ARTICLE SUMMARY
Guide to managing your purchase order (PO).
Purchase order processes play a critical role in making your business succeed. Without an efficient and accurate process for managing POs, time and resources are wasted and unnecessary mistakes become common.
One challenge businesses in every sector face is the need to create a consistent, reliable process for generating, approving, and tracking purchase orders. Managers are often looking for ways to add accountability and standardization to their PO workflows, in order to gain control of (and insight into) their purchasing decisions.
If this sounds familiar, then this article is for you. Below, we’ll explore the purchase order process from beginning to end by defining the term, breaking it down into its basic components, and providing some best practices for POs, regardless of the size or industry of your business.
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A purchase order is a type of legal document that buyers send to sellers to register the sale of products and services.
The distinction between a purchase order and a purchase requisition lies in their roles within the procurement process.
A purchase requisition is a formal request submitted by an internal department or employee to the procurement team. It outlines the need for specific goods or services, including details like item descriptions, quantities, and justifications. A purchase requisition initiates the procurement process, signaling to the procurement team that a purchase is required to fulfill operational needs.
On the other hand, a purchase order is a formal document generated by the procurement team in response to an approved purchase requisition. The PO includes comprehensive details about the purchase, such as item specifications, quantities, prices, delivery dates, terms, and supplier information. Once issued, the purchase order serves as a legally binding agreement between the buyer and the supplier, outlining the terms under which the goods or services will be provided.
In summary, a purchase requisition is a request for procurement, initiated by internal departments, while a purchase order is the official document issued by the procurement team to a supplier, confirming the specifics of the purchase and establishing contractual terms.
The difference between a purchase order and an invoice lies in their purpose and timing within the procurement process.
An invoice is generated by the supplier and sent to the buyer after the goods or services have been delivered. It is a request for payment, detailing the actual costs of the items or services provided, any applicable taxes, and payment terms. The invoice serves as a billing document that formalizes the financial aspect of the transaction.
In essence, a purchase order is a proactive document that initiates the purchasing process, while an invoice is a reactive document that concludes the transaction by requesting payment for the delivered goods or services.
Purchase orders (PO) help businesses understand and account for all the goods or services that they have requested. Managers can use POs to keep tabs on additional, relevant information such as quantity, delivery instructions, cost, terms, and date required.
The purchase order process consists of all the steps businesses take to create, approve, validate, manage, and track POs, from the moment a need is identified up to the point of delivery or sale.
While the PO process for your company may be unique in some ways, there are 7 elements of the workflow that are common to most, if not all, purchase order processes. Here are the most common purchase order process steps:
The first step in the PO process is to create a purchase request. At this point, you’ll need to know what is being purchased, the priority level of the requisition, your budget, when the product or service is needed, who needs to approve the order, and the suppliers.
After the order has been created, the next step in the process is to get approval of the purchase requisition. In some cases, this approval may be verbal or sent as an email. In other companies, more formal actions, such as completing paperwork, may be required.
The level of approvals depends on the purchase amount, company policies or guidelines, and the requirements of the supplier. Approvals may also require verification of budget or documentation, such as product specs or detailed statements of work (SOW). After approval, the requisition turns into a PO.
After the requisition is approved, the PO is sent to the selected vendors. The vendors then submit bids based on the POs. The bids are approved based on price, quality, support, service, schedule, and other factors relevant to your business.
After the bid is accepted, the company and the vendor must agree to a contract. The contract typically includes terms and conditions relevant to the purchase, such as what support comes with the item being purchased or how to handle any disputes.
The supplier will then produce and deliver the items being purchased based on the outlined schedule and shipping requirements. Your company will verify quality and match the goods received against the expected goods. From there, you can notify the supplier if the goods don’t meet your requirements. Typically, the supplier will send the purchasing company an invoice that outlines the price and payment terms.
After the goods received are approved, the purchasing company will then match the purchase order with the PO and invoice from the supplier. Companies should check to ensure that all charges are accurate.
After the three-way match is approved, the purchase order is closed out.
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There are several types of POs used in procurement processes. The main ones are these:
The format may vary based on organizational preferences, industry norms, and the complexity of the purchase. However, it typically includes key information required for the transaction, such as:
A consistent, repeatable PO process provides a range of benefits, including enhanced control, visibility, and efficiency.
Consistent PO processes help your finance department accurately account for all relevant purchase expenses and maintain forecasts and budgets.
