In organizations where a single department is administering budgets, there is one person who will be buying goods and services while there will be another who receives and makes all bill payments. Purchase orders are the only thing which will help all of these people know exactly what’s happening all the time. The main purpose of purchase orders is to help people track cash flow. Whether you consider the traditional multi-copy purchase orders from the past or the electronic forms of today, another purpose of purchase orders is to clearly outline the proposed transactions that link originating parties with potential suppliers in their shared responsibilities.
A purchase order system that has been designed well can serve a number of vital functions for a business
- Information: Purchase orders are able to transmit specifics of all requisitions as well as all of the actions which are required by every party that is a part of the system right from the originator and the supplier all the way through to the inventory and accounting departments which are at both ends of the transaction. A purchase order which is properly filled out will clearly outline the details of what’s being purchased, who it’s being purchased from and all of the terms of this agreement. Item, model or part number, number of units, dimensions, terms of purchase as well as delivery are a few of the important details which should be mentioned on purchase orders. Type of payment and forms including discount information also need to appear on a purchase order.
- Contract: When administrators sign purchase order contracts, they become offers for purchase, and it is a guarantee of payment as well. Typically, suppliers need to fulfill these purchase orders and then send them on to accounts receivable which will, in turn, issue invoices to the buyer. When the supplier has fulfilled his/her part of the deal, the originating company needs to pay the supplier as per the terms which are specified on the order. The purchase order then takes the form of a contract and obligates the supplier to deliver as part of the specifications and the buyer will make the payment as per the details mentioned on the purchase order.
- Communication: Every participant in a purchase order system will need to do exactly what is required in order to fulfill successful and bill a transaction which has been initiated by purchase orders. The buyer needs to encode the purchase order just like any other message using language and the descriptive terms which are familiar to all of the recipients. The buyer will then send a copy of the order to accounts payable which is a sort of notification to the department that an invoice will be on its way soon. Copies of purchase orders also need to be sent to the accounts receivable of the supplier so that they can generate the appropriate invoice. This entire system, will then generate a type of feedback, first as far as the response from the supplier is concerned and then as far as sending items which are a part of the purchase order is concerned. Payments to suppliers as per the terms that are a part of the purchase order notifies them that they have fulfilled their part of the contract.
- Oversight: In corporate environments, where there are multiple people maintaining records, handling payments and invoicing, and completing tax returns and reports, it is the purchase order system which acts as a reference for supervisors, accountants, and those responsible for financial functions of the company. Apart from outlining details of purchases, establishing originator and supplier responsibilities, notifying participants on the execution of their obligations, purchase orders also help administrators track expenses.