You’ve probably dealt with purchase orders before, but do you actually know what they are? Let’s cut through the jargon and get down to the nitty gritty. This handy guide will walk you through everything you need to know about POs in simple, easy-to-understand terms. In just a few minutes, you’ll be a pro at purchase orders! From what they are to how they work, we’ll cover all the basics so you can confidently work with POs.  Whether you’re a small business owner or purchasing manager, you’ll learn the ins and outs of these fundamental business documents. So get ready to become a purchase order expert with this straightforward no-nonsense guide!

What Is a Purchase Order (PO)?

A purchase order, or PO, is a  document issued by a buyer to a seller, indicating the type, quantities, and agreed prices for products or services. It's a (sometimes) legally binding agreement that authorizes the seller to ship and invoice the goods specified.  

The Purpose of a PO

The main goal of a purchase order is to define the details of an order before any exchange of money or goods takes place. It helps ensure that the buyer receives exactly what they requested and that the seller provides the correct items, preventing confusion and disputes. POs also provide an audit trail for both parties in case of any future issues.

The PO Process

The PO process typically starts when a buyer determines a need for supplies or services to support their operations. They will review quotes from different suppliers and select a seller that meets their needs. The buyer then issues an official PO, which the seller must acknowledge and agree to before shipping the goods.

What's Included in a PO

A standard PO will specify things like:

• The supplier and buyer's details
• Order details (e.g. order number, order date)
• A PO number for tracking purposes
• Item descriptions, part numbers, quantities, and agreed unit prices
• The total cost of the order
• Payment terms (e.g. net 30 days)
• Shipping and delivery information (e.g. delivery address, expected delivery date)

Using POs Strategically

For businesses, POs are more than just a formality. They can be used strategically to improve supplier relationships and gain more favorable terms. Issuing higher volume POs, providing longer lead times, and paying invoices early are all negotiating tactics that can lead to things like volume discounts, preferred customer status, and priority shipping.

The Key Elements of a PO

A purchase order form specifies the key terms of the purchase including:

• Product or service details: A full description of what’s being purchased including any specifications. This ensures you receive exactly what you need.
• Unique Identifying information: A unique number or code (e.g. PO number) that allows the purchase order to be identified and categorized throughout its lifecycle.
• Pricing and payment terms: The agreed upon price for the total order and when and how payment will be made.
• Delivery details: When and where the items should be delivered. Clearly stating delivery locations, delivery schedule, and deadlines helps avoid wasted time and money.
• Quantities: The exact amounts of each product or service being purchased. Accurately specifying quantities guarantees you receive the right volumes to meet your needs.
• Contract information: Details like contract start and end date, renewal options, and termination clauses. Including contract specs provides legal protection for both the buyer and the seller.

A Standard Purchase Order Template (Link)

Following up appropriately

Once you’ve issued the PO, follow up with the supplier to confirm they’ve received it and understand all the details. Ask if they foresee any problems fulfilling the order as requested. It’s also a good idea to track the shipment and delivery to ensure everything goes as planned. By staying on top of the process, you avoid unwanted surprises and keep your operations running smoothly.

Using a PO may seem like an unnecessary formality, but it provides security and accountability for all parties involved in a transaction. For the small effort required, a PO yields big benefits to your business.

The PO Process Step-by-Step

A purchase order typically follows a standard process to procure goods or services. Let’s walk through the basic steps:

1. Identifying the Need

The first step is determining what materials, supplies or services are required. This could be anything from office supplies to manufacturing equipment to consulting services. The requesting department will specify exactly what they need, including product details, quantities, and timelines.

2. Creating the PO

Once the need has been identified, a PO is created. This is usually done by the purchasing or procurement department, but may also be done by the supplier.  If you are a small business and don't have a purchasing department, then it's up to you!  You don't need a special background or training to issue POs

It is not uncommon for suppliers to have a purchase order template that they prefer to use.  

The PO will include specifics like the supplier name and address, item details, price, delivery date, payment terms, and any other relevant purchase conditions. It acts as an agreement between the buyer and seller.  Please see the link above for a standard purchase order template.

3. Approving the PO

The created PO then goes through an approval workflow to ensure the purchase is necessary and within budget. Approvers typically include managers from the requesting department, accounting, or senior leadership in cases where a PO falls outside a normal scope of work. The PO is either approved, denied or returned for modifications.  Modifications can be made via email, Slack, or other communications channels.  

There are also softwares available that make this type of process more streamlined which are described later in this article.  

4. Placing the Order

After the PO has been approved, it is sent to the supplier who will then fulfill the order. They will ship the requested items or begin providing the services outlined in the PO. The buyer should receive confirmation that the order has been received and processed.

5. Receiving and Inspection

Once the order has been delivered, the requesting department will inspect all items to ensure everything matches the PO and meets their needs. If there are any issues, the supplier may need to replace or refund certain items. Payment will not be issued until the order has been received and approved.  

During this stage, some companies leverage a process called "three way match."  Three way match involves comparing three  documents: the purchase order (PO), the goods receipt or packing slip, and the supplier invoice. This process is meant to verify that the goods or services ordered were actually received and that the invoiced amount matches the agreed-upon price and quantity.  

6. Issuing Payment

Finally, accounting will issue payment to the supplier according to the agreed upon payment terms (typically 30 days from receipt of invoice). And the PO process is complete! Following these steps helps ensure efficiency, compliance and cost control.

PO Best Practices

Once you have a handle on what a PO is, it’s time to make the most of them. Following some tried-and-true best practices will ensure your PO process runs as smoothly as possible.

Clearly state quantity, specifics and prices

Be extremely detailed in your PO. Specify exactly what items you’re ordering, how many of each, the unit price, and the total cost. Leave nothing open to interpretation. This avoids confusion and ensures you get exactly what you need.

Get multiple approvals if needed

For large or expensive orders, require sign-off from more than one person. Set a dollar threshold that triggers dual or triple approval. This adds an extra layer of oversight and accountability to big-ticket purchases.

Review terms and conditions

Carefully check the fine print to understand cancellation policies, return policies, delivery terms, and payment terms. You don’t want any surprises after issuing the PO. Negotiate the best terms for your business before finalizing the order.

Track status and delivery

Stay on top of your PO by monitoring its status regularly. Follow up with your vendor to ensure there are no delays or problems. Once delivery has been made, inspect the items to confirm everything arrived as ordered and in good condition. Keep records of all communication and the delivery details.

Pay promptly

Make payments according to the agreed payment terms. Paying on time maintains a good relationship with your vendor and keeps your credit in good standing. It also ensures you continue to receive any discounts offered for on-time payment.

Following PO best practices may require a bit of diligence, but it will give you tighter control and visibility into spending. Your vendors and accounting department will surely appreciate your attention to detail as well. Keep these tips in mind for a streamlined purchasing process.

The Role of Technology in the PO Process

Technology has played an integral role in streamlining and optimizing the purchase order process. Gone are the days of manual data entry and paperwork. Automated PO management software has digitized and automated many of the tedious tasks involved in creating, approving, and fulfilling purchase orders.  

Reduce Manual Work

Entering purchase order information manually into systems is inefficient and prone to errors. PO management software allows you to create digital purchase orders that automatically populate information from your supplier database. Approvals and order fulfillment can also happen electronically without printing or signing paper documents. This reduces the amount of manual labor required and allows employees to focus on more strategic work.

Improve Visibility and Tracking

With an automated PO system, you gain real-time visibility into the status of all your purchase orders. You can see at a glance which POs are awaiting approval, have been approved, or are ready to be fulfilled. Digitized POs are also easier to track through each stage of the procurement process. If there are any bottlenecks or delays, the system will flag them so you can take action. This level of visibility and tracking is difficult to achieve with manual PO processes.

Ensure Timely Order Processing

An automated PO system helps ensure that purchase orders are processed, approved, and fulfilled in a timely manner according to your company's procurement policies and supplier terms. The system can be configured to automatically send reminders to approvers if POs are awaiting review for too long. Suppliers can also be notified electronically as soon as POs have been approved so they can start working on the order right away. This streamlined workflow avoids delays that can happen with manual PO processes.

Companies That Make The Management of POs Easier with Technology

There are several companies that make this typically manual, time-intensive process more palatable.  

Accounting softwares such as Quickbooks Online and Xero offer templates to issue POs.  

ERP systems such as Netsuite, SAP, and Coupa offer procurement modules as part of their offering.  However these systems are typically robust offerings that are expensive and resource intensive to implement and are not recommended if you're looking for a procurement or PO system on its own.  

There are newer technologies such as Anvyl and Zip which have created game changing platforms that make procurement a breeze.  

FAQs About Purchase Orders (POs)

What exactly is a purchase order?

A purchase order, or PO, is a document issued by a buyer to a seller, indicating the products or services they wish to purchase, along with the agreed terms like price, quantity, and delivery details. Think of a PO as a legally binding agreement between the buyer and seller to provide the requested items.

Why are POs important?

POs provide benefits for both buyers and sellers. For buyers, a PO ensures the seller will provide the correct products at the agreed price. It also gives the buyer leverage if there are any issues. For sellers, a PO guarantees payment once they fulfill the order. POs minimize confusion and make the purchasing process transparent for both parties.

How does the PO process work?

The PO process typically involves a few simple steps:

1. The buyer determines what products or services they need to purchase. They check available inventory and budgets to verify they can make the purchase.
2. The buyer creates and issues the PO to the seller, indicating what they intend to purchase along with terms like pricing, delivery dates, and payment details.
3. The seller reviews and approves the PO, confirming they can meet the order details. They formally accept the PO.
4. The seller fulfills the order by delivering the requested products or services.
5. The buyer inspects the delivery to ensure it meets the PO requirements. If all is well, the buyer authorizes payment to the seller according to the agreed terms.
6. The seller receives payment, completing the PO process. Both parties retain records of the PO and transaction details.

What happens if there are issues with a PO?

If there are any problems fulfilling a PO, it's critical for the seller to communicate with the buyer right away. The parties can then work to modify or cancel the PO if needed. Failure to fulfill a PO as agreed can damage business relationships and may have legal consequences. Close communication and documentation are key to avoiding issues.

Conclusion

So there you have it - the lowdown on POs. They might seem complicated at first, but once you get the hang of them, POs are just a regular part of doing business. Keep your POs organized, make sure to get all the right info and approvals, and communicate clearly with your vendors. Follow those tips, and you'll be a PO pro before you know it. And when in doubt, ask your manager or accounting team - they've got your back. The PO process doesn't have to be painful or confusing. With a little experience under your belt, you'll be cranking out POs like a boss.

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