This is a very important topic. Knowing how to process a purchase order is a vital component for any successful business. Here, we are going to take a look at the whole payment and purchase order process while giving you a clear explanation and highlight tips for improving the process.
What are PO’s?
Purchase orders are basically documents sent by buyers to suppliers asking for an order. These orders include a description of the item, the quantity, and the agreed price. Some are really detailed as well. The more information included the more effective the order is.
Whenever a seller accepts purchase orders, it is the equivalent of a legally binding contract. Also, the buyer needs to explicitly and clearly communicate all their requests when placing the order, so there isn’t any confusion whenever the purchase orders received.
Also, if the buyer refuses to make the payment, the seller will be protected since the purchase order is as good as a binding contract.
Lastly, there are a few commercial lenders who use purchase orders for reference to provide financial assistance to organizations.
How are they different from invoices?
Purchase orders are drafted by buyers. Sellers are the ones who prepare the invoices. This is done after receiving payment. In certain cases, buyers are also provided invoices with payment due dates.
Both the invoice and the purchase order contain the same details. The invoice usually references the PO number too so as to confirm that both documents are for the same product and correspond with each other. The biggest difference between both lies in the technical details which are found in the purchase order and not the invoice.
Why are purchase orders so important?
Processing purchase orders are essential for businesses even though many believe the extra paperwork is a hassle which slows everything down. Whenever a business starts up, they usually have organic purchasing processes. But, with time processes change as organizations develop relationships with their vendors. Once they grow, and the demands become specific, communication challenges eventually crop up when purchase orders aren’t being used or when the purchase order policy and procedures are being flouted.
If buyers receive their order and it doesn’t match with the purchase order specifications, if there’s no purchase order approval process, it could end up being quite a disaster for all parties involved when trying to figure out where things went wrong. At this point, it is likely that both payments and invoices were sent which puts all parties in a complicated legal situation.
Purchase orders provide clarity and instructions to sellers as well as a paper trail which can be used for referencing where everything went wrong.
Why can’t manual procedures be successful?
If you are using paper-based procurement processes, you’re likely creating extra documents. Many companies can end up processing as many as seven documents in a single purchase cycle. This includes quotations, purchase orders, advice notes, packing slips, etc. Using paper even needs a regular and efficient updated filing system which takes less space.
So, what is purchase order processing?
You will have to first understand how your business controls purchasing and then envision how the purchase order process flowchart works.
Integrating PO’s and requisitions
If your organization doesn’t use purchase orders already, you can start using them to get more control and visibility about what purchases are being made by your organization.
Requisitions are basically requests to employees for items or materials required for doing their jobs. There are a number of organizations which let employees email requests to managers and then have the make the required purchases. Including requisitions will offer a couple of benefits, managing a budget on employee spending and taking advantage of discounts on larger orders. Most companies allocate budgets for purchases once requisitions are submitted.
You’ll have to create standardized requisition documents which every employee should use. This standardized procedure will ensure receiving requisitions doesn’t take any time.
When employees start drafting requisitions, you can create average monthly spending and track purchases. This means you will be able to analyze how supplies are being used and identify savings options.
Requisition to PO
When requests become standard process, the next thing to do is create a PO process. This can be as simple as contacting suppliers and letting them know you’ll be submitting PO’s before paying for goods. Suppliers are likely to be happy because of this since it will help both parties significantly. Once some requests have been sent to the approver, they complete PO’s and send them to sellers.
Integrating purchase orders and requisitions significantly increase your chances of tracking expenses and get rid of many of the headaches that come with purchasing. Visibility in spending is very important, and purchase orders can really help you with this.