A Purchase Order (PO) is a process control tool that enables planning, inventory management, expenses tracking, while also serving as legal evidence, for both parties.
In this blog, we discuss what a purchase order is, what it contains, how it works and why it should be used.
What is a purchase order?
A Purchase Order (PO) is an official document issued by a buyer, to a seller, to place an order for purchasing goods and services.
A Purchase order is a legally binding document between buyers and sellers. It serves as an essential tool for buyers by formalising their requirements and for sellers as proof of order. Using POs to place orders enables the management in creating an efficient process of Purchasing.
A standard Purchase Order template contains the following:
Creation of a Purchase Order Request: The buyer generates a purchase request to solicit goods and services, as per their requirement.
Approval of Purchase Order Request : The Purchase Request is forwarded to the appropriate business Managers and Directors for their approval.
Purchase Order Generation process: Once the Purchase Request has been approved, the Requester or the Buyer can generate a PO. Generation of this document requires significant attention to detail and clarity as the document is a binding agreement with the Vendor. ControlHub offers a free PO Generation tool which can be found here.
Purchase Order transmission to the seller: The PO is then sent to the seller. On their acceptance, the document becomes a binding contract between the buyer and the seller.
Receipt of goods and services: Once the goods and services are delivered, the Buyer, Requester or any other person in the company (i.e. sometimes the Warehouse Receiver) verifies that the shipment contains the right items, amounts and performs a Quality check. It is also recommended to store a copy of the Packing Slip. Once all the items are received, the PO can be marked as closed.
Invoicing: Vendor generally Invoices the customer for the order. It’s best practice to reference the PO number in the invoice.
3 way matching: Reconciliation is done by matching the Invoice to the PO and the Packing Slip (which is part of the Receiving Process).
Payment: For Invoices that have a clean 3-way match, payment can be issued. For those that fail the 3-way match process, it’s recommended to collect further approvals to ensure payment should be sent.
Sync everything with the ERP. All critical steps, such as PO Generation, Receiving, Invoice capture and Payment should sync with your company’s ERP or Accounting System.
Why use Purchase Orders?
Inventory Management: A well organized Purchase Ordering system enables tracking the status of each order through delivery and payment. Keeping track of invoices is also a lot simpler when you have a good PO system. ControlHub offers a robust and easy to use PO system with trackable and clickable POs with complete details for reference and verification.
Budgeting: PO and accounting systems serve as information sources to compile spend reports, which contribute to budgeting process and decisions. Having a thorough Purchase Requests + Purchase Ordering process gives management a hang of the budget even before purchases happen. ControlHub’s Purchasing Requests and Approvals process makes this process easy to follow.
Audit evidence: POs are legal documents. They serve as evidence during financial audits. Clickable POs referenced by date, vendor and project makes auditing a breeze. You can use ControlHub’s Audit Logs to have a complete rundown of all the activities involved in every company purchase, including employees’ names, timestamps and locations.
Clear communication: POs ensure that the vendors have exact order details, avoiding miscommunication or conflict. Save time and effort of preparing a physical PO. Instead, try creating Purchase Orders with software that allows for easy verification and processing for your vendors.
Time saving: By automating the purchasing process, there is more time available to focus on key operational processes. Repeat POs can be created with a click of a button in ControlHub.
Data Security: With set permissions to create, edit or view PO data, ControlHub’s purchasing system is a secure and qualitative system, since the margin of error is low. Ensure that every level of organization knows only the specific data they need from the PO to prevent a data leak and keep your competitive edge.
Subscribe to our newsletter
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.