Purchase order is an important and useful document but is often overlooked, particularly by smaller businesses. While it is possible to operate without them, they can streamline procurement decisions, improve record keeping, and provide legal protection if issues arise between the purchaser and supplier.
What is a purchase order and how is it different from an invoice?
A purchase order is prepared by the buyer before the actual purchase is made. This is in contrast to an invoice, which is created by the supplier either before or after payment is received. A purchase order can be very simple or very detailed but often benefits from being detailed. This makes it easier for the supplier to fulfill and more likely that the buyer will receive exactly what they were looking for.
The item, quantity, and price are the most important things to include in this document, but more detailed specifications can be listed as well, such as dimensions of the item. A purchase order is a contract between the buyer and seller, and as such, the more details are provided, the more protection each party will have in case of issues with delivery or payment.
Why use a purchase order?
Aside from it being a legally binding agreement, there are other benefits to be gained from a purchase order. It allows the purchaser to better track spending, make budgets, and compare the delivered product against what was requested. While it may feel like unnecessary effort and extra paperwork, purchase orders can save effort in the long run. They make it easier to track complex or recurring orders and give both parties a clear document to refer to. If either company has an issue, the purchase order can help pinpoint who is at fault. Without one, it becomes difficult or even impossible to determine who was at fault and to resolve it satisfactorily.
Using purchase orders also allows the company to consolidate and track employee requests. It provides insight into what people within the company are buying, and how it might be streamlined. If multiple people or departments are ordering the same thing, these requests can be combined into one purchase order, which may be able to take advantage of bulk discounts. It also makes it easier to detect unnecessary purchases, and to keep the company within its budget.
Types of purchase orders
There are four main types of purchase orders: standard, planned, blanket, and contract. Each one is useful in different situations.
Standard: This is used for one-time or infrequent purchases. It includes basic information such as the products being ordered, quantity, price, and payment terms. If an office wants to replace some of its computers, for example, it will likely use a standard purchase order, as this is not a transaction it will need to make on a regular basis.
Planned: A planned purchase order has similar information to a standard one, but it is used when details such as date of delivery are less certain. A company might create a planned purchase order for a specific quantity of office supplies for the year, and then issue a release for a specific portion of the order when it needs more supplies.
Blanket: This is similar to a planned purchase order, but does not include a quantity. If the company knows it will need office supplies all year, but isn’t sure how many, it may issue a blanket purchase order rather than a planned one.
Contract: A contract purchase order is more general than the other types. It is an agreement that the company will make purchases from the supplier, and may include terms around delivery and payment, but does not include specific products. It sets the basis for an ongoing relationship, rather than creating an immediate order.
All of these types of purchase orders can help an organization streamline its purchase process, as well as provide legal protection if problems arise. Even smaller businesses should integrate these documents into their procurement process. While keeping paper copies of every purchase order can be cumbersome, there are many procurement software solutions available that can keep the process digital and easy to access. Purchase orders are valuable additions to any sourcing and procurement strategy.
For more information on how purchase order can help your business, PO format, sales order, and purchase order process: