Definition Of A Purchase Order

Departments in small business have to order supplies through their businesses financial arm instead of buying supplies themselves. This process also includes using both purchase and requisition orders which represent separate steps in the purchasing process. The best way to define purchase orders is by understanding what requisition orders are. Let’s take a look at them:

Requisition Order

Requisition orders are forms which departments need to submit to the ones in control of financial activities of businesses. Even though individual forms can vary from one business to another, requisition orders usually ask for certain information including the name of the department which is requesting materials; the supplies requested, a description of what is needed, the name of the supplier, and the price expected. Requisition orders are then either approved or denied by the financial department.

When are they required?

In the case of small purchase orders, it’s often a standard part of the procedure for departments to purchase materials from retailers directly using the company card which skips the entire requisition or purchase order process completely. Most businesses only require purchase or requisition orders when purchases exceed a fixed monetary value. There are some who require requisition orders for all purchases too.

Different types of requisitions

They are usually submitted so departments can get approvals for purchases of the materials from entities which operate outside the business. But, sometimes a department may want to purchase equipment from another department, and in such situations, the purchasing department will need to submit a requisition order within the departments. These are called interdepartmental requisition orders. They can be quite helpful when it comes to financials in large businesses where the departments have separate budgets for operating.

Now, let’s define purchase orders:

When the financial office of businesses have approved requisition orders submitted to them, they issue a purchase order for the requested goods to the supplier. Purchase orders need to include some information like the name of the office making the purchase, the supplies they are purchasing, the shipping address, the payment terms, instructions for invoicing, and the purchase order number. In order to help with record keeping, purchase orders are usually numbered the same as the requisition order. This is the proper definition of purchase order.

If you have purchased suppliers for your company, you may have been asked for a PO number. When looking for a purchase order definition, you need to know that it is nothing more than a written sales contract between a buyer and a seller detailing the exact services or merchandise which needs to be rendered from a vendor. It will specify the payment terms, dates for delivery, quantities, item identification, shipping terms, and any other conditions or obligations.

They tend to be preprinted, numbered, and generated by the financial management system of a retailer. The main purpose of PO’s are to create trackable documents within the POS system of your company which can be used in beneficial ways for running your business.

First, PO’s tell your inventory about a new order. If you’re using open to buy systems, it will know to not order more of products since some have already been ordered. Secondly, it could establish purchase specifics with vendors. It will certainly contain the quantities of every product ordered but also contains details of payment methods, payment terms, and the delivery method for the products.

There are a number of vendors who have default systems in use for freight and billing. Even without instructions, they will use the default delivery method. But, if you require the order faster, your PO can communicate this. It’s also an accountability document for all parties involved. It’s easy to make a mistake while completing an order. The PO will ensure this doesn’t happen.

Everything is in writing and arguing here will be hard. If vendors make mistakes with the billing or invoicing, purchase orders can be referenced to get everything corrected.

When merchandise reaches the buyer, they can compare it with the PO and make sure it is according to the order. Employees will also get involved in this. Tasks can be delegated since the order needs to be matched with the PO. When there is no PO, the person who placed the order will be the only one who can confirm if the correct goods have been delivered.

One of the biggest benefits of using purchase orders is that they increase your credit worthiness. There are many banks who look at purchase orders in order to determine the solvency of a company.

Having a solid purchase order to your name will go a long way in ensuring you get approved for a loan. A poor one will mean you might not get the loan. It can even be used to get credit from a vendor. For example, there are some vendors which may ask you to make cash payments whenever you place orders. After doing business with you for a while, they might let you submit PO requests against credit cards. This is a great benefit when it comes to trying to manage the flow of cash in your company.

PO’s are a very common practice when it comes to retail. That’s why you need to install a competent accounting software in your company. It will play a very important role in ensuring all purchases go smoothly and without any problems.

So, the next time you get asked what the right purchase order definition is, you will be able to give quite a detailed response. Just come back here and read through this article for all the answers you’ve been looking for. It’s not that difficult to explain. Once you can properly understand the difference between a requisition order and a purchase order, the rest isn’t too difficult. Also, if you aren’t already using a purchase order system in your company, it’s time you started. There is no point in pretending you are better off without it. After reading this article, you too will agree that it is absolutely necessary.