well as when the order is going to be fulfilled. 

A PO also serves as an internal document of what has been ordered, and notifies a vendor that a customer wants to place an order. A purchase order is considered a legally binding document between both the seller and buyer. If a business is ever unsure about the price they are paying for goods from a supplier, they can always check the purchase order. 

Purchase Orders Vs. Invoices

Purchase orders are different from invoices because of who generates them. A buyer generates a purchase order in order to get what they need from the supplier. The supplier in turn creates an invoice to show how much the buyer owes them. A purchase order is the contract part of a sale, whereas the invoice is known as the confirmation of the sale. 

The Process of Creating a Purchase Order

The first step in generating a purchase order is creating a purchase requisition. This is a document used within the company to keep track of what is being ordered. This will help the company track expenses, and the requisition has to be approved by a manager before the PO is made. 

The next step is the actual purchase order creation. Once it is agreed upon which goods are needed, the PO is created and will contain shipping info, the buyer and seller’s name, and any discounts. It will also contain the item numbers, quantity, and purchase order number. POs can be transmitted through paper or electronically. For the former, a purchase order is physically sent to the supplier, who then manually transcribes the order into an ERP system. It is more common for businesses to transmit POs through Electronic Data Interchange (EDI). EDI refers to the computer-to-computer exchange of documents, which is more efficient and more accurate. When transmitting POs through EDI, the order is sent electronically and automatically placed within the supplier’s ERP or MRP.  

Next, the seller will accept or reject the purchase order. There will be a line for the seller to sign off approval at the bottom of a purchase order. This can be done physically on a paper PO, but it is more common for businesses to use electronic purchase orders. The seller will still need to accept or reject the purchase order for it to be legally binding, but this can be done through an eSignature. eSignatures can be as simple as clicking a box to signify consent, creating a personalized signature that mimics their handwritten signature, or typing their name on the dotted line. Prior to signing, the seller maintains the right to reject the document if they feel that the terms aren’t fair. After the PO is signed, it becomes legally binding for the buyer and seller. 

The final step is for the purchase order to be fulfilled. It will remain open until the order has been received. The PO will only get closed after all the goods have been delivered. 

The Legality of Purchase Orders

When a PO is sent, it is not yet a legal document. It becomes a contract once the seller accepts the terms and signs the document. Purchase orders often used to be communicated through the mail or by fax but can be done online. Usually, it can be completed via email or on the seller’s website. Purchase order software companies like PurchaseControl, Xero, and WorkflowMax automate the purchase order process from conception to signature, and they allow signatories to electronically send documents, discuss terms, and eSign their finalized PO.

A purchase agreement is slightly different than a purchase order. Unlike a purchase order, the terms of a purchase agreement have been confirmed by its signatories before the purchase agreement’s creation. The agreement will have all the information that a PO would have, but it is usually a bit longer and more detailed. 

How Can You Track Purchase Orders?

Since purchase orders are such a critical resource in a D2C or e-commerce business, keeping track of them is a top priority. Accurately tracking purchase orders and associated invoices enables a business to control its spending and increase capital available to invest in growth. 

There are purchase order tracking software applications available for businesses to use. They can see the real-time status of purchase orders and allow for the process to be handled completely electronically. This type of software also automates purchase order creation and approval and ensures compliance with regulations and policies. 

Settle offers an intuitive UI that helps with large POs that allow businesses to grow. With Settle, businesses can get up-and-running within minutes and pay ACH, checks, and wire transfers with no cost to you. We also offer seamless integration with accounting software like Quickbooks and Xero so that everything is in one place. 

Why Do You Need Purchase Orders?

Some companies might feel like purchase orders are an unnecessary step in their process. This is especially true for smaller businesses because they feel like they already have good relationships with their current vendors. But as a company grows, the need for purchase orders also grows. 

Processes for ordering become more complicated and require more people to use their time and resources to sort out the details. This leaves a lot of room for mistakes, resulting in a loss of income for the company. If a business deals with purchases that don’t have a PO attached to them, it can be hard to figure out where it came from and what the terms of sale are. 

Purchase orders provide an audit trail and also give companies peace of mind because they are legally binding. Once a purchase order has been signed, vendors don’t have to worry about whether the buyer is going to fulfill their end of the deal. 

Budgeting for Purchase Orders

Before creating a purchase order, a business should analyze its projected supply and demand. Businesses don’t want to fill out a purchase order for more than they can reasonably sell because this could result in excess costs or inventory. One business can accurately predict the amount of inventory it needs on a monthly basis, it can craft purchase orders for a reasonable amount of inventory within its budget.

Designate certain people as approvers who maintain your business’s budget and keep it in the green. If someone goes over the budget, make sure they know that they are only to purchase what is needed immediately for the company. 

Offering Volume Discounts

Sometimes when a business submits a purchase order from the same vendor multiple times, a business may be able to get a volume discount. This means that if a business purchases a large enough amount, the supplier might reduce the price. If a vendor agrees upon a volume discount, make sure it is explicitly stated on the purchase order. 

Purchase Order Automation

Relying on paper purchase order records can be a hassle. This type of system can easily lose important documents and slow down business significantly. Paper systems also require a lot of organization on a regular basis to keep things in order. 

When a business automates its purchase order system online, all documents are stored in one place without taking up any office space. Online systems have an unlimited amount of storage for documents, and POs won’t get duplicated by accident. Businesses can also easily find old POs by searching for them in an automated system. The accounts payable department benefits from this because it’s easier for them to turn purchase orders into invoices. 

Creating a Purchase Order Template

If you’re new to the world of purchase orders and need a good place to start, we can help! The first thing to do is look at a few examples of purchase orders online to get a good feel of what they should look like. The next thing you’ll need to do is gather the necessary information for your template. 

This will include the date of the order, payment terms, delivery date, business name and shipping address, the shipping method, the cost of each item, the total for all the items before tax, the total including the tax, and a PO number. 

We know it might sound easier to send an email instead of making a PO. But POs offer legal protection, make it easier for vendors, and help businesses manage their budget. It’s a good way to keep track of how much a business is spending and creating purchasing patterns based on past POs. Digging through emails for all that information is time-consuming and annoying. 

How Settle Can Help

At Settle, we can help businesses make payments for items they’re purchasing, or get paid faster on the purchase orders issued to clients.. The Starter plan is free and allows 10 transactions per month, including ACH and paper checks. The Pro level is $90 per month and allows 50 transactions per month with free international and domestic wires. The Premium level is $290 per month and offers 200 transactions per month. Finally, our Enterprise level for high AP load companies has unlimited transactions for your business. 


Sources:

https://corporatefinanceinstitute.com/resources/knowledge/other/purchase-order/ 

https://www.ownr.co/blog/purchase-order-po/ 

https://vendorcentric.com/single-post/when-does-it-make-sense-to-use-a-purchase-order/ 

https://www.legalzoom.com/articles/purchase-order-vs-purchase-agreement