Start learning what Purchasing Process. Whether you are preparing to start your own business or you are trying to expand it, you are doing the right thing to do some business blog reading. Especially if you want to make sure that everything is on the official and legal side. For this post, it’s all about the purchase order process. What is it? Is it important? And how we can use it? We will answer all of that here.
Purchase Order or PO
Before we talk about the process, let’s have a better understanding of what a PO is. The purchase order is a document given by a buyer to a seller (that authorized the purchase) as an official confirmation of an order. Basically, it is used as an official document for the purchase of goods to be paid in the future.
Generally, a PO includes the following:
- Name of the company purchasing the goods or services
- Order Date
- Contact information
- Mailing and Invoice Address
- Delivery Date and Location
- Description, quantity, and price of the goods or services
- Shipping charges (if any)
- Payment information, terms,
- Purchase Order number
- Tax ID
- Other supporting documents
There might be other information needed but that is between the buyer and the seller. Now, why do companies use a PO? Aside from legally binding both parties to a deal, it is also used for setting clear expectations like clarifying needs, and payment terms. It is also important for managing inventory, budgeting, and act as a key part of audit trails for both parties issuing and receiving.
Purchase Order and Invoice
By the looks of it, some may get confused about a purchase order and an invoice. While both documents may include the same information, they are used differently. To put it simply, a PO is issued by the buyer to the seller to officially order goods or services. While the invoice is issued by the seller and sent to the buyer to request the payment of the order.
Purchase Order Process
A process is important because it describes how things need to be done in order to get a successful outcome. The following steps in order, are the process of purchasing that you need to keep in mind when applying it to your business.
Creation of Purchase Requisition and Issuance of Purchase Order
Before a buyer can issue a purchase order, a purchase requisition document has to be created first. It needs to be checked by the department that controls the business’ finances. Depending on the financial state or capability of the company, the team will approve, reject, or flag the request for discussion or adjustment. If it gets approved, that’s the only time a PO will be issued and sent to the seller or vendor.
Seller or Vendor’s Approval of PO
Once the seller received the PO, it will be checked thoroughly. They will then determine if the PO is approved, rejected, or flag and sent back to the buyer for discussion. They will usually base the answer on order quantities (and availability), prices, the total amount due, and terms and conditions.
Note: Keep in mind that a PO between two parties is usually issued if there’s already a discussion for a deal between parties. Such as the prices, discounts, payment options or terms, etc. It is best to do this to avoid unexpected delays to the transaction due to changes in orders or terms.
Recording of PO
The last step is for the PO to be recorded and filed. Keep in mind that this is a legal document and important for audit.
Pro Tip: The purchase order process should be automated. There are software or programs that can do this for you. Not only that it can save time on creating, but it is also sent to your vendor digitally, and saved in a centralized and secured location. There are programs that can even give you a real-time update if it has been approved, rejected, on its way to delivery, remind of payments, etc.
Once the purchasing process has been completed. The delivery, inspection, receiving, and payment for the goods or services follow.
See Also:INVENTORY PROCESS