An established PO process allows you to manage many orders at once and provides visibility into related activities, such as shipping and receiving, inventory control, and production planning. In addition, a healthy purchase order process should allow for transparency at every touchpoint along the way.
A robust PO process will create a paper trail for cash flows and add accountability for the cost of goods along the way. Banks, auditors, and legal departments will see this as an asset for your company.
Creating a legal contract between your company and your suppliers during the PO process helps define responsibilities and resolve disputes. Terms and conditions are clearly stated, and details such as warranties, guarantees, or other policies are set down in black and white.
Businesses evolve, and their processes need to be retooled from time to time to remain efficient and accurate. PO processes are no exception.
The immediate risks of not maintaining your PO process include errors, waste, overspending, under budgeting, and, ultimately, high burn rates. That’s to say nothing of the stress and disorder an outdated PO process can cause you or your team. In the long term, an inefficient or inaccurate purchase order process can also cause problems in your relationships with suppliers and your ability to acquire goods or services on pace with your company’s needs.
Managers preparing to improve their PO processes should consider the following best practices:
Every process in every business should be continuously reviewed and analyzed for areas of improvement. Make sure to map each step out, identify and resolve any bottlenecks, identify the number of approvals required in the process, and account for the different factors that might be impacting your budgeting process. You should also review key stakeholders in your process — internal players and long-term vendors — and how technology can be integrated to help orchestrate this process.
Outline and detail goals surrounding your purchase order process. Consider metrics revolving around speed of deliveries, reliable vendors, or reduced spending.
A written process is a great way to communicate best practices and standardized procedures to an entire company. These rules and policies should include the necessary information required for each step of the process, number of approvals needed, and who the internal reviewers are.
This list will help your team quickly pick from a go-to list of vendors your company has built longstanding and trusted relationships with and negotiate the best deals.
These budgetary restrictions help streamline the process by automatically implementing purchase guidelines. For example, if a company has a monthly budget of $1000 allocated to office supplies, the finance team knows how much they have to spend for necessary resources.
Having someone oversee this process helps improve company-wide adoption and provides a point of contact to answer questions that might come up when implementing a new procedure.
Integrating a purchase management system into your company’s PO process is an easy way to standardize procedures and replace repetition with automation.
PO tracking can be managed through emails and spreadsheets or by using dedicated software. Using software to manage and simplify your PO process is an easy way to save time, money, and stress. Key benefits of automating your purchase order process include:
Pipefy helps you take control of the purchase order process. Designed for fast deployment and ease of use, Pipefy brings consistency, accuracy, and speed to your PO processes.
Pipefy also provides templates and resources to make your process manageable and make you the hero of the procurement team. Create an end-to-end system for creating, tracking, and resolving POs in a workflow that works for your team.
Find out why customers choose Pipefy to automate and optimize their purchasing process
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The purpose of a purchase order is to formalize an agreement between a buyer and a supplier for the procurement of goods or services. It outlines the specifics of the transaction, including item details, quantities, prices, and terms, providing a reference for both parties to ensure accurate order fulfillment, delivery, and payment.
A standard PO is a common tool in procurement to ensure clarity and alignment between both parties throughout the purchasing process.
The PO approval process begins with the submission of a purchase requisition for evaluation. Upon approval, a purchase order is created, outlining the purchase details and sent to the supplier. This process might involve various levels of approval to ensure compliance with budgets, specifications, and internal policies before finalizing the procurement.
The approval of a PO involves relevant stakeholders within an organization. Depending on the organization’s structure and policies, these stakeholders could include department managers, budget holders, procurement officers, and higher-level executives.
Processing a purchase order payment involves several steps. First, verify the received goods or services match the PO details. Then, reconcile the supplier’s invoice with the PO and any supporting documentation. Obtain necessary approvals for payment. Input payment details into the financial system. Finally, initiate the payment as per agreed terms, ensuring accuracy and compliance with internal processes.
In the purchase order process, the sequence usually involves receiving the goods or services from the supplier first. After this, the supplier sends you an invoice for the delivered items. You then compare the invoice details with the purchase order to ensure accuracy before proceeding with payment.
The time it takes for a purchase order (PO) to be paid varies based on factors such as the payment terms negotiated between the buyer and the supplier, the internal processes of the buying organization, and any potential delays or discrepancies that might arise during the invoicing and reconciliation stages.
Payment terms specified in the PO, such as “Net 30” or “Net 60,” indicate the number of days the buyer has to make the payment from the date of invoice submission. However, actual payment timelines can fluctuate.
A purchase order (PO) is an official document a buyer sends to a seller. The purchase order binds the buyer to a promise to pay the seller for designated products at a future date. The purchase order form itself specifies the types and quantities of each product.
Purchase orders are beneficial to both parties involved. They help sellers by guaranteeing the future safety of their cash flow since any PO counts as a legal document that requires the buyer to pay for the products they receive.
Sellers can be certain that they won’t be over – or under-producing any products, as the details in every purchase order request they receive tell them exactly what quantities of each of their products they need to manufacture.
POs also help buyers by giving them precise control over the quantity and specifications of any given product they will be receiving. At the same time, POs are a useful way for buyers to keep track of their order details, which helps to simplify the auditing process.
A purchase order counts as a binding contract. This means that sellers are protected from the risk of buyers backing out of a deal or refusing to pay for a product, while both parties have legal protection against scammers.
Purchase orders essentially work by clearly defining a buyer’s procurement process. They do this by being the means through which a buyer communicates directly to a seller which products they are after, and in what quantity. This greatly simplifies the task of procurement as a whole.
The precise steps that make up the purchase order process are as follows:
The buyer makes a note of which product(s) they will be purchasing for their business, then chooses a company that sells that product.
The purchasing department of the buyer’s company sends a PO to the seller. This PO serves as a purchase requisition. It contains details regarding the delivery date for the product(s), as well as the pricing for all chosen products.
Once the seller has checked that they are able to fill the order, they confirm this with the buyer. If the seller is unable to fill the order, the PO is cancelled and the purchasing process is terminated.
The seller prepares and ships the order, ensuring that they comply with the due date specified in the PO. The PO number is included on the packing list for the buyer’s convenience, as this helps them keep track of the audit trail.
The seller issues an invoice to the buyer. Since the payment terms were set out in the PO, this process is streamlined and simple. The seller will often already have the details of which specific company credit card the invoice will be billed to, for example.
Using the payment method detailed in the PO, the buyer pays the invoice.
The short answer to this question is that buyers issue purchase orders. The longer answer is that many different kinds of companies can play the part of ‘the buyer’ in this scenario. That means any business that requisitions supplies, products, or services from other companies may issue purchase orders.
For example, most companies that are affiliated with the retail sector would have a purchasing department in place that manages the purchase order system for the company. Of course, a small business or new startup might not have a dedicated department. They would typically have a smaller team or group of individuals that procure necessary resources.
The important thing to keep in mind with regards to who issues a company’s purchase orders is that a specialised team takes care of this, rather than the business owners themselves.
While there are various types of purchase orders, each of them are full of similar types of content. Every purchase order has details about the product(s) that are being ordered, including quantity, SKU, date of delivery and price (generally including VAT).
Purchase orders will typically also contain details regarding the accounts payable process, such as whether the order in question is to be one-off or continuous over a set amount of time.
They also include a purchase order number, which helps with future invoicing by letting a PO be matched up with its corresponding invoice number.
Lastly, POs contain shipment details, so the seller knows where to send their product(s).
Put simply, buyers issue purchase orders, while sellers issue invoices. Invoices are also typically for products that have already been shipped, or for services that have been carried out. Purchase orders concern future services or products.
Buyers that issue POs have to ensure that their future budgeting takes the payment of these orders into account. Invoices, on the other hand, are a concern for immediate budgeting, as they must be paid once the seller has issued them rather than on receipt of a product (in the future).
Automating the PO process allows finance departments to process the details on electronic purchase orders more easily, which helps those departments to run more smoothly. This is because the process of managing the details on POs can be automated, thereby saving resources and allowing employees to focus on other areas.
An automated PO process relies on a solid purchase order template that’s filled in automatically whenever an order is required. This simplifies the process of making blanket purchase orders, as the automated service will ensure that repeat orders are handled correctly.
POs streamline the workflow of companies, which maximises the efficiency of the business itself and boosts customer experience. Exemplary customer experience is a vital consideration for all retail businesses.
When automated PO systems are already helping your business to run more smoothly from the inside, it’s time to look at improving the way your business appeals to customers on the outside. Find out how a RingCentral cloud phone system can help your business achieve just this.
Marjorie Hajim
SEO Manager EMEA
Marjorie Hajim is the SEO Manager for EMEA at RingCentral, a leading cloud communications company that provides VoIP and video conferencing services. She develops and executes strategies for short-term and long-term SEO growth. In her spare time, she loves reading books at coffee shops and playing with her dogs.
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