A Purchase Order (PO) is a commercial document issued by a buyer to a seller indicating types, quantities, and agreed prices for products or services. Purchase orders can be an essential part of enterprise resource planning (ERP) system orders. Companies use purchase orders for several reasons. Purchase orders allow buyers to communicate their intentions clearly and explicitly to sellers.
Why Purchase Orders are Important for your Business?
There are many small and medium-sized businesses that don’t use purchase orders because they feel like the paperwork is just a roadblock or unnecessary step in the process because they have steady working relationships with vendors. When small businesses are still in the startup phase, business owners tend to have an organic purchasing process that’s simple and straightforward. But, as the company grows, and more hands are involved from start to finish, the process changes as the relationships with vendors grow and evolve with time. At a certain point in company growth, purchasing demands become more complex, urgent, or specific, meaning communication can become difficult and leave plenty of room for error if purchase orders are not used, or lack a certain level of detail.
Purchase Order Process
Every company may establish its own purchase order process. Here are the common steps that most companies usually follow. You can find some variations of these steps in actual implementation.
Step 1: Purchaser creates a purchase requisition
A purchase requisition is an official order that is created to inform department managers or purchasing officers about a decision to make a purchase. The purchase requisition is usually used in larger organizations. In most small-sized organizations, a purchase order is created directly without a purchase requisition.
In any organization, there is always the need for supplies or materials, and equipment. These may be office supplies, consumables, machines, and other equipment. But, when organizations allow departmental managers to place orders directly with suppliers, it’s all too common for fraud to occur. To counter this risk, an organization will develop a procurement team, who dedicates time to placing orders with vendors on behalf of other departments. Most importantly, the purchasing team will follow a purchase requisition workflow. This reduces the risk of fraud and creates an audit trail between these departments so that each person involved in a purchase can be made accountable.
Step 2: Purchaser issues purchase order
Once the PO is approved, it is issued to the vendor. The approval process varies depending on the needs of a company. Usually, there are one or more than one approver is assigned to approve purchase orders. In some cases, a particular type of purchase order or a purchase order under certain values is auto approve. A purchase order approval system is a feature in a purchase order management system software, which allows you to configure approvers and approval conditions for purchase orders. Once it is configured, all purchase orders go through this approval workflow. And if workflow determines that approval is required then it will start the process by alerting 1st approver. If approval is not required, then PO is auto-approved. Most of the purchase order systems designed for small businesses do not provide this feature.
Step 3: Vendor accepts the purchase order
When a vendor receives the PO from a buyer, it will check the PO to make sure all the information in the PO is correct and it can deliver the goods or service to the buyer. The vendor will then accept the PO and creates a sales order and attached the PO to the sales order. The vendor will fulfill the SO to deliver goods and services to the buyer.
Step 4: Vendor delivers goods or services and issues invoice
The buyer receives the goods and services and also the invoice from the vendor. The buyer will receive the goods against the PO that it created. The vendor’s invoice will have the purchase order number so that the buyer can track the invoice for a specific PO. The buyer then pays the vendor,
Difference between Purchase Order and Invoice
Both purchase orders and invoices contain similar information, such as a billing address, and shipping address.
An invoice is usually a document issued by the seller to the buyer showing items that have been sold, payments, and signatures of the buyer and seller. Invoices typically reference the purchase order number, with the addition of an invoice number to confirm that both documents are related and correspond with one another. It shows that the buyer has some money to give to the seller after showing the list of products the seller grants to the buyer. Many invoices these days are issued using online software.
Making use of an invoice helps you to track the money you make and your expenses as a seller. It also helps in inventory checking and management and helps you to calculate the profit made. They also serve as a reference for all your business transactions and give you a measure of control over your business and monitor your progress.
Whereas a Purchase Order is a document that is sent from the buyer to the seller or vendor to grant a purchase. A purchase order indicates the items the buyer decides to buy and the prices. Sometimes the purchase order may allow a company to order a particular product as many times as possible for a certain period. Many purchasing systems exist today which can record what has been ordered, what has arrived, and what is not invoiced.
Further reading: the best purchase order software review & pricing